Costco Wholesale Corp COST
Q2 2013 Earnings Call Transcript
Transcript Call Date 03/12/2013

Operator: Good morning. My name is Crystal, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Second Quarter FY '13 Operating Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

Thank you. Mr. Richard Galanti, CFO, you may begin your conference.

Richard A. Galanti - EVP and CFO: Thanks, Crystal. Good morning to everyone. This morning's release of course, reviews our second quarter and fiscal first half 2013 operating results for the periods that ended on February 17th. As with every call let me start by stating that these 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.

So to begin with our 12 week second quarter reported earnings per share of $1.24 up 38% from last year's $0.90 reported number. As noted in this morning's release and as I had mentioned during our first quarter conference call – earnings call back on December 12th, this quarter's net income was positively impacted by a $62 million or $0.14 per share income tax benefit. That was in connection with the portion – that portion of the special cash dividend paid by the Company in December of 2012 to Company 401(k) plan participants. Excluding this one-time benefit, our earnings per share for the quarter would have been $1.10 or up 22% year-over-year.

In terms of sales for the second quarter, total sales were up 8% and our 12-week reported comparable sales figure was up 5%. For the quarter, sales were very slightly benefited by gasoline inflation less than 10 basis points of an impact and were also benefited by strong foreign currencies overall relative to the U.S. dollar year-over-year by net added about 50 basis points. Even so the 5% U.S. comp sales excluding the gas inflation remained at 5% and while the reported 6% international comp figure assuming flat year-over-year FX rates would have been 4, total Company comps both were reported at 5%, excluding both gas and FX, they still came out to a 5% for the Company overall.

As announced last week for our four-week month of February, which of course includes two weeks – the last two weeks of fiscal Q2 and the first two weeks of our fiscal Q3, but in terms of those four-week month of February, comps came in at a 6% both for the U.S. and the total Company. In terms of new openings, after opening nine new locations in the first quarter, which ended November 25th, we opened five new locations in the second quarter, one in Washington D.C., two in Canada, one in Oshawa, which is in the Toronto market of Ontario and one in Drummondville, which is in the Montreal market in Quebec.

We also opened in Leicester, U.K. in Central England and in Gwangmyeong, which is outside of Seoul, Korea. All told that puts our 2013 fiscal year openings through the second quarter end at 14 new locations such that we now operate at 622 locations around the world.

Between now and the end of fiscal '13, which I think ends on September 1st, we expect to open an additional 14 locations, five in the current fiscal quarter and nine in the fourth quarter. Of these 14, before fiscal year end that we haven't opened yet, four will be in the U.S., five will be in Japan, two in the U.K. and one each in Taiwan, Australia, and Mexico. Such that we will most likely end the fiscal year with 28 new openings this fiscal year and be operating a total of 636 Costcos worldwide at that time. I'll also talk later in the call about e-commerce, membership trends and discuss guidance of course about margin and SG&A.

On to the quarter itself, again, sales were up 8%, comps were up 5%. In terms of the reported 5% comp number, that was the product of an average transaction increase of a little over 2% for the quarter and an average frequency increase of a little over 3%. The frequency trend for the last three calendar months that we reported was 5%, 3%, and 4% for December, January, and February, and year-to-date we are at 4%.

In terms of sales comparisons by geographic region, overall the Southeast, Texas and Midwest regions were the strongest. Internationally, in local currencies, Korea and Japan were the weakest, again, mostly due to the cannibalization on a relatively small basis of existing units, and with Canada and Mexico being the strongest internationally in local currency. In terms of merchandize categories for the quarter, for the second quarter within food and sundries, overall in the mid-single digits; frozen foods, candy and deli were the relative standouts, and hardlines overall in the low-single-digits, the strongest results were hardware, patio garden and lawn garden and tires.

Consumer electronic sales were slightly negative, mostly due to the timing of the fiscal calendar, as the typically strong Black Friday sales around Thanksgiving benefited Q2 last year and benefited Q1 this year. So, you take that out and those numbers would have been little better.

Within the higher single-digit softlines comps, small electrics, domestics and jewelry were the standouts with media of course continuing to be the relatively weak area, and then fresh foods, comps in the mid-singles; deli and produce were a little better than the two other large categories.

Moving on to the other line items, membership fees, we came in at $528 million, or 2.17% of sales. That's up 15% in dollars, or up $69 million from the $459 million last year and up 13 basis points.

In terms of membership, we continue to enjoy strong renewal rates, and I'll go through little bit that in a minute. Continued increasing penetration of the executive membership, which is roughly $110 a year fee, and we are still, of course, benefiting from the $5 and $10 membership fee increases that began little over a year ago in both the U.S. and Canada. Of the $69 million increase year-over-year membership fees, right at the half of it, or about $35 million, was due to the fee increase. Our membership fee income, as I've talked about in the last few quarter, is based on the deferred accounting nature of those increases and recognizing the increases occurred over a 12-month period based on when somebody originally signed up, and then the income comes in over the succeeding 12 months of that first increase. Basically, we'll continue to show year-over-year benefits from that fee increase throughout fiscal '13, and to a lesser extent into the first quarter of fiscal '14 this coming fall. Again, that's due to the deferred accounting treatment for membership fee income.

New membership sign-ups in Q2 Company-wide were up about 1%. There were more locations opened this quarter, five versus last year's two. It’s mostly reflective of the very strong signups we have internationally, most particularly in Australia and Asia. Last year, we opened two units in Japan during the quarter and two right at the end of the quarter, in the first few days of Q3. Of the 14 units opened thus far in this fiscal year, only one of them has been in Asia, and again, we have pretty much oversized sign-ups in some of those new units.

In terms of number of members in Q2 end, Gold Star 27.8 million, up from 27.3 million at Q1 end; primary business remained at 6.5 million; business add-on went from 3.6 million down to 3.5 million, again, that's somewhat reflective, I believe, of people as they switch into their own membership as an executive member. All told, total members went from 37.4 million at the end of the first quarter to 37.9 million, and including extra cards, spouse cards 68.2 million went to 69.1 million at Q2 end.

At Q2 end, paid executives were a shade over 13 million, an increase of 181,000 over the last 12 weeks, or about 15,000 new executive members, and that's both new members and conversions from the base Gold Star membership. Executive members are approximately a third of our membership base, a little over two-thirds of our sales. In terms of renewal rates, they have continued to tweak up in the U.S. and Canada, which is about little over 80% of our total Company and certainly almost in most mature part of our Company.

Business renewals, which ended the fiscal year at 93.7% rate and at the end of the first quarter it was 93.8%, are now at 93.9%, and Gold Star, which was 88.7% and remained there at the end of the Q1, was 88.8%, such that total U.S. and Canada went from an 89.7% essentially to an 89.8% over the last quarter. And worldwide, recognizing in newer markets you start off with lower renewal rates anyway, we went from an 86.4% at year-end, remained there at the end of first quarter and it tweaked up to an 86.5%. So, really over the last year since the fee increases, we've always been asked a lot about renewal rates. Basically, each quarter have been either the same as the prior quarter or slightly up, and it continues to tweak up almost a full percentage point in the last year quarter.

Going down the gross margin line reported margins were up 6 basis points from a 10.53% to a 10.59%, here we get to write down a few numbers, a little chart with five line items and four columns. Basically, we'll do columns for each of Q1 and Q2 and of course those of you who've heard this before, this relates to the fact of how many basis points of margin reduction or improvement come on a year-over-year basis, the comparison, and once we do the chart, I'll give you a couple of comments.

In terms of core merchandising, reported in Q1 was minus 7 basis points year-over-year and without gas inflation, was minus 1. Going across that line, it was zero and zero in Q2, reported without gas inflation, on Ancillary business, the second line item, plus 14 and plus 15 in the Q1 columns, plus 2 and plus 3 in the Q2 columns. 2% reward, minus 2 and minus 3 in the Q1 columns and minus 1 and minus 1 in the Q2 columns. LIFO, plus 1 and plus 1 in the Q1 columns and plus 5 and plus 5. Lastly, total, reported Q1 was a plus 6, which would be sum of column one. That's what we reported in Q1 year-over-year margins. Without gas inflation it adds up to a plus 12 and then of course for Q2 reported as I just mentioned were up 6 basis points which would be that third column summation and without gas inflation plus 7 recognizing there was a very lower gas inflation.

Basically again core margins were basically flat year-over-year. Those are the four core businesses food and sundries, hardlines softlines and fresh foods, which is a big piece of our business, basically not a bad showing. If you look back of course as you know over the four quarters of fiscal '12 on average year-over-year prior to fiscal '11 – compared to fiscal '11, those numbers were minus 13 without gas inflation and the trend in Q1 year-over-year was minus 1 and of course now it's zero year-over-year. Secondly Ancillary businesses, you'll note that in Q1 it was 15 year-over-year, a big chunk of that as I mentioned in the first quarter call was strong gas margins year-over-year and some inflation. I think I said in the first quarter call about two-thirds of that plus 15 related to that.

In Q2 gas reversed as gas prices went up, margins go down as cost of gas goes up we make less and that plus 3 reflects strong Ancillary business margins offset by probably 5 or 6 basis points of negative related to gas. 2% reward is simply a reflection of little higher sales penetration to those earning the 2% reward and LIFO is a plus 5. Again that's a LIFO credit I will mention in a minute is about $9 million of our credit versus $2.5 billion LIFO charge in the same fiscal quarter a year ago. Mind you, when LIFO is a positive, it means the costs of merchandize are coming down and as you might expect we tend to reflect that in our sales prices as well which should be on the merchandize margin line.

For the quarter, year-over-year, food and sundries gross margins were flat, hard lines and soft lines were up and fresh foods was lower. As I mentioned on Ancillary overall, as in the chart, you saw was a plus 3 without gas inflation. Again, all the other ones, pharmacy optical hearing aids, food courts were all up during the quarter, more than offset or offset by what I just mention about in gasoline. The impact of the membership of the executive member I already mentioned and LIFO I mentioned as well.

Moving to reported SG&A, our SG&A percentage second quarter year-over-year was slightly higher or worse by two basis points coming at 970 versus 968. Again, we're right down four columns, the same four columns. Two for Q1 reported and without gas and then two for Q2 and the sideline items would be core operations, central, RSUs, which would be stock compensation, quarterly adjustments and total. Going across in Q1, the two columns were plus 10 basis points and plus 5, meaning lower plus means good lower and in Q2 zero and zero, central was minus 7 and minus 8, last year zero and zero, this year and as well in Q1 and then zero and zero in Q2. Stock compensation was minus 4 and minus 4 and then Q2 was minus 2 and minus 2.

Quarterly adjustment in Q1 was plus 8 and plus 8 that was the -- that plus 8 last year was compared to the prior year a one-time charge for the initiative in Washington State that we funded for alcohol and then quarterly adjustment to zero and zero in Q2. So, all told, reported in Q1 was a plus 7, meaning that SG&A was better or lower by 7 basis points in Q1 year-over-year, plus 1 total without gas inflation and then in Q2, again it was minus 2 and minus 2, so again higher by 2 basis points. Within core operations, our payroll as a percent of sales improved year-over-year by 5 basis points – it was lower by 5 basis points. Total payroll dollars increased about a little over 6% in Q2 compared to the 8% sales increase, so a good showing there. This improvement in payroll was offset by higher cost and benefits in healthcare including healthcare and workers comp, pretty much a wash between those things. Some of that was accrual related, again these are big expense numbers that we also do actuarial things for.

Our Central expense, it was flat year-over-year in Q2, notwithstanding ongoing IT modernization cost, I think in Q1 we talked about that was 6 or 7 basis points year-over-year increase. On an ongoing IT modernization basis as we're halfway – we're not halfway through, but into the second year of a three plus year project, it represented – on an ongoing basis we estimate about a 3 or 4 basis point hit over the coming quarters, year-over-year.

Next on the income statement line is preopening; it was $6 million in both Q2 last year and this year. Now, last year we only had two openings, this year five, really no surprises, a lot of it has to do with timing preopening starts, in some cases many months before the actual opening in terms of the costs associated with it. All told operating income in Q2 was up $94 million or 15% as operating income went from $644 million to $738 million year-over-year.

In terms of below the operating income line, reported interest expense was lower year-over-year with Q2 coming in at $25 million, $2 million lower than the $27 million last year. Basically we had one big reduction in interest expense in the quarter and then an increase related to the recent debt offering. As recall last year on March 15th, we paid off $900 million of five-year maturity fixed rate debt. The annual pre-tax interest savings to Costco paying that off, I think, I mentioned back then was about 46 million pre-tax per year or about 10.5 million pre-tax for this quarter, so that would make it lower – had made it lower by 100 million. Offsetting this reduction, of course, was about $8.5 million of additional interest expense related to our recent debt offering. As you know on November 28th, we completed the $3.5 billion offering in the form of senior notes a combination of 3, 5 and 7 year notes with the weighted average maturity of five years and all-in annual rate of interest just under 1.25%, which again is about 44 million pre-tax per year currently. So, that's about $9 million increase in interest expense for the roughly 11.5 of the 12 weeks that was issued and outstanding during the quarter. So, pretty much wash between those things and that's why interest expense year-over-year was pretty much in line with last year.

Interest income and other was higher year-over-year by 16 million a quarter. Last year it was $10 million, this year it was $26 million. Actual interest income for the quarter came in at 11 million, the same amount year-over-year. The other component of interest income and other amounted to income of 15 million this year versus 1 million – negative last year or $16 million swing. About 13 million of the $16 million year-over-year change was related to forward foreign exchange contracts we used to manage cost of U.S. dollar merchandise purchases in our international operations. These contracts are required to be mark-to-market at each quarter end and the change year-over-year was attributable to the general strengthening of the U.S. dollar as of the end of Q2 of this year versus general weakening compared to the U.S. dollar (indiscernible) foreign currencies in Q2 of last year. Last year again we recognized a small loss related to it, this year we recognized a gain. Now, mind you and again this doesn’t show as part of our gross margin, this is where you put this FX contracts, but these are generally done by our borrowers in foreign countries where they are basically locking in typically foreign currency or U.S. dollar merchandize purchases in many cases, where they've locked that in. So again, as it relates to the buyers, many of them consider that part of their margin although we've shown it here.

Our Company tax rate this quarter came in at 25.1% versus 34.2% in last year in Q2. As discussed earlier in the call, the income tax line benefited primarily from $62 million tax benefit in connection with that portion of the special cash dividend paid by the Company in December of 2012 to employee 401(k) plan participants. At such time, Costco shares held by employees in the plan approximated 22.6 million shares. These are held through an employee's stock option – an employee ESOP established several years ago.

Dividends paid on these shares were deductible for U.S. income tax purposes and we recognized that one-time tax benefit during the quarter. Excluding the one-time benefit, our tax rate in Q2 came in at 33.5%, slightly lower compared to the last year's 34.2% during that, basically, a combination of a few positive discrete items that went our way in Q2. Generally, let's say ongoing, we'd estimate our effective tax rate barring anything unusual for the balance of '13 to be in the range up to 35%.

Overall, net income was up 39% versus last year second quarter and excluding the one-time benefit, the 39% increase would have been 23% on a net income basis and as I mentioned earlier 22% on an earnings per share basis.

A quick rundown of a couple of other topics, the balance sheet will be included in the info pack that you can get online. Actually, it was in the press release as well. Depreciation and amortization for the quarter was $217 million and $430 million year-to-date. The other component that, were asked about is our inventories to payables ratio, since we're a high turn business and we fund a lot of our inventories with trade payables. This improved year-over-year, as of the second quarter end. On a reported basis, it looks really great, 98% at the end of Q2 versus 91% AP as a percent of inventory. Given our ramped up expansion right now, there's a lot of non-merchandize payables in there for construction and related stuff.

So, really on a merchandize inventories to merchandize payables, it was 86% a year ago and it showed a little improvement to 87% this year. So, it's certainly in the right direction there. Average inventory for warehouse was up $600,000 or $11.6 million per warehouse a year ago to $12.2 million this year, so up about 5% on the 8% sales increase. A little under half of that $600,000 per warehouse increase related to higher levels of merchandize in consumer electronics and small electrics, with the balance mostly spread over most of the other non-foods departments.

Overall our inventories are in good shape, no big mark down this year due to the recent holidays as well, in our mid-year fiscal inventories which we take in January and February, halfway through our fiscal year were our best ever.

In terms of capital expenditures, in Q1, we spent $488 million. In Q2 we spent $455 million for a total of $943 million through the first half. I'd estimate that for the year it'll be in the $2 billion range compared to last year for the whole year of about $1.5 billion and again that certainly reflects our ramp up in openings.

In terms of Costco Online, as you know, we operate both in the U.S., Canada and the U.K. now, both sales and profits were up again in Q2 and Q3 year-to-date. As you know we re-platformed the site last fall and also have our first apps and the so far so good.

In terms of next on the discussion list, expansion; as again I mentioned, we have no relos or closings this year. But in terms of units basically for the four fiscal quarters, nine in Q1, five in Q2, five in Q3, and nine in Q4 that would put us at 28 for the year up from 16 net new openings in fiscal '12 and 20 in fiscal '11. So finally we got up a little bit there. If you go back to fiscal '12 the 16 units on the base of 592 was about 3% square footage growth. The 28 this year assuming we get them all open on a base of 608 that we began the year with which would be a square footage growth in the 4.5% to 5% range.

New locations by country, for the year of the 28 will be 13 in the U.S. and three in Canada, three in the U.K., a total of seven in Asia, one in Taiwan, one in Korea, and five in Japan and one each in Australia and Mexico. As of Q2 end, total square footage totaled 88.986 million square feet. In terms of stock re-buybacks we did not purchase stock in Q2. As you know we purchased quite a bit less than we had in the last few years, a couple of years in Q1. Certainly we during the first several weeks of Q2 we completed a special dividend and the debt offering through the holidays. I don't think there is a whole lot to read into that at this point, sometimes we will buy a little more, sometimes a little less. As we have said in the past we will let you know each quarter.

In terms of dividends, our quarterly dividend stands at 27.5% – $0.275 per share per quarter or $1.10 a year. This currently represents annualized dividend costs for the regular dividend of $480 million. That's of course in addition to the $7 special dividend, which totaled little over $3 billion paid out to shareholders in December of 2012.

As I mentioned a supplemental information pack will be posted to the Costco Investor Relations site later this morning. Lastly, I'll go ahead, our third quarter scheduled earnings release date will be May 30, that will be for the 12 – that's Thursday I believe that will be for the 12-week third quarter which ends on May 12.

With that, Chrystal, I'll turn it back to you for Q&A.

Transcript Call Date 03/12/2013

Operator: John Heinbockel, Guggenheim Securities.

John Heinbockel - Guggenheim Securities: Just a couple of things, drilling into payroll and benefits a little bit. If you looked at total labor cost, payroll is probably what? 80% and benefits are 20% or something like that?

Richard A. Galanti - EVP and CFO: No. Keep in mind, benefits is everything from healthcare to FICA to vacation and sick leave, it's everything. It's not just healthcare. The big one that has the most inflation and of course is healthcare cost and to a lesser extent, but percentagewise this quarter workers comp, but roughly for every payroll dollar it's about 50%, not a $0.50 in the U.S. and less in other countries.

John Heinbockel - Guggenheim Securities: Well, because I am wondering…

Richard A. Galanti - EVP and CFO: 80-20 is maybe 80-20 just in healthcare and benefits, yes. But I don't have the exact number off the top of my head.

John Heinbockel - Guggenheim Securities: You said payroll is up 6%, right?

Richard A. Galanti - EVP and CFO: Yes.

John Heinbockel - Guggenheim Securities: So, if you look at the other part that would have offset that all in benefits was probably up what double digit or not that high?

Richard A. Galanti - EVP and CFO: I don't think it was up that high, no. I don't have that number of detail in front of me, but the big issue is as I mentioned earlier, keep in mind, we're talking about $20 billion, $25 billion sales numbers, every basis point is $2 million, $2.5 million, just accruals on $1 billion annual U.S. healthcare cost and $150 million, $150 million annual workers comp cost when you look at different actuarial numbers, you're always going to get plus or minus a few basis points, sometimes plus sometimes minus. It's kind of like the – as I mentioned on some of the discrete income tax items on all small little things more went in the positive than the negative, a couple of more than negative and the positive here, so that is healthcare and workers comp in the U.S. still inflationary yes. It's still, healthcare I think is definitely in the low double digits in terms of percentage dollar growth in Q2.

John Heinbockel - Guggenheim Securities: You still think you need what about 4.5% comp to leverage expenses or has that changed.

Richard A. Galanti - EVP and CFO: It's somewhere in the 4% to 5% range. We've given up and trying to figure out there is so many other moving parts now with international and manufacturing businesses and everything else we do in life.

John Heinbockel - Guggenheim Securities: Another thing, so on Kirkland. Where does that stand roughly when you think about percent of unit sold and percent of dollars and to what degree has that been growing?

Richard A. Galanti - EVP and CFO: Well I think units, I don't know the units off the top of my head, I would guess we tend to try to build bigger packs and better quality and there are examples as you know in the past from the tuna fish where we sold our brand, which is packaged at a higher spec, higher-quality than the leading national brands at a higher price, but a greater value. But, let's assume, on average, it is lower price point by 10% or 20% versus what we would sell the brand for. Private label is in the low 20s and continues to grow. When we talk about aspirational numbers, we'd like to see three in front of us instead of two, but I don't know how long that takes but certainly we keep adding new items. In the last couple of years, we certainly added several items in apparel, in canned goods, those types of items. I think, I mentioned last quarter on the call like the KS Men's wool slack, which is a very high quality slack at $50 or $65 where we've gone from low six digit units to closing on 1 million units a year. So, those are the kind of things that eke out you count some numbers too.

John Heinbockel - Guggenheim Securities: And it is growing as a percent of SKUs inside the club I imagine maybe a little bit.

Richard A. Galanti - EVP and CFO: Absolutely.

John Heinbockel - Guggenheim Securities: So, that mix that you are getting because if you imagine it is coming out to a flat gross the positive mix we are getting from Kirkland to some degree is getting reinvested in price somewhere, but I don't know where but it is somewhere, right?

Richard A. Galanti - EVP and CFO: Again there is a 100 moving parts. At the end of the day I think that we've seen as you know I think you are the ones who pointed out earliest back in Q4 of '11 as we were 'investing in price and seeing some of the numbers come down year-over-year – overall gross margins and certainly as I mentioned in the quarters where a lot of it is, we saw that year-over-year trend flatten out in last two quarters relative to being down 10 basis points to 15 basis points on a year-over-year basis each quarter last year.

John Heinbockel - Guggenheim Securities: Then just one last thing, I don't know if you have anything to say about this, but what are you seeing in Texas with Sam's membership fee increase, anything different competitively than what you're seeing from them elsewhere since they have that fee to play with?

Richard A. Galanti - EVP and CFO: We really don't see a lot of difference elsewhere. I mean, we generally are – we try to fiercely competitive everywhere. First of all, I think it would be too early to tell, nothing is – I haven't looked at it closely, but nobody has also mentioned in the last few budget meetings anything regionally big in terms of margin change, but I'm not suggesting it's not a little lower, it may very well be, I just don't know off the top of my head.

Operator: Deborah Weinswig, Citigroup.

Deborah Weinswig - Citigroup: Can you talk about your e-commerce strategy as you move outside of Canada, the U.S. and the U.K.? How should we think about it on a market-by-market basis? Then just from a SKU perspective, how should we think about your overlap between online and offline?

Richard A. Galanti - EVP and CFO: Well, just like we've done with our brick and mortar warehouses, we go into a new country, we do it slowly, and we see how it goes. So, don't expect to see us in five more countries in the next 12 months. We certainly want to expand it, and we'll do so over the next few years in a methodical way. So, our strategy is the same, do it as we normally do stuff. In terms of – I think we've expanded some of the product categories to test some apparel items, and there's a little overlap there, but it's still small. Historically, over the last few years, the view was this was an extension of our product line, not the same product line that we have in the warehouse. Typically I used to hear numbers in the 80% to 90% range was not overlapping with the warehouse, and maybe it's a little lower percent today, but by no means going dramatically in that other direction. We still don't put our stuff online of what's in every warehouse and what the sales prices are in the warehouse and the bricks and mortar. One of the challenges in a fast turning business like ours is, is we could sell our stuff pretty quickly. We'd hate for a member to look at something and says we have units in locations that they are going to shop at or something and it not be there.

Deborah Weinswig - Citigroup: All right, and then…

Richard A. Galanti - EVP and CFO: So, at this point, we'll continue to do what we do and we're pleased with what we've seen so far with the re-platforming and all the little growth pains that you have when you redo stuff, and as you might expect it was more of a hassle for the buyers as they're learning how to use the new system and put stuff on, but we're doing fine.

Deborah Weinswig - Citigroup: Then, what do you attribute your renewal rates tweaking up to?

Richard A. Galanti - EVP and CFO: I'd like to think we're wonderful. It's everything we do. The mantra around here is, as you've known for a long time is, constantly driving quality up and prices down, and never being static and constantly pushing ourselves and improving. I think executive member certainly helps. Gas and food, I'm convinced over the last four and half years of a bad economy has certainly driven more frequency, that helps, and more food, and so any time you get another reason why you want to come shop at Costco, it's another reason why you are going to renew every year. We try not to disappoint. Then to a lesser extent on AMEX there is auto renewal, of course; you can opt out of it. A member – a cardholder can opt out of it. But certainly that's in my view less of an issue right now, because the rate of increase is not as big as it used to be.

Deborah Weinswig - Citigroup: The last question, if I go back and look over our model for a long period of time, it does seem from an SG&A perspective on the operations line that there is a more consistent pattern in terms of leveraging the operations. Can you just discuss if there is anything that's significantly changed in terms of how you approach the operations, or any kind of philosophical changes I guess?

Richard A. Galanti - EVP and CFO: Nothing philosophical. I mean, as – a couple of things I have mentioned on prior calls in the last several fiscal quarters are things like increased penetration in non-U.S. and Canada markets, where certainly non-U.S. markets are related to healthcare costs, lower – higher – lower wage related to price points in those markets. So you have little lower payrolls, you certainly have lower healthcare costs. Those types of things help that increasing penetration. I think as the economy – I know I have mentioned over the last few years a couple of times on a qualitative basis the word focus, and it is wonderful again as we think we are being efficient. When the economy got bad, everybody looks to see what can you do better and what you should stop doing that you used to do, but you don’t need to do. It's those little things. I think in the past year I mentioned the example of overtime hours. We are probably pretty good at managing and minimizing overtime hours, but once we started getting all the 12 or 15 or so senior VPs of operations around the U.S. and the world every month at the budget meeting to report on it, guess what? Total hours were going up 3% plus year-over-year, or 3.5% to 4% or whatever it was. Overtime hours were going down 20% plus. Again, that's a year or two trend benefit, but those are kinds of things I think that we've gotten better at. I think getting back to John Heinbockel's question earlier about expense, what do you need in comp sales? One of my canned answers in the last few years has been – it's hard to know what, who knows what exactly the expense leverage is. I can only tell you that I believe that whatever it used to be, it's a lower number now because we've gotten a little better in the bad economy.

Operator: Karen Short, BMO Capital.

Karen Short - BMO Capital: Just on merchandise margins, it sounded like giving us what your core merchandise margins did in '11 and '12, and then kind of comparing that to what happened in the first half of this year, it sounds like you are kind of trying to signal we should not expect this first half of the year to be the trend for the remainder of the year. Did I read that right?

Richard A. Galanti - EVP and CFO: Well, we try not to signal other than to say, I know last year as each quarter we showed that the core year-over-year prior – versus compared to the prior respective quarters of the prior year, when they were down 10 basis points and 15 basis points year-over-year that people would say once you anniversary that for four quarters, does that mean you're quote investing your prices and getting more, and of course I would say there is no telling what it will be, we'll continue to do what we do for living. Certainly, we are confident we want to try to increase earnings and sales, but we're going to try to do it by driving sales and lowering expenses first. But so far so good, there is two quarters behind us this year that have shown certainly a better relative trend in the four fiscal quarters last year. But again, I can't really tell you what the next quarter or next year is going to be.

Karen Short - BMO Capital: One of your competitors had also signaled that they had accelerated their price initiatives. I guess, are you seeing anything on that front? Are you changing anything in terms of your pricing in response?

Richard A. Galanti - EVP and CFO: I don't want to sound arrogant, but we do what we do every day and we haven't seen any big changes out there in general. Again, we and our competitors, and probably the one you're talking about, are both fiercely competitive. As I've said in the past, direct warehouse club competition, most particularly with Sam's, is going to be the most competitive that we have and that hasn't changed over the years. We get questions about what happens when the supermarkets are doing something or other forms of retail food and sundries as an example. That's less of a direct impact with the exception of few areas like some of fresh foods areas like fresh meats and everything and some cuts of beef, but other than that we haven't seen any dramatic deltas.

Karen Short - BMO Capital: Just last question, you've been kind of giving us cannibalization impact on your total comp of about 50 basis points. Is it fair to say that that's kind of steady state for a while? I know you gave the cadence in the locations of new store openings in the back of the year.

Richard A. Galanti - EVP and CFO: I think, years ago it used to be bigger, because we had smaller base of units in the U.S. and we've opened half a dozen units in LA or something like that. We've always just given it out, and then it got down so it was maybe 0.25% cannibalization and now it's back up to 50 or 60 in the last year. It is not going to change dramatically from that. Certainly as we continue to ramp up expansion, it stays in that range. I don't ever see it go into 1.5% or 2%. I don't know if it gets up from 50 or 60 to 80, but it probably stays up there as we continue to open, particularly in some of these new international markets where we have very high volume units that we've got to cannibalize some and get more locations open.

Operator: Colin Mcgranahan, Sanford C. Bernstein & Co.

Colin Mcgranahan - Sanford C. Bernstein & Co.: First question on expansion. It looks like you are now targeting 28 units this year. I think last quarter the budget was 30, although you've always said units can slip. It looks like you lost in Korea and U.S. Anything of note there and anything to read into that?

Richard A. Galanti - EVP and CFO: No, I think the U.S. one that’s just delayed for six or nine months, and I am not sure about the other one. No, nothing unusual.

Colin Mcgranahan - Sanford C. Bernstein & Co.: And then just sticking with expansion. There has been few press reports of some interest in Europe and France, and maybe you can update us on your thinking of Continental Europe as a longer term future opportunity.

Richard A. Galanti - EVP and CFO: I think we've spoken generally, and there have been verticals in the local and international press in those countries like France and Spain. I would say over the next couple of years we hope to be open, but it’s a long process in some of these countries as it relates to the zoning and the permitting and the approval and the appeals of residential and other businesses can appeal. So, there is a lot of things going on, but we have people landed in a few different countries, including those two, and those are the most likely, but again once we know more we'll let you know.

Colin Mcgranahan - Sanford C. Bernstein & Co.: And then just on the LIFO, obviously, you had a little bit of benefit. How are you thinking about that through the year in terms of inflation, deflation? What are the merchants saying about what's coming down the pipe?

Richard A. Galanti - EVP and CFO: The only area I'm hearing a little more inflation still is in protein; beef and poultry and pork. And that relates both to international demand for some of those items, as well as the costs associated with the drought last year and grain prices, corn and wheat and things like that. As it relates to – as freight costs have gone up a little, it has – I don't think they went all the way down when freight costs peaked a few years ago and then came back down. So, I am not hearing a lot of inflationary talk out there. On balance, there is not a lot going either way with the exception of proteins, that's really all I have heard from our buyers.

Colin Mcgranahan - Sanford C. Bernstein & Co.: Final question just on MFI. Fees came in a little above our estimate, but it looks like we are fairly good at figuring out the dollar value of the membership fee increase. So two questions there; was there anything else, or was it just you have 1% growth in new members and high renewal rates that drove the little bit of upside in MFI? That's the first question. And then just kind of out of curiosity, is there any lumpiness through the year in terms of when renewals happen?

Richard A. Galanti - EVP and CFO: On the first question, your thoughts are generally correct. On the second question, I probably need to go look at it again, but historically since we generally try to get openings done, ideally if we can – I am thinking of the U.S. holiday and seasonal calendar here, but you can take at each country into that as well, but generally speaking, we love to get every location opened; A, as soon as possible, every location opened the week before back-to-school and Labor Day, and to enjoy again Labor Day, back to school, Halloween, Thanksgiving, Christmas, seasonal, you name it, New Year's, and that's why there's typically more done, and then of course if you're trying to push those views to get open, you'll probably slow down a little bit in January and February. So, I think if you look back at the calendar, probably there is a little lumpiness of openings, probably not as much as there used to be, but then because of deferred accounting and such a big piece is the total now, it's not as lumpy as – it tempers some of that lumpiness even more.

Colin Mcgranahan - Sanford C. Bernstein & Co.: U.S. comps have been really, really consistent. It looks like your business has been incredibly resilient and impervious to some of the pressures out there, like the payroll tax hike, the delay in tax rebates that other retailers have pointed out. Have you guys done any work on how that might be impacting your business and any offsets to that?

Richard A. Galanti - EVP and CFO: No. We haven't – we kind of joke about that we don't spend a lot of time trying to analyze other than driving quality and lowering the prices, and everything else take care of itself. But, yeah, I know back when the payroll tax holiday occurred and some of those same companies were talking about how it did help them a little bit and when asked, we basically indicated and looked at it and indicated that we didn't really see much benefit from it. So I think the same thing's happening on the tail on the other way. It can't help, but it doesn't seem to really be impacting our numbers.

Operator: Chris Horvers, JPMorgan.

Christopher Horvers - JPMorgan: Executive membership, 15,000 per week, it slowed down here in the second quarter. Does that have to do with the timing of the opens in Japan? Do you generally over index the executive in those countries versus domestic and (in the end) do you sit there and say hey we need to step up executive membership to a high percentage of sales as you think about what traffic could be in the future, is this something that you're watching and maybe saying, you know what if executive membership doesn’t – grows at a slower rate then maybe our traffic could flow below that, the reason very consistent trend?

Richard A. Galanti - EVP and CFO: I don't think, look everyday people in our membership marketing department are (finding) ways to drive both new members and converting members to the executive member and then signing them up, higher percentage of new members signing up as executive members. I think we have done a good job over the last few years doing that. I remember a few years back, for every 100 members that signed up in the U.S. 20 or 21 were executive or 10 or 12 were executive members. Then a few years later it was in the low to mid 20s. Why, because we started focusing on a little bit in warehouse. Not doing a whole lot of fancy stuff but just doing the 80-20 rule that we were pretty good at, one of the simple things that we can do drive this. Certainly trying to get people who can also do, the triple value play what we jokingly call and also sign up for the MX program card. So all those things drive frequency, drive loyalty, drive sales and so we are constantly looking at ways to do that. I think part of – ultimately it's got to slow down a little bit. We have now had it in the U.S. for 13 or 14 years, in Canada for seven or nine years I think, in a few other countries for less time than that. Those other countries there were a much smaller piece of the total Company pie. So I think it's – I would expect it to continue to come down a little bit and I actually think 15 in a year is still pretty good – 15 a week.

Christopher Horvers - JPMorgan: Can you talk about you said one-third of your members are executive and two-thirds of the sales. Can you talk about the deviation around that? So with some of your – is that a – is there a wide deviation around that among your stores and maybe where some of your better and best stores are as an indicator of where potentially that could go?

Richard A. Galanti - EVP and CFO: Well, I think it has more to do – less to do, if I think about it. I'll take the United States. I think it has less to do with the typical geographic areas other than the people – the operators in those areas are pushing it a little harder and we try to learn from them. One of the benefits I think as our '13 four-week meeting in – every four weeks or 13 times a year, our '13 fiscal period meetings out here for two days we are going to is each of those 15 or so senior VPs of operations, in this example the U.S. the eight senior VPs of operations gets up and one of the things they talked about is what's going on in these areas, what are the new things they have done to drive whatever. I think some do focus more than the others and we try to learn from that.

Christopher Horvers - JPMorgan: So, I guess you have some stores where it's 40% to 50% of your membership base?

Richard A. Galanti - EVP and CFO: Absolutely. Yeah. I see what you are saying. Yeah. I don't have that number in front of me, but I would assume if you say – if I'm assuming let's say something – and if it's roughly a third or a little over a third overall, it's probably in the U.S. in the mid to high 30s. Let's just make up a number here 36. If it's 36, I would bet you across the 430 plus locations, it would range anywhere from the high 20s to the low 50s.

Christopher Horvers - JPMorgan: But I'm shooting…

Richard A. Galanti - EVP and CFO: Are you happy with that answer.

Christopher Horvers - JPMorgan: Just from an accounting perspective can you talk about how the calendar shift might impact total sales versus comp in the next two quarters?

Richard A. Galanti - EVP and CFO: I don't think it's a big deal in the next two quarters. There is always a shift in the same month in quarter. I don't think there is a whole big deal there. I think, now of course, in Q4 last year it was a 17 week quarter and I looked at that far out in terms of when Labor Day falls and all that stuff. I think Labor Day – well if Sunday the 1st, we end on Sunday the 1st, September 1st is fiscal year end, so I guess Labor Day is 2nd. So that might affect it a little bit too, but I haven't talked through that yet.

Christopher Horvers - JPMorgan: Last question. Online you accept credit card purchases so how does that change the profitability of an online versus an in-store transaction?

Richard A. Galanti - EVP and CFO: One of the cost components of course online is or/and in-store as well is what we call bank charges, which is credit, debit and other fees related to vault and cash and currency and check-cashing. Online we of course have the ability to – since you can't pay by cash or check online, we also accept other national forms of credit cards, of course in store it's exclusively American Express, in terms of branded national cards and its higher merchant fee elsewhere. So we have a higher bank charge line, although we have overall a much, much, much lower SG&A number online because 75% plus of the goods are shipped factory direct, so there is a lot less handling. So, it's a – as a percent of sales online is a more profitable business than brick-and-mortar, but we do both.

Operator: Mark Miller, William Blair & Company.

Mark Miller - William Blair & Company, L.L.C.: It is encouraging to see the step up in club openings, particularly more coming in the first half of the year. And I wanted, Richard, to get your view on I know there is an objective to possibly accelerate the club growth further I think had been potentially as high as 6% you would hope over the long run. But is that upper end of the objective becoming more credible in your view and maybe you can just talk about that pipeline of club openings you will look at I think that pool going out say three years is that group of opportunity stores growing at that type of rate?

Richard A. Galanti - EVP and CFO: Probably 6% is a little high but given that we were at 3% and now we are getting towards 5%, that's a good sign. I think there is certainly a lot more in the pipeline now to give, I think, us a little more – be a little more credibility with you in terms of what we talked about at the beginning of the year and there is always going to be a couple of the fall out because we try to be optimistic that everything we got going on is going to work and get done on time and maybe push the envelope at the end of any fiscal year to get them still open. But I am feeling better now that – two years ago I was feeling that let's try to get until 20s at least and we did 20 in 16. We thought we'll be in this fiscal year talking about 30 and I think we have a good chance of actually hitting to 28. I think that going forward – I think Craig would like to see it in the – have a 3 in front it, but probably a very low 3 in front of it. So, if I was a (betting) person over the next three years – fiscal '14, '15 and '16 27 to 30, 3 or 4s which would give you a 30 estimate but I could be off a few. But I think we've got enough of the pipeline to be able to do that and we'll go from there.

Mark Miller - William Blair & Company, L.L.C.: And then on preopening you indicated that it was nothing particular and usual there, but the preopening cost first half were up about a third, but the number of openings was more than double first half. Is that because you've got the openings coming late in the year with the nine club openings in fourth quarter or is the preopening cost coming down a little bit for you?

Richard A. Galanti - EVP and CFO: I would be willing to bet it's the former reason not the latter. A lot of it just has to do with timing. I think you would mind preopening, let's say that we're doing a leased not an owned, and we've got – you get the property four or five months in advance of opening. We might have a few hundred thousand dollar charge per period for rent expense, which is preopening, prior to the opening day that alone might be $1 million or a little $1 million on a location. Now that's the exception not the rule, since we own a lot of the units and certainly when we're building a multistory unit with parking and two stories of retail on a two-acre site in Japan or in Korea, it takes a lot longer to do, so you might have even more preopening and some of those are leased. So, those are the kinds of things that will buck that number up the other way, so overall, I mean, again like everything around here, each location has preapproved by senior by Jeff and Craig and heads of the respective operations, heads in those areas of what preopening is going to be and we hit it and miss it, but overall we have a pretty good handle on what it is, though in '14, we don't have a good handle on sometimes when there is a delay. Again, two or three months delay because of the soil issues or rain or freezing ground. We couldn’t get the foundation laid before the ground froze, there can be 200 to 800 ground on a location, a preopening during those several months.

Operator: Greg Melich, ISI Group.

Greg Melich - ISI Group: I wanted to follow-up on the LIFO gain, which area was actually deflating or which categories, and did any of that actually closed in sort of retail deflation?

Richard A. Galanti - EVP and CFO: On deflation, if I look at the big pools what we call foods and sundries, foods was down a little, about a half a percent, sundries was up less than 20 basis points. Apparels down a little bit. Electronics and appliances are down a little bit more than that, but still less than 2 percentage points. (Indiscernible) which is a mixture of things including gas, and sporting goods and office and auto is down a shade and then alcohol, tobacco, beer and wine is up a shade. But overall again, it's down a little over half a percent from the beginning of the year. Certainly, the bigger deflationary items are still electronics, and sometimes there are deflationary items like, I'm just looking at the top 20 deflationary components. Aside from small amount from gas and the biggest chunk is electronics, (indiscernible) they're down 20%, well that's because they were probably double last year or whatever it was. So, sometimes you have these giant commodity price increases, a year ago, particularly in the nuts category and some in grains and then it comes down the other way.

Greg Melich - ISI Group: The 600,000 increase in inventory for warehouse. Could you help us sort of break that down and figure out where it’s going into that investment?

Richard A. Galanti - EVP and CFO: I think right at 200 of it was electronics and another 75 plus of it was small electric. So then – I think there was a chart – we definitely expanded apparel. I will give the example of the (wool pants). We have got a much better I think present commitment to apparel. But then there is a lot of little stuff everywhere else. But the single biggest component is consumer out front. As you go into the warehouse you see a lot of 60 and 80- inch TVs now and tablets.

Greg Melich - ISI Group: Just to maybe understand a little bit better as you grow the online business how should we think about the inventory per warehouse vis-a-vis the online growth. Is it the same SKU assortment, is it an extended assortment?

Richard A. Galanti - EVP and CFO: Well, right now it's an expanded assortment, it's not the same. I mean, certainly you are going to see some overlap on electronics or few apparel items or some. But you are going to see more SKU selection online and perhaps the (indiscernible). Whatever changes you are going to see there are going to be very slow in terms of percentages because the brick-and-mortar are so big.

Greg Melich - ISI Group: Then lastly you mentioned on the accruals. We know that just 2 million to 2.5 million is 1 bps, but the ones that you cited in this quarter was that sort of a one-off catch-up accruals or do you think now there is a different sort of accrual run rate for those things you cited?

Richard A. Galanti - EVP and CFO: No. Those are I think as it relates to – I don’t have the exact basis points in front of me but on workers' comp, I think there was a couple of basis points there. That's just looking at – that's probably – my guess is there is a little catch-up in that number. But again it's more when it's kind of – again I get back to the income tax, we benefitted by several million dollars. I'm not talking about the big $62 million number, but there are discrete items usually when you've got discrete anything, there's two or three pulses and two or three minuses and it balances out to be very little, a basis point or two. My guess is there are three or four here. So, it's not a whole lot. I wouldn't read a lot into that.

Greg Melich - ISI Group: Lastly on the club openings as we do more outside of North America, how should we think about CapEx in terms of how many of those might actually be leased? I know you are well over 90% plus here, but as we go international, are most of those units in Asia and elsewhere going to be leased?

Richard A. Galanti - EVP and CFO: Probably, a little more of them are leased or at least ground leased and with long-term ground leases. We still try to buy where we can and I think we're getting a little more aggressive on that, but it's hard to predict. I think overall, we're in the low 80s in terms of how much we own, but I think I know even in the U.S. when interest rates plummeted four years ago, all of a sudden, you'd have a – a lot of times when you have an individual land owner, they don't want the cash and so we've done a few more leases in the U.S. as well in the last several years, but certainly, there's probably a higher proportion that was done in areas like Asia. I think we own more in Japan than we do in like in – like Korea, I think we leased more. Every country's a little different, but if – the three Asia countries overall, there's more leases there of course than in the U.S.

Greg Melich - ISI Group: So, maybe asked a different way, if there's 27 or 28 openings, is it fair to say that maybe this year given where they are that half are leased and half are owned or would that be too extreme?

Richard A. Galanti - EVP and CFO: No, we'll still own more.

Greg Melich - ISI Group: Still own more.

Operator: Dan Binder, Jefferies.

Daniel Binder - Jefferies & Co.: Couple of questions. First on IT modernization cost, I didn't hear you call out this quarter, I know it's been adding some pressure, are we now through the worst of that?

Richard A. Galanti - EVP and CFO: No, I think on an ongoing basis, looking over the next few quarters, and this is guess, somewhere in the 3 basis points to 4 basis points year-over-year. I think it was higher in Q1, it was closer to flat in Q2, but some of that is just again timing of things that you also capitalize some of those costs, and again overall my guess over a two or three year period it's going to add some times 3, some times 5.

Daniel Binder - Jefferies & Co.: I remember last year you guys were very focused on some of the operational opportunities to improve your cost structure you called out some of that today. Overtime reduction was one of them, which you mentioned earlier. I'm just curious as you look at the organization today are there any big buckets where you can still pull costs out?

Richard A. Galanti - EVP and CFO: I don't think there have been any big buckets. Even by the way, as I did mention the overtime, 20% plus reduction in overtime hours. That was several million dollars a year, maybe 1 basis points or 2 basis points over a couple of years, but nothing so dramatic that's going to change. Nothing like everybody thought that RFID would free up the front end and reduce our biggest labor cost area, that didn't happen. But we have done a better job at front-end labor. It's going to tackle in little things. There is still the focus out there, but I can't think of – other than driving sales. Again these are – I am shooting from little things here, but we've streamlined and tested and now rolling out how we returned merchandise and in some cases not doing it at the warehouse but bringing it into some of the depots and if that can continue to work do we save few million here and 5 million there, yes. But there is no giant thing out there.

Daniel Binder - Jefferies & Co.: I am sorry I missed it but did you comment on the (dotcom) sales growth and the contribution to comps this quarter?

Richard A. Galanti - EVP and CFO: No. I think it was in the low teens in terms of sales growth.

Daniel Binder - Jefferies & Co.: What does that look like in terms of the contribution to comp?

Richard A. Galanti - EVP and CFO: I don't know. We either do in the high 2s for the year and whatever your budget is for total sales for the company. So, it is 2.5% of sales and up in the low teens.

Daniel Binder - Jefferies & Co.: And then on consumer electronic sales I know you called out the calendar issue that affected the quarterly number. But generally your monthly sales updates have been pretty – showing some good strength in that category I was just wondering if you could speak to some of the – maybe the trends that you are seeing take place in the club there?

Richard A. Galanti - EVP and CFO: I think in electronic the biggest takeaway is our TV sales, in general, even though they were – that's the biggest – TV sales are the biggest piece of electronics. Well, now it was down slightly in February and over the last several months it's been up in the mid-very high single digits. And a lot of that – I have been told in the budget meetings as is relates to the fact that we've done very well with 60 to 80 inch TVs. We've done relatively well. We've now cycled by not showing as you know – we start selling some of the Apple products, the once we were allowed to sell well over a year or maybe two years ago. So, on that low base, we are starting to sell some of the other tablets and the like. The cellphone business is pretty good, but again it's all dwarfed by TVs.

Operator: Sandra Barker, Montag & Caldwell.

Sandra Barker - Montag & Caldwell: Richard, I just had a clarification on the website. What impact have you seen from making it searchable and adding the mobile apps. I mean, has it been anything notable now that you are sort of more visible?

Richard A. Galanti - EVP and CFO: Well, I think, sales are up a little better than they have been. But the first thing is I know for the months leading up to what and everybody is warning us from our own dotcom people and say the IT people that the day you flip the switch is not the day you start to see immediate benefit because it takes time to build the clicks and all that stuff. But again kind of like the other things we do, we're methodical and slow about it and it's showing some improvement, but off the top of my head, I can't give you any specifics.

Sandra Barker - Montag & Caldwell: I can't remember, is Jim still in the building a little longer or what's the focus on?

Richard A. Galanti - EVP and CFO: Jim is on vacation this week, but yes, he stays here a lot. He is generally – somebody asked me other day, I mean, you go to Craig to ask questions and get information at this time. Jim is still traveling and he is still on the board, of course, and I see him quite a bit. But to his credit and I think to the Company's success, it's been a very good, a little over three year transition with he and Craig, and he's still travelling a lot to openings with the merchants and with Craig, and spends a lot of time with Craig and Jeff too, but he's doing a good job of staying away a little more. If you asked me six months ago, I would have said he was in the office 80% of the time, now it's still well above 50% but we'll see. He's still doing well.

Operator: Bob Drbul, Barclays Capital.

Robert Drbul - Barclays Capital: I just have two questions for you. The first one is, can you talk a little bit on the numbers around, I think you said new member sign ups in the metrics and international markets versus the U.S. and Canadian markets, the number is higher abroad. Can you tell us how much higher it is? The second question is, you talked about the buyback a little bit, but on the buyback going forward, is there any reason why you wouldn't be active at these levels where the stock is?

Richard A. Galanti - EVP and CFO: Well, I think I'll answer the last question first. No, I mean, we looked at it and we'll keep looking at it. I think generally speaking, as I mentioned in the past, we issue our issues that add 3 million and 3.5 million shares a year. It'd be nice to cover that, but we don't feel pressure on a given day or week to do something. Generally speaking, we still feel good about the Company long-term and again, I think at this point, we'll wait for 12 weeks and see what we're doing. The other question, what was it?

Robert Drbul - Barclays Capital: How much higher are sort of the new member signups in international markets versus the U.S., Canadian?

Richard A. Galanti - EVP and CFO: I'll give you some general numbers. I mean, we've had numbers – keep in mind, when we talked about opening day signups, it's for the general 8 to 12 weeks leading up to the opening day where the parking lot's partly done and you can get in and out of the parking lot and people come in and sign up in advance of opening. There is this little flags outside and the whole bit in the tabling activities. In the U.S. where we have opened a new unit even in a very strongly existing market you might have a few thousand sign-ups because there aren't a lot of people in that market and it's not like this giant thing for a new market. We opened – I know I was there at the opening back in the Carolinas three or four months – four or five months ago and it's a relatively medium sized town, less a 1 million people in a brand new market and through opening day sign-ups for those several weeks they are all booked if you will starting on opening day was in the 6,000 or 7,000 which was better than we thought. We have some openings that we've done over in Asia and Australia, whereas through opening-day we've had anywhere from 20,000 to 60,000 members signed up. Now mind you, you are going to have a much lower renewal rate on those a year later but we have units I think – our membership numbers and we've been in Japan for a while now but we also have some new units there, the number of members per unit over there is a little over double what the Company is running. So it's a little different metric in some of those markets, quite a bit. So when you open four or five in those that's going to jump your membership increase – the number of members recognizing we don't use differed accounting for accounting members but for their dollars we do. Well, is that it, Crystal?

Operator: There are no further questions at this time.

Richard A. Galanti - EVP and CFO: Well thank you. Bob and Jeff and I are around. Appreciate your time today.

Operator: Thank you. This concludes today's conference call. You may now disconnect.