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

Chuck Grom - J.P. Morgan Deborah Weinswig - Citigroup Mark Wiltamuth - Morgan Stanley Robert Drbul - Barclays Capital Dan Binder - Jefferies Mark Miller - William Blair Adrianne Shapira - Goldman Sachs Andy Wagstaff - Touchstone Investments Wayne Hood - BMO Capital Markets Chuck Cerankosky - Northcrest Research

Good morning. My name is Brandy and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco third quarter conference call. (Operator Instructions) I would now like to turn the call over to Richard Galanti, CFO. Please go ahead, sir. Richard A. Galanti: Thank you, Brandy. Good morning to everyone. This morning’s press release reviews our third quarter fiscal 2009 operating results for the 12-weeks ended May 10th. As with every conference call, I will start by stating that the discussions we are having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and that these statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today’s call, as well as other risks identified from time to time in the company’s public statements and reports filed with the SEC. To begin with, our 12-week third quarter fiscal ’09 operating results for the quarter, as you saw this morning earnings per share came in at $0.48 a share, down 28% from last year’s third quarter of $0.67. Current first call consensus currently stood at $0.53 as we announced earnings this morning. As outlined in this morning’s release, this year’s third quarter earnings results include an impact of several items, nearly all of which negatively impacted our results for the quarter, and these include a pretax charge of $34.1 million, mostly non-cash, related to litigation settlement covering our membership renewal policy, so that’s about $0.05 a share. From a couple of the emails I got this morning, there was a little bit of confusion of where that lands -- about $27 million of it hits the membership income line and about $7 million hits the SG&A line, the $7 million being the cost related to the plaintiff attorney’s cost as well as mailing and production costs on our side. In addition we mentioned in the press release higher employee benefits costs -- about two-thirds consisting of higher health care usage and then other benefits as well. In all, about $0.03 a share negative impact. What I mentioned for the last two quarters and I’ll probably mention next quarter as well, ongoing FX headwinds, our foreign currency earnings results when converted and reported in U.S. dollars hurt us again in the third quarter by a little over $25 million pretax, or about $0.035 a share after tax. That is assuming FX exchange rates were flat year over year, which are not of course. Our foreign currency operating results in Q3 would have been higher by this amount. Assuming no major currency changes throughout the rest of the fiscal year, we would expect a continued hit to reported earnings of a little over $0.01 a month, or about $0.04 to $0.05 a share in the upcoming 16-week fiscal fourth quarter. It could be a shade less than that at this point. In the last few weeks, foreign currencies relative to the U.S. dollar have rebounded a little bit but again that would just simply mean the $0.04 to $0.05 in my view might be $0.03 to $0.04 as a hit. As you’ll recall, there was significant strengthening of the U.S. dollar relative to several of the foreign currencies of several of the foreign countries in which we operate back in mid-September to early November of last year. Again, hopefully once we get past that anniversary and hopefully see a little more stability in those exchange rates, that won’t be an issue to discuss. As you can see in our income statement, our income tax rate was higher year over year in Q3. It came in at 38% this year in Q3 versus 36.6% last year in Q3. This represented about $0.01 a share negative impact to our Q3 results. There are a couple of discrete items that I will talk about later, nothing terribly exciting. Other items hitting, if you will, Q3 P&L, about a $4.5 million pretax charge to our investment accounts. These are the remnants of the $1.1 billion we had in enhanced money market funds starting about a year-and-a-half ago when some of the markets melted out there and liquidity got held up. In addition, there’s just under about a -- just under $5 million pretax charge to reserve for the closing and related costs of closing the two Costco Home stores effective July 3rd. Again in Q3, we have a hit of about 4.9 -- almost just under $5 million. We expect to incur up to $2 million to $2.5 million pretax in Q4 when they actually close, so this will be another small hit in Q4. LIFO was actually a little bit of a boost, about a penny a share pick-up in the quarter, or $6.5 million pretax. And as I will discuss in a few minutes, the hits to gross margin we incurred in Q2 year over year abated nicely in Q3, I am sure a relief to many of you, and us. In terms of sales for the 12-week quarter, reported total sales were off 4.8%, or 5%. Our 12-week reported comp sales figure showed a decrease of 7%, rounding up to minus 7%. For the quarter, both total sales and comp sales were significantly impacted by both gasoline price deflation and by the strengthening of the U.S. dollar. On a comp basis, the minus 5% U.S. sales decline in Q3 excluding gas deflation would have been flat at zero and total company comps reported at a minus 7% for the quarter excluding both gas deflation and FX changes would have been a plus 2% for the company overall. Other topics this morning that I will review, our opening activities and plans -- after opening eight new locations in Q1, we opened no new locations in Q2. And then in Q3, we opened four net new locations in Q3. Q3 openings included two new Costco business centers, one in Las Vegas and one in Hawthorne, California; three new Costco warehouses, one each in California, Hawaii, and Texas; and a temporary closing of our 26-year old Redwood City, California Costco that is being rebuilt and expanded and will reopen in the fall, most likely in Q1 of fiscal 2010. Since Q3 end on May 10th, we’ve opened one new location in Dartmouth, Nova Scotia, Canada, with six additional openings planned before our August 30th ’09 fiscal year-end. Included in the six are three in Asia, one each in Japan, Korea, and Taiwan; a new business center in Southern California, another one; and our 32nd Mexico warehouse club, a new one in Mexico. And in mid-August, we expect to open our first location in Australia in Melbourne, Australia. We now -- we currently operate 555 locations around the world, including the 31 in Mexico. Other topics of course this morning, ancillary business results, Costco online results, membership trends, a little discussion about margins and SG&A, balance sheet, which I will briefly go through the numbers but I will be sending that out, it will be available shortly in our big Q&A facts that we send out. And a few comments about inflation and deflation. Okay, on to the quarterly results, sales for this year’s third quarter, the 12 weeks ended May 10th were $15.5 billion, down just under 5% from last year’s third quarter of 16.3. As I mentioned earlier on a reported comp basis, comps reported were down 7%. Now, the 7% third quarter reported comp was mostly comprised, recall we start in the second quarter of February and end the 10th of May, so -- but mostly comprised of the minus 3 that we reported in February, the minus 5 in March, and the minus 8 in April, plus the first couple of weeks of May, which we haven’t reported yet. Please recall that the minus 3 in February would have been a plus 5 without gas and FX. The minus 5 reported in March would have been a plus 4 without those two items, and the minus 8 in April would have been flat. As well, keep in mind that there was the Easter shift, so that the -- what I’ll call the normalized plus 4 in March had the benefit of we estimated 1% to 2% by the Easter swing; similarly, the normalized flat in April had a minus 2% to 3% hit because of the swing of Easter, so if you look at April and March and April excluding FX and depreciation and adjusting for the Easter shift, pretty similar numbers. The minus 7% reported comp figure was negatively impacted by 4.3% due to year-over-year strengthening of the dollar. As you noted in the press release, our international comps in local currency were actually up 8% but once converted into U.S. dollars, are reported at minus 12%. Gasoline, as I mentioned, was the big impact; the minus 5% U.S. comp would have been flat. This impact may be a little bigger negative in Q4 as we anniversary peaking gasoline prices last summer. Part of that will be dependent on what gasoline prices do between now -- of course, in the last several weeks, they’ve been -- they’ve been rising a little bit. If that continues in the summer, we might see the same kind of impact. For the quarter, we always share with you what the comp number is in terms of the -- it’s the product of the average transaction size and the average frequency. The minus 7% reported comp consists of an average transaction decrease of about 10.5% and an average frequency increase of about 4.5% plus. Again though, the minus 10.5% includes FX, which is a little over 4% of the quarterly comp number, and gasoline, which is a little over 4%. So still down slightly after these adjustments. Again, we continue to see some deflation in consumables, as well as of course items like electronics. In terms of cannibalization, not a big issue. Maybe at some point we’ll stop talking about it but it was about 35 basis points negative in the quarter, the same impact as occurred in Q2. In terms of sales by geographic region, overall Q3 was a tad weaker than Q2, taking out all the noise but not tremendously weaker. Within the geographic regions, nothing surprising there as well. California was the weakest, Southern California being a little weaker than Northern California. We see similar things in parts of Florida and parts of Vegas and things like that where the real estate economy has hit us. Relatively speaking, our Northeast was the strongest region of our major regions in the U.S. Canada and other international are fine. In local currencies, Canada is in the mid-singles and other international, low doubles positive. So again, geographically, that’s how we look. In terms of merchandise categories for the quarter, within food and sundries, which is in the low- to mid-singles, adjusted, you know, taking out FX, tobacco continues to be in the mid-singles negative; otherwise mostly all -- and by the way, that’s notwithstanding the fact of a $6 increase per carton, or a $6, 20% increase per carton on April 1st as a floor tax. So while the sales price is up dramatically, usage I would assume is down some. Otherwise mostly all sub-categories within food and sundries are in the low- to mid-single-digits, or low- to mid-low-single-digits. This of course reflects some of the deflationary pressures across come of those consumable categories as well. I’ll talk in a minute about that a little more. Within the mid-negative, mid- to high-negative hard lines comps, again same story as last quarter -- the weakest sub-category is office, sporting goods, and garden patio, and a negative sales impact from deflation in electronics. Anecdotally, like we saw in November and December, and in January and February, as we saw in the third quarter as well, unit sales of televisions and unit sales of laptops were up in the 30% to 50% range. Dollar sales were about flat, so it’s a tremendous deflationary pricing pressures in that that we’ve really I think taken the opportunity in that area to really show great value and to drive sales. Needless to say if you have flat sales but are selling 30% to 50% more units, it costs you a little more to do so. Within the soft line comps, which again is in the mid- to high-single-digits negative, again nothing tremendously different or thrilling from the last quarter. The one stand-out, and it’s not an exciting stand-out, is small electrics, slightly positive, with media and jewelry being the weakest, both in the high-teens, low-20s. Fresh foods, [light] food and sundries, slight positive, no thrilling standouts. Actually the standout, if you will, in fresh foods is unit sales, which helps offset the deflationary pressures. Both our meat department, which is beef, poultry, and what have you, and produce are enjoying unit sales up in the low double-digits this past quarter year over year but the average price points of price per pounds of meat and poultry and price of various items in produce are down a like amount, so again a little bit of a challenge profitability wise but still driving business and driving frequency and loyalty, we believe. Moving on to the various line items below that on the income statement, and I’ll start with membership fees -- again, I think there was a little confusion based on a couple of the emails I got this morning, having to do with that $34 million. $27 million of it related to the membership line and about $7 million to the SG&A line. Now, we reported in the quarter $328.4 million of membership fee income, or 2.12%, compared to 350.9 or 2.16% a year ago. Well, that would imply, of course, in dollars down 6% and in basis points down 4%, and again in dollars, down $22 million. Now, there’s two things that we need to adjust for -- one is the litigation settlement; again, $27 million of that $34 million hit this year’s Q3 membership line. In addition, about 18% of our sales and roughly the same amount of membership fee income comes from overseas where we have the FX impact. If you adjust for both of those things, the membership is $27 million, the FX is about $15 million, that the 328.4 reported number, adjusting for those two items, would be $371.3 million, or 2.40%, which would be up 6% in dollars and up 24 basis points, or $20 million. So a good showing in membership fees, as I’ll show in a minute in terms of renewal rates as well. Let me take a minute here to elaborate on the membership litigation settlement. The settlement related to a class action stating that our membership renewal practices violated various provisions in California and New York common law and statutes. Under our historic practice, membership paid their renewal fees up to six months late generally had their 12-month membership renewal period commence at the time of the prior year’s expiration rather than at the time of the late payment. The settlement provides members who renew their membership late between March 1, 2001 and March 31, 2009, one to three months of free membership depending upon the length of their first late renewal, in addition to the payment of attorneys’ fees and costs. Again, the accrued amount for the free months of membership, if you will, we estimate is $27 million and the $7 million was plaintiffs’ attorneys’ fees and processing and mailing costs to our members. We did change our renewal policy in March of 2009. In terms of membership, we continue to benefit from strong renewal rates and the continued increasing penetration of the $100 per year executive membership. Our new member sign-ups in Q3 were down 5% year over year in fiscal quarter. Recall that they were down 7% in Q2 year over year. We don’t feel this is a big issue -- we still are feeling the impact of seven openings in Q2 last year compared to no openings in Q2 this year. Again, overall fewer openings we believe are the biggest impact of that piece of negative on new sign-ups. In terms of number of members at Q3 end, at Q2 end we had 20.7 million Gold Star. We now have 20.9 million. The primary business remains at 5.7 million. Business add-on remains at 3.4 million, so total, which was at 29.8 million at Q2 end, is now 30 million, and with spouse, 54.5 million at Q209 end is now 54.9 million. At May 10th, third quarter end, our paid executive memberships stood at 8,528,000, which is a 325,000 member, or 4% increase since second quarter end 12 weeks earlier. That’s about 27,000 new executive members, or converted executive members, increase in the quarter. In terms of membership renewal rates, they continue quite strong, within one-tenth of a percent of our all-time high renewal rate, coming in at 87.4% for the quarter, 92.1 on the business side and 86.1 on the Gold Star side. Moving on to gross margin, gross margin was up in the quarter compared to a year ago, 45 basis points from a 10.54 to a 10.99. Again, we’ll jot down some numbers and then talk through them -- the line items are merchandising core; second line item is ancillary; third line item, 2% reward; fourth line item, LIFO; and then a total. And then I’ll just give you the last three quarters, Q1, Q2, and Q309. Going across, merchandising core year over year in the first quarter was minus 13 basis points; in Q2, minus 7; and in Q3, plus 42. Ancillary, plus 46 in Q1 -- recall the giant gas movement there; in Q2, minus 19; and in Q3, plus 8. Two-percent reward, minus 2, minus 9, and minus 9. LIFO, plus 1, plus 4, and plus 4. All told in Q1, year over year we were up 32 basis points in gross margin; in Q2, down 31 basis points and in Q3, reported up 45. More importantly, again let’s start with our core merchandising gross margin, which was up 42 basis points -- as was in the case in Q2, the plus 42 year over year is a result that requires some explanation. While still much better than our gross margin in Q2, our lower margin gas business, which represented 10% of our total sales in Q308, only represented 6% of our sales in Q309, thus the sales penetration of our core merchandising business was up year over year as gas prices declined. And this aggregate higher sales penetration year over year caused margins to be up significantly more in our matrix. Now, more importantly, our gross margins of our core merchandise business, and our core merchandise business we view as food and sundries, hard lines, soft lines, and fresh foods, and again that’s a little under 80% of our total business, they were actually in Q3 higher by five basis points. Recall that in this plus 5 basis points in Q3 year over year compares to our Q2 year over year gross margin delta in those core businesses of minus 57 basis points. Of the four major departments, food and sundries, which is about half of our sales, and hard lines, which is a little under 20% of our sales, were up year-over-year in Q3. Soft lines and fresh foods were down slightly year over year in Q3, recognizing fresh foods, as I mentioned, with the higher units but lower prices, really did pretty well given that but still a slight down year over year in the actual percentage. So again, I think a relief to many out there, given what we saw in Q2. Gasoline profitability, by the way, year over year had very little impact on the quarter’s P&L. Q3 over Q3 gasoline operating results were within a couple million dollars of each other. Other gross margin comments, the impact from increasing executive member business continued in Q3 at minus 9 basis points impact, implying about 4%, 4.5% increase in sales penetration to these all-important members. We believe this reflects increasing sales penetration to these members which in this economy we believe is a positive. LIFO, recall we had a small credit of $2.2 million in Q1, a credit of $7 million pretax in Q2, and as I mentioned, a $6.5 million credit in Q3. This reflects the deflationary trends that may continue into Q4 but it’s difficult to predict, particularly given the volatility in gas prices. Now moving on to SG&A, our SG&A percentages were higher year over year by 96 basis points, coming in at 10.69 compared to a 9.73 a year ago. Again, let’s start by looking at a little matrix in the numbers and then we’ll go through them. The five lines here would be operations, line two would be central, line three, stock compensation or equity compensation; line four, quarterly adjustments; and live five, total. And again, we’ll look at the three quarters, Q1, Q2, and Q3, and going across, operations would be minus 16 basis points in Q1, implying higher SG&A year over year by 16 basis points; minus 34 in Q2, and minus 67 in Q3; Central, minus 3, minus 4, and minus 15; Equity, 0, minus 1, and minus 5; Quarterly adjustments, minus 12, 0, and minus 9; for all told, minus 31, minus 39, and minus 36 -- I’m sorry, minus 96 -- wishful thinking. Operations, again going through the detail here, operations again which shows higher by 67 year over year, again a very big factor here is deflationary gas sales levels, just like with gross margin percentages where it helped us, it correspondingly hurts us. We estimate -- we calculate that the reported SG&A that minus 67 includes 34 basis points related to -- so a little more than half of that minus 67 is simply gas deflation. I’ll get to some other comments in a minute on that core. Our central expense was higher year over year in Q3 by 15 basis points. About four basis points is gas mix -- again, the [deflation]; about three basis points, or $5 million, is site costs. This again, some of you will look at this as being good and some of you will look at it as being a slight negative but about $5 million of site costs in our SG&A number because we have chosen not to do about five to six locations that we had on the books over the next couple of years. As the economy has softened and as we see perhaps some better opportunities with better available locations, including some in malls, or in the parking lots at malls, we also look over the next year or two and recognizing that we’ve walked away from a few that we can always do in a few years. There’s nobody rushing to do them in certain cities or certain expanded cities for us, and so we did go through and I think there was actually six locations that we decided not to do and any costs incurred in legal permitting, negotiating, you name it, was -- we wrote those off. They are capitalized until the deal either dies or goes forward and then [of course capitalize if the] deal went forward, so again about $5 million inside the SG&A number. That is something I didn’t mention earlier. Our stock compensation expense in dollars was almost flat year over year, up very slightly, about less than 1% but because of lower sales dollars, it was 5 basis point hit to the numbers. Benefits, Q3 year over year we mentioned this qualitatively in the press release, I’ll let you decide how you want to book it or look at it, but Q3 year over year percentage was higher by 17 basis points -- again, this is within the core. This includes a sizable spike in healthcare utilization. If you recall in Q2, we saw back in November a big spike. We saw similar big spikes in two of the months, in March and April, and I can’t tell you how May is yet but this has more to do with just utilization per member, so a higher batting average, if you will, of utilization by our employees and their spouses and dependents and kids. About two-thirds of this number is related to that spike and the rest of it is divvied up among other various things. We actually have a slight improvement in workers’ comp to the tune of a couple of million dollars, but still the net of all of this together was a pretty sizable number, I think. As I mentioned earlier, a total of about $0.03. Depreciation, the dollars are up somewhat but more importantly on lower sales, depreciation hit us for seven basis points, which is usually at least five basis points more than we normally see in a number like that in regular years. Overall, not a terrible SG&A dollar performance but given the sales levels and given a couple of those unusual items, it is as we reported here. The big question, of course, going forward is sales trends. We are going to continue to see the challenge in Q4 with gas as it peaked last year in the middle of the summer, and again, I think if -- we’ll have to wait and see on healthcare utilization. When we talk to our third party providers, in general the perception is we are not the only ones suffering it in terms of more utilization with the stress out there. However, recognizing nearly 90% of our employees are covered fully and that certainly is probably a higher percentage than many other companies out there, so wherever they are utilizing -- in our case they are utilizing under our program, not someone else’s. In terms of -- next on the income statement line is pre-opening expense, up about $850,000 from a year ago, or one basis point worse at $9.3 million versus 8.4. We opened again five units in Q3 versus four a year ago, no real surprises there. In terms of provision for impaired assets and closing costs, in Q308 we had a charge of $9.2 million for the quarter; in Q309, we had charges of $6.6 million, again about -- just under $5 million of that was the Costco Home but again we had charges last year too, so that’s pretty much a wash versus a slight improvement net to the company for the quarter. All told, operating income in Q3 was down 23% year over year from $465.6 million last year down to $359.1 million this year, or a decrease of $106 million. Of course, hitting this year’s Q3 operating results were many of the things I talked about earlier, the $34 million in membership litigation settlement, the roughly $0.03 on healthcare and benefits increases, above and beyond what we consider normal increases year over year, $0.03 to $0.04 in FX headwinds, of course offsetting a slight benefit in LIFO of about $0.01. So just those line items alone represents nearly three-fourths of this $106 million shortfall. I’m not making excuses, just allowing you the detail to do your own analysis. Below the operating income line, reported interest expense was slightly higher year over year. Q3 was $25.2 million versus Q3 last year of $24 million, so about $1 million. Actual interest expense was down about $1 million, but offsetting that is with a little less expansion going on now versus a year ago, capitalized interest was actually lower and that’s a reduction in interest expense. Capitalized interest was actually lower year over year by about $2 million. Interest income, $4.2 million this year versus $23.9 million last year. The 4.2 of course includes that $4.5 million impairment on the enhanced money market fund, so still that -- even adjusted that $8.7 million compared to $29 million, a lot less interest income. Cash is fine. As you well know, interest rates on safe stuff is very low, you know a quarter to a third of what it was a year ago. Also, almost -- so about two-thirds of that lower income figure was lower interest income and about -- and the other, a little less than the other third of it was our half of Mexico’s earnings. Mexico’s earnings in pesos are fine but the peso, of course, a year ago was a little over 10 and now stands at a little over 13, probably in the high 13s on average for the quarter. It’s come back down from 14, 15 down to the low 13s in the last several weeks. On to our tax rates, our company tax rate this quarter came in at 38%, a bit higher than both last year’s Q3 rate of 36.6 and this year’s first half tax rate of 36.9. Again, a handful of discrete tax items totaling about $5.5 million. This $5.5 million of course is after tax, so it’s a little over $0.01 a share. About half of that relates to transfer pricing between U.S. and Canada and the agreement that those two federal taxing authorities have, where more income was -- a little bit more income was brought down to the U.S. which is taxed at a slightly higher U.S. tax rate than Canadian tax rate. The other roughly half of it is several little things, mostly a couple of states, various audit adjustments that are ongoing -- sometimes they go our way, sometimes they go the other way. A quick run-down on the other usual topics, the balance sheet as of May 10th, cash, equivalents, and short-term investments, $3.668 billion; inventories, $5.277 billion; other current, $1.142 billion; total current, $10.087 billion; net PP&E, $10.498 billion; other assets, $719 million; all in on the asset side, $21.304 billion. On the right-hand side, short-term debt, $92 million; accounts payable, $5.370 billion; other current liabilities, $3.797 billion; total current liabilities, $9.259 billion; long-term debt, $2.145 billion, with $2 billion of that being the $2 billion of debt we put on our books in February of ’07; deferred and other, 336; total liabilities, $11.740 million; minority interest, 91; stockholders’ equity, $9.473 billion; total of that side, of course, $21.304 billion. Some of you asked for, since we don’t have the cash flow statement ready today but we’ll have that finalized of course for the 10-Q, but some of you asked for the depreciation/amortization -- for the quarter, depreciation/amortization is $161 million. Year-to-date through the third quarter, $476 million. The balance sheet needless to say is strong, you know, low debt-to-cap ratio. Accounts payable, if you look at this on a reported basis, a year ago in the third quarter it was -- accounts payable over inventories was 108%. It’s still over 100 but it’s 102%. That includes, of course, construction payables and other payables, not just merchandise payables. On an apples-to-apples merchandise payables standpoint, last year it was 88% and this year it’s 85%. We’d expect it to be down a little bit, while inventories are down slightly in terms of real dollars, the fact is that slower sales are [a little lower turn] as well. Average inventory per warehouse last year at Q3 end stood at $10.506 million. This year at Q3 end, it stands at $10.089 million, so down about $417,000, or 4%. FX is three-quarters of that, about $80,000 of that $400,000 is lower inventories in local currency dollars. So no real inventory concerns. One of the comments I made on the Q2 call was that in addition to the aggressive pricing that impacted gross margin in Q2 negatively, we also had higher-than-normal, if you will, seasonal markdowns, particularly at Christmas, to the tune we estimated of about $0.03 a share in Q2. When asked about Q3’s outlook on the Q2 call, I had indicated of course that we -- the aggressive pricing we felt would abate and of course, as you saw in our core merchandise gross margin, it did nicely. In addition, my best guess at the time was is that if it was a $0.03 for seasonal markdowns, notwithstanding some weakness in things like patio furniture, we did a good job of cutting back inventories and canceling some orders and so that talking to our non-food, [senior non-food merchant], not only in Q3 did we have nominal changes year over year in markdown dollars but he doesn’t see any -- in terms of lawn and garden, doesn’t see any big hits in Q4 as well, about the normal. In terms of CapEx, in Q3 we spent $226 million, so year-to-date it stands right just under $900 million. I would estimate that for all of fiscal ’09, it will be lower than last year’s figure, of course, probably in the $1.2 billion to $1.3 billion range, compared to last -- fiscal ’08 of $1.6 billion. I mentioned our dividend, earlier in May we increased our quarterly dividend from $0.16 a share to $0.18. It was our annual amount of $0.72 a share. This annualized $0.72 a share dividend represents a cost to the company of about $310 million to $315 million annually, and of course at today’s stock price, represents about a 1.5% dividend yield. Costco.com and Costco.ca up in Canada -- still very profitable business. The challenge, of course, with the economy and particularly with the fact that our dot.coms are typically big ticket, non-foods items. Principally average ticket in the high 300s down from the low 400s a year ago. That is certainly impacting it somewhat but still quite profitable. In Q1, sales were up slightly, with September being more than all of that increase before all hell broke loose out there in the economy. In Q2, sales were down slightly, mid-single-digits -- again a reflection of the sizable penetration of big ticket discretionary items. In Q3, down very slightly, in the low-single-digits, so a relative improvement from Q2 and nonetheless quite profitable. Next on the discussion was expansion. As you’ll recall in Q1, we opened eight new, which include the temporary closing of our Las Vegas unit, I believe, where we reopened that later in the fiscal year as a Costco business center, so a net of seven in Q1, nothing in Q2. In Q3, we opened five and closed -- and relocated -- and closed one. Again, we’ll reopen that in Q1. That’s the Hawthorne, California -- the Redwood City location, so a net of four. In Q4, we opened six -- we will open a total of six, although we’ll be closing for good the two Costco Homes in early July, so a net of four, plus of course one in Mexico this fiscal year. So again, new openings, 20, less four, two of which were temporary closings and two of which are the Costco Home closings, for a net of 16 this year, which includes the one in Mexico. So all told, 16 net on a beginning base of 543, is about 3% unit growth and about 3.5% square footage growth, recognizing we opened bigger units into some relos, some remodels to add square footage to a handful of units as well. Total square footage at the end of the year stood at 74.3 million square feet. Lastly, in terms of stock repurchases, we purchased a very small amount in the quarter when the stock fell below 40. Early in the quarter we started to dip our toe back in the water. Recognize back in September, we halted it. It has more to do with liquidity concerns back then, given that there were lock-ups in the money market funds and the enhanced money market funds and cash was king and there was no rush to do anything other than make sure that we have adequate cash. We were just getting our feet wet when in a matter of a week, the stock jumped another $5 to $10 back to the high 40s, and again I think long-term we view ourselves as relative buyers of the stock but don’t feel the pressure when asked that we have to go do something tomorrow. Lastly, while no guidance for this year, this year is what it is -- I mean, I don’t think there’s -- and hopefully some of the comments I gave to you today enhance or improve some of the confusion we had, like on where the hits and membership settlement, things like that and hopefully some of those other items you recognize are related either to the economy or some anomalies as well, like the spike in the closing costs and what have you. Hopefully you will take away from this call the following -- food and sundries sales are certainly driving retail business right now and certainly helping us. On non-food sales, there is still softness. There still is some overall deflationary pressures that are with us right now. I cannot tell you when that will abate but it will -- I just don’t know when. Gross margins, again came back nicely, underlying gross margins came back nicely in Q3 as compared to Q2. Expenses, again I think in dollars, taking out a couple of the things I mentioned, were pretty well controlled but certainly a challenge with what’s going on right now with sales and certainly with the spikes in healthcare. Frequency is still at a high level for us. Membership renewal rates are great, loyalty is great. Membership dollars are fine. We are picking up some high-end vendors which again long-term is a positive, we think. Come fall, of course, September, October, November, we’ll anniversary both the high gas prices, which was from late August and into September, and also the beginning of the dramatic U.S. dollar strengthening relative to several of our foreign currencies, which was started in late September through early November. In terms of real estate, again these are not earth-shattering, things that are just going to change our company’s bottom line tomorrow, but whereas we have eliminated or postponed units that we could have the opportunity to do later in our corporate life, and we are seeing some more exciting opportunities out there and in many cases at some lower costs. Again, it’s not going to be a one-year thing. We think this is over the next three to five years that it will benefit us, not dramatically but somewhat. And of course, financially we’re quite strong, so we think that again, bottom line it’s been a challenging year and a challenging quarter and we don’t see any big changes in Q4 as it relates to the challenges of the economy, but we are well-positioned going forward. With that, supplemental information we posted on the Costco investor relations site later this morning and I’ll turn it back to Brandy for Q&A. Thank you.

(Operator Instructions) Your first question comes from the line of Chuck Grom with J.P. Morgan. Chuck Grom - J.P. Morgan: Thanks. Good morning, Richard. If I look at your reported comp down 7% in the quarter, backing into the first eight days of May, I arrive at roughly a down 10% comp, which suggests a core comp of roughly flat or maybe even negative, which I don’t think is the case. I’m just wondering if you could flesh that -- I know there’s some rounding going on there but could you give us a little bit of color on May sales? Richard A. Galanti: There’s not a whole big change. Again, I think as -- you know, the trend during -- taking out Easter and taking out [inflation], the trend in Q -- back in April was a shade weaker than in March. I don’t think we saw any big improvement from April, so not a lot -- a little bit of a change. I mean, there’s some rounding in there but maybe a shade further negative -- not negative negative, but you know -- but not earth shattering. Chuck Grom - J.P. Morgan: Okay. And then for the upcoming -- looking back at the last fourth quarter, if I recall there’s the four key parts of your business were up about 20 basis points on gross profit. Can you give us a sense for what you are thinking this upcoming fourth quarter will be? I know you just said that the core businesses were up about five basis points, gas was 42 for the 47 but what do you think for this upcoming fourth quarter? Should we think a little bit better than five? Richard A. Galanti: I wouldn’t predict at this point, since we are not giving predictions. Clearly at the end of Q2 -- on the Q2 conference call, again the big issue was wow, there was this aggressive pricing and seasonal markdowns, both of which could continue to impact Q3 and Q4. You know, I am pleased with what we saw in Q3. Again, the feeling in Q4 at least as it relates to lawn and garden, the merchants feel that markdowns are fine, so that won’t be an issue in Q4. Again, it’s hard to predict what Q4 brings in overall core but I’m more comfortable with Q3 than I was in Q2. Chuck Grom - J.P. Morgan: Okay, and then just a last question on CapEx -- it looks like you lowered it about $300 million from the last call. Is that a function of just lower costs to manufacture the sites or -- I’m sorry, build the sites as well as a lower store count? I’m just wondering if you are reducing CapEx elsewhere. Richard A. Galanti: It’s more the lower store count. There is -- when you talk to the -- to Jeff Robin and Paul [Malden], the real estate guys, they are seeing 20% to 25 -- 15% to 25% reductions in projects that were ongoing but hadn’t been signed yet, both in land values as well as construction costs. Most of the construction costs decline is on -- you know, we are doing more and more steel buildings and as I understand, the prices of steel is down 75%, 65% to 70% from a year ago, $1200 a ton to $400 a ton, or something like that. And of course, labor has -- the actual physical cost of constructing, the labor costs have come down but not nearly like that -- very little, in fact. But all in, 20%, 25%. I think a bigger issue is the roughly $5 million of site location costs which hits SG&A -- in fact, closing costs, that was that site location costs. That’s a bunch of -- that’s again, a half-a-dozen projects where we just halted on them. In part, I’m sure we’ll end up doing some of them but we are able to negotiate better numbers, so -- and then I guess in your model, if it’s come down 300, my guess is a little of that is rounding. It could have come down 200, depending on what your estimates were. But again, it’s not going to jump next year to $1.8 billion. My guess -- we haven’t put our numbers in for next year but it probably gets back to that 1.5, 1.6 and goes from there. There are more opportunities but we also reduced a few opportunities this current year. Chuck Grom - J.P. Morgan: Okay. All right, thanks, Richard.

Your next question comes from the line of Deborah Weinswig with Citi. Deborah Weinswig - Citigroup: Thank you. Good morning, Richard. Your frequency has been quite strong -- do you believe that you are getting more of your customers’ grocery spend? And what percent of their wallet do you believe that you have currently and what do you think the opportunity is there? Richard A. Galanti: On the latter part, I don’t know what percentage of their wallet. I would like to think all but on the frequency, clearly when you look at the comps even anecdotally on things like rotisserie chickens, on takeout pizzas at the food court even, those things are way up. Even within some of the anecdotal stories I hear on things like housewares, like toaster ovens and food savers and the magic bullet, that thing that mixes stuff at high revolutions -- I mean, all those types of home stuff for food preparation is increasing. So yeah, I do think -- and clearly the frequency helps offset some of the reduced transaction. Some of that reduced transaction is not just TV sets that are lower priced but people, you know, coming more frequently to spend a little less. Deborah Weinswig - Citigroup: Okay, and then what is your outlook for deflation in food and separately non-food? And is there an opportunity to hold price and pass this along in the form of higher quality? Richard A. Galanti: Well, that’s our mantra -- I mean, an example just a month-and-a-half ago at the -- two budget meetings ago was taking our tuna. We introduced, as I understand over the last 30 years, the normal tuna sized can of all the leading brands in the supermarket has gone from below seven ounces to below five ounces, and we basically went to a 7.1 ounce, back to a 7.1 ounce can, called a retro can, I guess, on KS and then with two of the manufacturers whose branded items we sell, two of the three tuna suppliers, we said basically build us a 7.1 ounce can so our customer can see how it compares our price to theirs. And our poundage of -- and our units and our poundage is up in the 20% to 30% range. Now that’s anecdotal, it’s one item. I can look at other things like price decreases on things like all the food wrapping and tin foil down in the 7% to 10% range prices. Paper towels down just a couple of percent. This is over year over year. All your plastic spoons and cutlery, all again along with paper plates and things, down 6% to 7%. Water, branded water down 7%, partly because ours is a much better value and just like we’ve seen increased penetration of the private label items across all of these consumables, same with water. So various -- and by the way, if you’ll recall on Q2’s call, I mentioned that whereas normally we might see a half to three-quarter percent increase in sales penetration year over year in private label, within many of the -- what I’ll call the supermarket items, whether it’s food wrap or paper plates or liquid detergent or fabric softener, we saw a 300 basis point increase in penetration of those items relative to the brands, and needless to say 10% and 15% increases in unit sales of the current KS and like decreases in units of the brands. At the same time, three months ago we started see articles, as you did, in the journal and other newspapers, talking about some of the big consumer branded companies. You know, we’re passing all these savings back at. They were still having higher prices and companies like us saying oh yeah, well, we are starting to see some of those reductions and again, that’s the right thing to do and good for the customer. It creates a little bit of a challenge but again, you can’t have deflation on top of deflation on top of deflation in the year that we’re having it. Hopefully as we anniversary it, it will start to flatten out if not get a little better. Deborah Weinswig - Citigroup: Okay, and then last question, how should we think about unit or square footage growth for 2010? What are the greatest opportunities from a geography perspective? And then how do the business centers kind of fit into all of this? Richard A. Galanti: Well, let’s see, if we started with 543 at the beginning the [last year], add 16, so we’ll start the year at 559, and throwing out a number here, if it was 23 on 559, that would be 4% unit growth. That’s as good -- you know, so somewhere between 3.5% and 5% unit growth, or -- say 3.5 and 4.5 unit growth and 4% to 5% square footage growth. In terms of the business centers, we are opening more of them. They work, it enhances the value to that all-important business member. But we’re not going crazy. You know, forever it seemed like we had two or three -- now we have seven. We’ll probably add two or three a year for the next two or three years but it could be more than that. But it’s not like we’re going to go from seven to 20 to 40 in the next two years. So they are profitable. We find things there that we then roll out to all locations. I think the most important thing is that it seemed like it was 10 or 12 years where they just were a little profitable and not terribly exciting and again, I think partly Phil [Lynd] and his people, one of our VPs and the guy that runs it, took it over a few years back and I think we’ve done some good things in that area. Deborah Weinswig - Citigroup: Okay, great. Thanks for the color and best of luck.

Your next question comes from the line of Mark Wiltamuth with Morgan Stanley. Mark Wiltamuth - Morgan Stanley: Good morning. Richard, if you take out your membership fees and look at just your retail margins, they are down to about 0.2%, which is near a historic low. Philosophically, would you want to defend your retail margin and keep it from going negative, or would you be more focused on keeping the sales and traffic numbers up? Richard A. Galanti: Well, we’re going to keep the sales and traffic numbers up. But we -- we’ve always -- and I have -- you know, this is the hundredth time in the last 20 years that this question comes up and of course, as there’s weakness, recognizing there’s some overall weakness right now, so even your 0.2 should be higher next year, or after the recession and without the membership litigation hit and the tough tier spike and some other things. But that notwithstanding, we view our business as a gross profit number, which includes our merchandise gross margin plus our membership fees. That number approaches 13. We would like our expense numbers to approach 10, not 11 as they are right now. But if it went slightly negative, it’s the same story. We are pushing for total profitability. We are not trying to break even. We’d every much like to make over 1% on the operation net of membership fees. That’s not in the cards right now. But again, the question -- I don’t mind the question but it’s being asked when we are -- and my hopeful view is we are at the low point of this process and as we get past this fiscal year and cycle through gas deflation and cycle through FX and cycle through hopefully and continue to maintain some margin improvement hopefully and cycle through FX, all those things, you’ll see that go the other way hopefully. But my guess is only a little better than yours at this point when. Mark Wiltamuth - Morgan Stanley: And do you have any sizable buckets of cost you can still go after if things stay weak or get weaker? Richard A. Galanti: They aren’t sizable but something I mentioned probably to half-a-dozen of you as you’ve called over the last 12 weeks -- for years, I’ve always said there’s no silver bullets and we run a pretty good shop. Well you know what? We’ve actually -- when we look at the numbers, if you look at the underlying payroll, which is payroll and benefits is 70% of SG&A and payroll is what -- 70% of that number, of that 7%. You know, payroll dollars were up that much and we’ve done a pretty good job of controlling payroll. What we’ve found is notwithstanding that there’s no silver bullets, when it got a little tougher, we are finding little bits and pieces of money -- not a lot but are there any big buckets? No. But we’ll see where we go from here. There are a few things that we are looking at but I am not going to talk about them now and I am not -- and there’s nothing giant. It’s not like when we changed the healthcare. We’re not looking to change healthcare to pass on more to the employee right now. We have had a higher increase at central now for about four months, five months. You know, you’ve always been more efficient in the warehouse because it’s more seasonal and hourly than you can fluctuate those numbers a little bit. You know, notwithstanding that, with the closings of the two Costco homes between the 180 employees, about 90 each in those two locations, and the 22 employees here, that’s about 200 people, we have no lay-offs. Now, we could have but we are going to incur a little extra employment -- you know, the northwest warehouses in Puget Sound are taking on about 80 employees and at central, we are going to take on 15 or 20 employees. But that’s the right thing to do and that’s nominal compared to the whole picture. Mark Wiltamuth - Morgan Stanley: Okay. Thank you very much.

Your next question comes from the line of Robert Drbul with Barclays Capital. Robert Drbul - Barclays Capital: Good morning, Richard. A couple of questions -- first, you dipped your toe on the buy-back. I was wondering what it’s going to take for you to resume guidance from the business perspective? What are you looking for? Richard A. Galanti: In terms of guidance, are you talking guidance on the buy-back or guidance on guidance? Robert Drbul - Barclays Capital: No, well, you feel comfortable to step in on the stock at a certain point -- I’m just wondering what it will take for you to get more comfortable to sort of predict, give us a little bit of a range or resume your guidance quarterly or annually, et cetera, going forward. Richard A. Galanti: I guess I want to reserve that for when we talk at the end of Q4 in early October. There’s frankly a bias among the board that less guidance is better. The question then becomes, as you just mentioned, should there at least be annual guidance. Those have all been discussed but I don’t want to suggest yes or no yet because I’m involved in those discussions but await to discuss again later this summer. I apologize for not being more clear but needless to say, we don’t want volatility. We all, not just Costco, have gotten a little bit of a free pass this year with the craziness in the economy and it’s easier not to guide right now. But I personally have a bias towards trying to at least provide some guidance but we’ll wait and see. Robert Drbul - Barclays Capital: On the cost side, when you look at the $0.03 to $0.04 hit from healthcare costs incremental this quarter, how long do you think that’s going to continue? How should we think about that going forward? Richard A. Galanti: Well, I don’t know. You know, [inaudible] and a penny, a little under a penny of it was some other miscellaneous accruals and things that were just some catch-up, nothing earth shattering, several little things. But on the $0.02 that I’ll call the healthcare spike, I don’t know. It happened back in October/November and then it abated and again, we kind of -- and with our -- and with our third-party provider kind of broad brush strokes said that it was related to the stock market decline and everybody freaking out and people had more accidents, people had more claims. Some would argue that it’s also related to the fact that people who fear being laid off want to get everything in that they can before they get laid off. Now I would argue that that should be less of a concern at Costco so far but there’s those fears out there. I don’t know how -- again, we saw it in March for the first time since I think November, and then we saw it in April again. We don’t have any indication yet for May. Those are numbers that come in at the end of the month. If I was a betting person, I would say you’ll see it in May but perhaps not as large as March and April, but if it’s $8 million or $9 million a month, it’s real dough. It’s a penny plus a month. But don’t think it’s a penny plus a month for the next six months. I think it will ebb and flow a little bit. Robert Drbul - Barclays Capital: Okay, and then just one last question -- when you look at California, I mean, we’ve heard a number of companies talk a little bit more constructively about what they are seeing in California. Why do you think your business hasn’t gotten much better in California? Richard A. Galanti: Well, keep in mind, I can only say that I know within the club business, we are the highest -- we believe we are the highest penetrated on not only non-food items but big ticket items and we are all getting hurt. We all know -- I say this somewhat seriously -- we all know very affluent people that are just choosing that they can afford it but they are still choosing not to buy a new car, not to buy a new patio set, not to buy $1,000-plus items. And that’s certainly part of our business. I think that you live and die by that a little. Again, I am thankful that relative in any one of those non-food categories, our negative comp is a lot better than traditional retails in those categories. That’s partly because we got them at least coming in the door and we are offsetting some of it with food. But again, in my view, the fact that our unit sales, our pounds of meat and poultry and our units of cantaloupes and grapes are up more than 10%, that’s not going away when the economy gets better and it’s not going away when the average price per pound or per dollar go up a little bit, so I think those things bode well for us but once we anniversary or once the economy improves a little. Robert Drbul - Barclays Capital: Okay. Thank you very much, Richard.

Your next question comes from the line of Dan Binder with Jefferies. Dan Binder - Jefferies: A few questions for you, first on the 5% decline in new member sign-ups due to fewer store openings in Q2, I guess it’s had a residual effect on Q3. What would you anticipate that to be in Q4? Should we start to see that membership growth rate in local currencies come back up to more like a 7%, 8% level? Richard A. Galanti: Keep in mind 5% is only about 30,000 people, so it’s -- I’m just looking at my calendar here. What’s going to really help Q4 and the comparison year over year is the fact that we’ve got three in Asia. Asia is nuts when it comes to member sign-ups. If you divide our total company by total -- total members divided by total number of warehouses, I think the numbers per warehouse for our whole company, it was average warehouse does $140 million or whatever and whose average age is in the mid- to high-teens, mid-teens, the average members per warehouse is in the low 50s, you know, 53,000, 54,000. And on opening day, we count all sign-ups that have come in during the eight or 10 weeks that we have the table set out with the flags and the tents outside to sign up people. Typically in Korea, Taiwan, and Japan, we may sign up 40,000 to 55,000 members as of opening day and it goes only up from there, so having Japan, Korea, and Taiwan each have an opening in early July, second week in July, so that’s -- we’ve got about halfway through the quarter, I don’t have -- I haven’t calculated the numbers but if I’m a betting person, we’ll see it up year-over-year a little bit or flat but certainly not down five. I bet it will be up a little. Dan Binder - Jefferies: So that would -- so in local currencies, should our membership growth get back to that seven, to about 7% level or so in Q4? Richard A. Galanti: Yeah, I mean, it’s already at 6 in Q3 in local currency without the membership hit from that settlement, so yeah, the answer I -- I would say probably yes. Dan Binder - Jefferies: Okay. And then on dot.com, you talked about I guess that business being a little less bad in Q3. Given the nature of the products you are selling there, and the fact that the comps actually got a little bit worse in Q3 for the rest of the business, I’m just trying to reconcile that. Do you think there’s early signs there that the consumer is starting to -- we are starting to see a bottoming on the discretionary purchases? Are you seeing that anywhere else in the business outside of California? Richard A. Galanti: Well, these are purely anecdotal -- first of all, the comp in dot.com in Q2 was in the mid-singles, negative, and the comp in dot.com in Q3 was in the very low singles, so there was an improvement, a relative improvement. Just a week ago, I was talking to Jim when he was traveling and he was starting to see some light on some of the lawn and garden stuff, and these are in markets where we saw -- markets where the season had already occurred. In other words, the Phoenixes and the Southern Californias -- it’s not like in the northwest where it was a late spring and where we saw a pick-up finally when the weather -- when the sun came out last week. So again, those are anecdotal positives but -- and then I know in dot.com, we’ve also offered some additional medium priced items. We’re not switching out of high-priced items but we are giving the customer a little alternative, which is easy to do on dot.com and something we are not prepared necessarily to do in-store yet. Dan Binder - Jefferies: Two final things -- are you expecting any -- should we be expecting any other non-recurring type items in Q4? And then I realize you are not providing specific guidance but if we look at the first call consensus at $0.77, I mean, any thoughts in terms of whether that’s in totally left field or any comments on that at all? Richard A. Galanti: Well, let me say there’s no comment on the second part of your question. Nice try, though. And on the first part of the question, what was it again? Dan Binder - Jefferies: Just in terms of non-recurring items -- I’m just curious -- in Q4, should we be anticipating any non-recurring items as we build our models? Richard A. Galanti: I hope not. I did mention the $2 million to $2.5 million of Costco Home closing costs, which is a rounding error, relatively speaking. My guess is as -- you know, we’re down -- the $1.1 billion in enhanced money market funds we had in December of ’07, we’re now down to about $40 million at book, having written off about $16 million over the last year-and-a-half, including the $4 million this quarter. My guess is there will still be little remnants of $1 million and $2 million a quarter for a couple of quarters, but again there’s no -- that’s just -- I’m shooting from the hip, it’s not based on any analysis. It’s based on the fact that these keep just bleeding a little bit but we’re through the pain on that but it’s more of a thorn. Other than that, at this point, no. Dan Binder - Jefferies: Okay, great. Thanks.

Your next question comes from the line of Mark Miller with William Blair. Mark Miller - William Blair: Good morning. First, a mechanical question -- you quantified the impact on SG&A from the higher gas penetration -- excuse me, lower gas penetration. Can you do the same in terms of how much that benefited the gross margin? Richard A. Galanti: Can I, Bob? Hold on, we’re looking. Bob Nelson is sitting here and he’s -- it’s in the mid-20s. He’s looking for it. But it’s in the mid-20s. Mark Miller - William Blair: Okay, and I was hoping you could elaborate on the higher penetration of sales from the executive members, and some context around how that’s been changing sequentially and sort of what’s happening with the non-executive members, so that spending is softer. I am wondering, what is it about their spending? Are they tending to be more discretionary, treasure hunt shoppers or how do you observe the trends in those two groups? Richard A. Galanti: Well, keep in mind first of all the executive member is first of all your higher end customer, the one that does spend more, so it’s a little bit of a self-fulfilling here. In talking to our membership marketing people, clearly in the last few quarters, operationally our view is we have done a much better job in warehouse of getting you to convert, or when you first come in to sign up, getting you to sign up as a executive member versus a gold star member. The last numbers I heard a few months, two months ago in the budget meeting when the marketing people were talking about it is a year or two years ago when we would have 100 people, new people come in to sign up at the warehouse at the desk there, we might get 10 or 12 of them to sign up as an executive member. Today, it’s nearly double that -- it’s in the very low 20s. So we’re getting a -- we’re better at selling them on it, recognizing we don’t do a lot of selling. I would also recall the anecdotal story of back when there were eight or nine warehouse club operations out there, companies, and one of these recent start-ups called Costco, it started in late ’83, probably in ’85 or ’86, was set to open its first -- Costco, we were set to open our first location in California, I believe in the Bay area, and at the time, Price Company maybe had three locations in the Bay area and a half-a-dozen in L.A. and a half-a-dozen in San Diego. And at that time, the entire industry, because this is the way the price club originally did it as a pioneer, wholesale members paid $25 and Gold Star members paid nothing but paid a 5% up-charge. To Price Company’s credit, when somebody finally was going to go into somebody else’s market, in this case us going into their market, they eliminated the free gold star member and 5% up-charge and just said everybody pays $25 -- it’s now $50, of course -- but everybody pays $25 and there is no surcharge. And what they did is they eliminated a lot of low-end members that weren’t -- didn’t value the membership and kept all the ones that did, and so I think the same thing happens here. We’re better at also while they are standing in line, we ask them occasionally to see their membership card. We hit it with a handheld RF gun and it immediately tells us that based on their prior 12 months of purchases, they are -- you know, if they’ve been an executive member, it would have more than paid the $50 and if they do it and they find out it’s not, we’re happy to give it back to them. And so again, I think we are getting better in the field of doing it. I don’t think it tells you a lot beyond that. The lesser member who does [inaudible] is moving on or staying at the low end. Mark Miller - William Blair: Okay, my last question is can you update us on the comp sales leverage point for expenses? And to be able to get leverage on labor, do you need to have that average ticket go up? I’m kind of curious about the labor hours. Do they tend to be tied to frequency? So you know, traffic is strong but you need to staff to that -- kind of what’s your thinking on the leverage point overall? Richard A. Galanti: Yes, I mean, all of the above -- I mean, the fact is we are selling 50% more TVs at 5% more dollars, it’s costing us more. We get the same margin percentage but it’s costing us more than 5% in labor dollars. One area where we have done a really good job is in fresh foods, and particularly in the manufacturing parts of fresh foods -- you know, fresh meats and in bakery. Because unit sales are up and in -- you have two things, because unit sales are up, you are a little more efficient so you don’t lose it all. It costs you a little bit more labor but not as much. And in the case of things like produce, given that unit sales were up, your spoilage is down, so your labor may be up but your -- it’s being offset on the gross margin line by a little less spoilage. Mark Miller - William Blair: And the comp sales leverage point, Richard? Richard A. Galanti: I have given up on guesstimating. I still think it’s in the four range but it’s a guess. Mark Miller - William Blair: Okay, thanks.

Your next question comes from the line of Adrianne Shapira with Goldman Sachs. Adrianne Shapira - Goldman Sachs: Thank you. Richard, you know, core comps have decelerated to that 2%, 3% over the last few months and the last time we saw comps soften to that range in the fall, you took a breadth of pricing actions to drive better sales. I’m just wondering if you could kind of give us a sense what is that tipping point, as you mentioned philosophically -- you know, it is to drive traffic and sales, so it would seem like we are back at that level. Richard A. Galanti: Well, other than, if you’ll recall the comments that I made about the perfect storm, and the other component of that perfect storm was there was huge deflation in core commodity items and it was a matter of weeks if not more than a couple of months -- less than a couple of months before the underlying procurement costs, so yes, we were eating into our margin to do it but we knew there was a finite end to it. So we’re not totally crazy here. I don’t view it as happening right now. I can’t predict what tomorrow brings but at this juncture, what you saw in Q3 is continuing in terms of our MO. Adrianne Shapira - Goldman Sachs: Okay, and what are you seeing out there in terms of the competitive landscape? Are you seeing other people be similarly rational? Richard A. Galanti: No. Sam’s is still pretty tough -- as they would say we’re still pretty tough. And again, you probably have more -- and some of you who follow BJ's have more insight than I do other than reading a couple of the research reports on it, but as you know, they recently announced -- they upped their estimates for the year and they talked about 100 basis points of higher gross margin, which leads us to believe that they are keeping more -- as prices are coming down, they are keeping more of it. That’s their prerogative. That’s not what we are going to do but it does give us a little bit of a window, recognizing that window is not as big of a relation to us than the Sam’s window, but it gives us a little bit of a window there. But that’s -- you know, supermarkets we think are keeping a little of it but not as much probably as some others. Adrianne Shapira - Goldman Sachs: Okay, and then just on the core comps, the softening that we’ve seen over the last few months, just qualitatively, is it deflation hitting food harder or is it worsening declines in the non-food? What is driving the recent weakness? Richard A. Galanti: I think it’s the former in the last couple of months because we finally saw some deflation, and the comment I made about some of the large consumer product manufacturers who just a couple of months ago were talking about we’re not having our prices come back down, so we’re making more. If I look down this list just in the last month, in the last four weeks, we’ve seen items like effective May 18th, a price decline of 6% to 10% on some liquid soap items. I’m not going to name the name but you guys can figure it out. We’ve seen 6% and 7% in effective -- 7% in March and another 6% on June 1st on all the plastic, spoons and forks and 7% on water, back in -- on branded water, a couple of different brands, back on April 13th. We are seeing -- the fact is, is consumer products -- branded companies cannot keep their prices up unless they want to lose market share and we’ve shared with you some of the deltas of our brand, of our KS brand versus the local -- the national brand where ours is up 10 and 15 percentage points in units and theirs is down a like amount. Ultimately they have to change their pricing, so again, I think you are going to still see -- I think there’s relatively speaking a little more of that. Adrianne Shapira - Goldman Sachs: Okay, and just then the final question to combat that ongoing deflation, help us understand what you are doing on the non-food side to drive better trends there. I mean, it would seem with such strong traffic we should see better conversion. You know, you obviously have members in there shopping for the food. Why then aren’t we seeing them convert to non-food already and perhaps give us your thoughts on merchandising issues -- I mean, obviously big ticket is a big part of that. Is the big ticket perhaps being re-bought and maybe not as big ticket as we thought a year ago, and in an effort to drive those non-food sales? Richard A. Galanti: Two things -- one is -- I mean, you look at two big ticket, big dollar items, PCs, laptops, which is more laptops than desktops today, PCs and TVs. I don’t know if we can do any better than 40% and 50% unit increase but 40% lower price points means flat or slightly up dollar increase. So you have that trend. It won’t go down 40% a year. I think again it’s been the perfect storm for that stuff. It was not only the standard deflationary year but also the weakness in the excess inventory out there, so we benefited from that or got hurt less from that. The -- I lost my train of thought. On merchandise in general, I asked the question of our lawn and garden buyers a few weeks back, because it’s in June and July when we commit for the upcoming January through April season, and clearly -- and I’ve used the example to many of you in the last few months, we’ve got a $3,000 patio set up there for $12.99, which is a great value, beautiful -- it’s not the ugly orange, it’s actually good-looking stuff, but it’s just not selling. Well again, fortunately we cut back -- we canceled about $55 million of orders, which was about a quarter, a little over a quarter of our commitment, so the good news is we are not going to have markdowns. The bad news is we had 25% less sales and so the question is for next season, if we think the economy -- maybe it needs to get a little better but it’s still going to take some time and it’s not going to be better yet, that do we come in with a $9.99. And the answer is both -- we are going to try some but we are not going to eliminate the $12.99 but we are not -- we hesitate to bring down price points but we are also logical thinkers here that we had to try a couple of things and we are trying some of that right now, and I’m sure that as we go into my example of June and July, we’ll be bringing in a combination of things. Adrianne Shapira - Goldman Sachs: So as we head into the holiday season, any thoughts in terms of ticket year over year -- what sort of -- what we could expect ticket to come down on some of those items? Richard A. Galanti: I think for holiday sales, we were already getting hit for tickets. In other words, we took big markdowns on gift baskets and stuff. My guess is in terms of realized, including the markdowns, realized pricing will be okay this season for gift baskets. I guess I’m a little more -- I’m a little less concerned, a little more optimistic on pricing than others out -- than you guys. I think we’ve already seen some hurt. Again, we’re not going to have another 40% decline in the average price point of a TV year over year on top of this 40. It’s going to be down 15 or something but now down 40, so again -- and again, I think once we anniversary it, it’s not another hit on top of that hit, the big hit. So I don’t -- at the end of the day, I don’t know completely. I know that clearly like in housewares, frankly the fact that we are being selling more coffee machines and more toaster ovens and more food savers hasn’t really changed the average price point in housewares. We’re just -- it’s helping offset the fact that not everybody is buying a new serving platter. Adrianne Shapira - Goldman Sachs: Thank you.

Your next question comes from the line of Andy [Wagstaff] with Touchstone Investments. Andy Wagstaff - Touchstone Investments: I saw this press release yesterday where you guys are doing this test in two New York City locations on accepting food stamps and I guess BJ's already does so but just I wanted to try and get my arms around this, given the fact that obviously we are talking about a membership environment where members are paying you $50 a year -- you know, outside of this, can you just kind of help frame the idea behind this and why these -- I guess are these customers that would have already been on food stamps and paying $50? Or is it such that these customers have in the last six months become unemployed and have gone on food stamps and they were prior customers from years past when they would not have actually received them? Richard A. Galanti: There are -- clearly there are more people on food stamps today than there were a year ago. Historically we have chosen not to accept food stamps because there are challenges of accepting them. You have to make sure that they are only for eligible items -- in other words, tobacco you can’t buy, paper towels you can’t buy. I don’t know what all the rules are today. I know literally 35 years ago my Dad’s supermarket in Atlanta, there was that issue, that you have to make sure that the customer is not buying and clearly today with the automation and the electronics registers, you can flag items to make sure. It holds up the front-end. If somebody is coming through with a -- a family is coming through with a buggy load of merchandise, some of which can be bought on food stamps, some of which can’t, you’ve got to separate them and transact it that way. So it’s a slow-down to a very efficient front-end. That’s why historically we have chosen not to accept food stamps. Andy Wagstaff - Touchstone Investments: Right. Yeah, I was just struggling really to understand why people would pay their membership fee of $50 if they are on food stamps, but I guess there are some that do. The other question I have for you is, and I am a big fan of the coffee that you guys sell there and actually it’s one of the off-brand labels, just some sense about maybe buying patterns in the coffee area with respect to your brands and the San Francisco French Roast, which is the one I’m partial to, and the pricing there seems reasonable, are you noticing buying patterns of people in the coffee area that are actually choosing to go with either plain label, you know, the Kirkland brand, or one of the others, as opposed to the Starbucks and some of the primary labels you guys carry? Richard A. Galanti: Just one last response to your previous question -- I think people in terms of food stamps, they are still coming to shop at Costco because the prices are great, relative to other traditional retailers. And part of the issue of us deciding to test it and accept it is we’ve had a lot of pressure, including political pressure, in the city and State of New York and we -- you know, we don’t have our head in the sand. We are going to see what happens here. Andy Wagstaff - Touchstone Investments: Yeah, yeah, yeah, just test it out, I hear you. Richard A. Galanti: But it could be a positive. I mean, when I was a kid, you had to accept them. They were little booklets of $5, $10, and $20 food stamps. Today it’s a card. You can program the registers for a flag, just like you program each item as taxable or non-sales taxable. So my guess is some of the inefficiencies are gone but we’ll have to see. Getting back to your item, I don’t know specifically about coffee -- if you want to email me, I can find out a little bit more color. I can tell you across all what I’ll call supermarket items, whether it’s paper towels or cans of corn or batteries that are fabric softener or laundry detergent, across the board, we are seeing a switch from branded to private label. Why? Because even though ours is the best price on that branded item relative to traditional retailers, it’s still on a $15 or $20 sell price, if that customer can save $3 or $4, it’s no longer an affordable luxury. They are making the switch because they want to save $3 or $4 on that item. Period, end of story. Andy Wagstaff - Touchstone Investments: Okay. Richard A. Galanti: -- our quality, it’s a no-brainer long-term for us because once we’ve got them, we got them, because it’s a great quality KS. Andy Wagstaff - Touchstone Investments: Okay. Thank you.

Your next question comes from the line of Wayne Hood with BMO Capital Markets. Wayne Hood - BMO Capital Markets: Most of my questions were answered, Richard -- I just wanted to have one additional question, that way I didn’t have to call you afterwards -- what are you seeing with your coupon redemption rates versus a year ago? Are they higher and if they are higher, how are the discussions with the manufacturers going because that puts pressure on them, given the higher redemption rate and their discussions with you about cost? And then the other question I had was on renewal rates, which you discussed a little bit but I was curious about the renewal rate of the executive member in clubs that were two years older, or older, so those are my two questions. Thanks. Richard A. Galanti: Coupon redemptions are up. The bigger issue, there’s less concern about the lower price point consumer product items relative to the big ticket items where the manufacturer of a laser printer, fax machine, or the manufacturer of a TV or manufacturer of a GPS item, where they are comfortable giving us that discount on 10,000 units but not on 25,000 units. The problem is those are the items that we are not selling as much as we used to, and the consumer product companies love it. So we haven’t -- yes, we are seeing increased redemption. Our goal is to put -- keep trying to put more things in there that are bigger ticket to get those items selling again too. But just like bigger ticket items are weaker out there, bigger ticket items in here are weaker relative to what they had done historically. The second question, I’m sorry, again? Wayne Hood - BMO Capital Markets: Just on your executive membership renewal rates on clubs that are a year or more older -- you talked to it broadly speaking but I’m more interested in the ones that are a year or more older. Richard A. Galanti: Yeah, we see -- the trends have been pretty consistent. Based on your tenure of being a member, gold star or executive, we see the longer you have been here, you are more likely to renew the next year. In our first year when we open in a new market, you might have a hundred people sign up and 70 then renew. And then the next year, you’ve got a new hundred, 70 of those renew but then 80, 78 of the -- 78% of the 70 from the previous, from year two renewed. And over time it get it gets up to that average of 87. On the executive member, we haven’t seen any improvement or deterioration in a converted member who converted and then a couple of years later goes back to the regular membership. That happens but we haven’t seen any deterioration in that rate. Wayne Hood - BMO Capital Markets: Thanks, Richard.

Your next question comes from the line of Chuck Cerankosky with [Northcrest] Research. Chuck Cerankosky - Northcrest Research: Good morning, Richard. I want to take a look at your sales mix say in Canada and some of your non-U.S. locations, realizing you only have 75 or 80 units in Canada. Any significant difference between food and non-foods in Canada versus the U.S.? Richard A. Galanti: Not in Canada specifically versus the U.S. but just like in the Northeast, we have a higher food and health and beauty penetration relative to the rest of the country. We see that similarly in Montreal, as an example, and similarly in Asia we see a much bigger penetration of food and health and beauty aids. I think part of it is the great value proposition on those items, particularly on things like health and beauty aids and analgesics and things where -- and vitamins. I mean, the price points on those items in traditional retailers in Asia before we got there were crazy. And food, again we were told that certain things wouldn’t sell over there, like our over-sized muffins and our pizza. The penetration up there is going nuts on those items. Many of those locations are our highest penetrations of those items. Chuck Cerankosky - Northcrest Research: All right, and how is gasoline doing as a traffic draw, apart from the price drop? Or maybe as the prices drop, how is it doing as a draw? Richard A. Galanti: As the prices drop, it’s a little less positive but still positive. I mean, there’s -- you know, when -- it’s more related to the fact that when the prices were spiking at $4, you could not turn on -- you could turn on any channel of news at 6:00 or 11:00 at night and the consumer advocate, one of the top stories was where was the cheapest place to buy gas. Because that’s not top of mind each night on the news now, you see I think a little less positive from it. Chuck Cerankosky - Northcrest Research: All right. Thank you very much. Richard A. Galanti: I’m going to take two more questions.

At this time, there are no further questions. Richard A. Galanti: Perfect. Thank you, everyone. Goodbye.

This concludes today’s Costco third quarter earnings results conference call. You may now disconnect.