Costco Wholesale Corporation (COST) Q2 2007 Earnings Report, Transcript and Summary

Good morning. My name is Katora and I will be your conference operator today. At this time, I would like to welcome everyone to Costco's February sales and Q2 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Richard Galanti, Costco's Chief Financial Officer. Please go ahead, sir.

Thank you, Katora, and good morning to everyone. As with every conference call, let me start by stating that the discussions we are having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and that these statements involve risks and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call as well as other risks identified from time to time in the company’s public statements and reports filed with the SEC. To begin with, our 12-week second quarter fiscal ’07 operating results; for the quarter, we came in at a reported $0.54 a share compared to last year’s second quarter $0.62 per share. As outlined in this morning’s press release, excluding the three non-recurring items recorded in Q2, what I will term normalized earnings per share would have been $0.66 per share, and of course this normalized $0.66 result compares to our December 14th guidance of $0.62 to $0.66 and current first call of $0.66. In terms of sales for the quarter, as previously reported, our 12-week comparable sales figure showed an increase of 5%. We are also of course reporting this morning our four-week February comp sales results, which came in at 4%. I will shed some light on those numbers in a minute. Other topics of interest that I will review with you this morning, our opening activities and plans, we opened four new locations during the second quarter, which ended this past February 18th -- three new in the U.S. and one new in the U.K. Such that fiscal year to date, we have opened 16 net new locations in the first 24 weeks of fiscal 2007.Operator: (Operator Instructions) Your first question comes from the line of Deborah Weinswig.

Good morning, Richard. You touched on the change in your generics pricing in the gross margin this quarter. Can you also please provide some additional color on the program launch during the quarter and how it compares to the $4 generic program that you had previously?

Sure, well, we matched what our competitor did out of the box on the $4 for 30 days. Historically on generics, our sense is it costs at least more than $4 to fill any prescription, and so we might have three tranches on a generic that might be making this up, but $7.99 for 30 days, $9.99 for 60 days, and $10.99 for 90 days, recognizing the cost of pills is very little on these generics, but you are still having only one cost of filling a prescription, whether it is 30, 60, or 90 days out. But that being said, we wanted to match the competition while we came up with our own plan. We since have our own list of generics which I think again numbers in the 200 to 300 range in terms of how many generics. Our is pretty flat, just 100 pills for $10, as compared to 30 pills for $4, 100 pills under that program would cost you I think $13.33. We are at $10. In some cases, it is 100 pills for less than $10 because we were less than $10 to begin with, and so we are not interested in selling 30 pills for $4. We lose money on it and so we think we are giving our customer the best value and protecting ourselves as well.

Then, with regard to the inventory reduction that you talked about, is there a new technology that Costco has put in place? Or are you just installing greater discipline?

Jim just raised the decibel level a little. The fact of the matter is when you are talking about doing $1.2 billion or $1.3 billion a week in sales here and every percentage point is $12 million of sales. While we turn our inventory fast, again when I looked at it, usually the concern is you look at it and say “oh my god, you are $700,000 more in inventory” and you expect $300,000 or $400,000 just because sales are growing at twice that level, but where is the other $400,000? Where your concern is in one category that is not doing well. The 100, the 50 or the 70 in electronics, no big deal. That is still comping in the mid-teens. But when you looked at it, it was throughout. It was 20,000 in this department and 15,000 in that department and 42,000 in that department, including the primers like paper goods and stuff. That is again simply a fact that sales in February, at least certainly through the first part of February and the last part of January had softened a little bit. They have come back a little bit. I think that will take care of some of it. But again, I think just a reminder from the boss reminding them if they would not like to do it, he would be happy to do it in about 30 minutes. It is really that simple. I am not trying to be cute about it. We are -- this is not complete science. This is also the art of merchandising and mashing out merchandise.

Last question, can you talk about what you are seeing with regard to executive membership trends, both traffic and ticket? I think most recently, you had talked about them representing about 50% of sales. Are we still in that ballpark?

Yes, I think I mentioned that the 21% of the members represent in the U.S. and Canada 53% of sales. Now, about 10 percentage points less, about 43% I believe is reward-able sales because we do not provide an executive member reward on tobacco, gas and alcohol. So it is still increasing, but it is increasing at a really low rate. If you look at the hit to gross margin of 6 basis points, if you reverse-engineer that, that would imply at a 2% reward about a 3% increase year-over-year in sales penetration of executive members getting the reward. Again, it is still growing but growing at a lesser rate, as we now have so many of those higher-volume people wanting to do it. But once they are there, they end up buying more because affinity programs do work and they are our most important customers. Their renewal rates, which is part of the 87% renewal rate, is in the low 90s.

Your next question comes from the line of Mark Warren.

The reserves that you are taking, I understand it is a one-time charge but given the fact that your returns are costing you more than you thought it was, what is it going to be costing on an ongoing basis? Does the change in the policy on the electronics more than offset that?

It took Jim easily two years to get to the point where he was even willing to approve this change that we are doing. Certainly we are doing it recognizing that we had to do something and we think that it will offset a big chunk of what we are being impacted by but again, that is several months from now, because everything that was bought prior to the day of the change is grandfathered into the old policy. Certainly during fiscal '08, you should start to see some of that improvement. I'm sorry, the first part of that question?

Are you starting to reserve at a higher rate now going forward as well?

Yes, we are. If you look at that $48 million, recognizing in a way it is from inception to date in the company because it is a change in the methodology of what we are using. It is a cumulative impact. Certainly these are not auditable numbers, but when we have done some back-of-the-envelope estimates of if we had you this methodology three or four years from now, during which time the sales of these electronics items has gone through the roof and the returns issues have been exacerbated, how much of that $48 million relates to the last several years? A true ballpark number might be $0.01 a share for the last couple of years. You would not spread $48 million evenly over 20 years but you would not also say that it went from 14 to 60 or 12 to 60 or whatever in just the last year or two.

If you look at all of your TV returns, or -- I guess TV is probably the best product to look at since it is such a big-ticket item -- if you look at all the TV returns, are a big percentage of them returned after 90 days?

No, a majority are returned within 90 days but when you are doing $2.5 billion a year in TVs and even a small percentage, which has a low realization when you dispose of the item, is still going to impact you greater than you thought it would. How is that going to impact it once the change in return policy goes into effect? We have our fingers crossed. We think we have done it a good way both for our members and ourselves.

Okay, one other question; on the new clubs that you are opening, as far as new club members, not the ones that are being cannibalized from current clubs but new club members, are the trends that you are seeing similar to what you have experienced in the past or are there any differences there?

I do not think we have seen any major differences at all.

Your next question comes from the line of Charles Grom.

Richard, in your prepared marks you mentioned that Jim was working with the merchants to drive better margins. I am sure he has been doing this for the past 15 or 20 years. Could you elaborate on the potential opportunities that he is looking at on this front?

I cannot elaborate specifically on them but I can tell you that as I sort out examples over the last few years, like when we took the allowable maximum markup on goods for private label from, whereas everything used to be at 14 and now it is 15. When we looked at our depot operations and demanded a higher return on those assets, which in effect raised the cost of goods a little bit and arguably, without cheating, allowed us to improve a little in margins. There are different kinds of things. I cannot go into them and I do not want to be cute or coy and suggest it is overnight where you can get X dollars per week, but there are real things that we can do to allow us and our buyers to still maintain, in our view, the integrity of limiting our mark-ups but still allowing us to earn a little bit more where we are very competitive.

Then, just kind of a similar follow-up question; in your annual report, you outlined a private label mix of about 25%, which was higher than your former guidance. When you look at the store, what product areas do you see the most opportunity going forward?

Well, it really is everywhere. Certainly there is more in general consumer products, whether it is supermarket products and domestics. We just put our name on these very high-end 520-count Egyptian cotton bedding, so there are really a lot of different items. Certainly the big ones typically, like when we do a private label diaper and it is $100 million a year in sales out of the box, but there are not many of those left.

Just one last question on international; how much longer do you expect Canada to be weak because of the tobacco issues up there?

I am looking at Bob here. I think it happened in the summer. Bob thinks it happened in August, so we will assume July or August.

Okay, so we would expect to see international comps in this mid-single digit range until then?

I think we are getting a double whammy because there was a $0.01 price increase up there, so the detriment should improve a little but then be at that lower level of detriment for the rest, from now until summer.

Your next question is from Adrianne Shapira.

Thank you. Richard, I just wanted to go back to the guidance for the third quarter. The last conference call, the $0.57, it sounded like that was not at the high-end and it sounds like the early trends on sales are pretty encouraging. I am just wondering, where does the -- understanding the payroll impact, but where does the further conservatism come in?

Well, keep in mind that the payroll impact is maybe up to $0.01, a little less because it starts in mid-March and that is a month into the quarter already, so it is a little less than a full $0.01. Again, there is a little offset to that to some markets already. Normalized, the lower-end is up close to 10%. I do not think there is a big change here. Arguably, I am allowing myself in this economy to be a little more conservative. I remember when we gave guidance for Q2 of $0.62 to $0.66, which was honest guidance. We also recognized that the impacts from returns are still going to impact us for the next few quarters even if we change the policy, as we are changing the policy now. So certainly there is a little conservatism built into the number. Again, as I mentioned, I would hope that like we gave with our range of $0.62 to $0.66 and we came in at a normalized $0.66, we can do the same here.

Okay, that is helpful. I am just wondering, as you say, in this economy, is the economy the macro? Or is there something else on the competitive landscape that you see that has --

Absolutely nothing else on the competitive landscape. I mean, competition is not easy but it is not any tougher than it was a month ago or a quarter ago. Again, arguably I think we have taken the viewpoint, we want to be a little conservative in our outlook because you never know what is going to happen tomorrow. I even was not sure if I wanted to share with you the last couple of weeks of sales were a little better than planned. They are a little better than planned, but who knows what tomorrow brings?

You had mentioned pharmacy as a standout. Are you seeing any sort of lift really as B.J.'s gets out of that business in overlapping markets?

At the last budget meeting from the east coast regions, I guess by definition you will see there is a small amount of lift but I doubt if it is that meaningful to the whole company.

Then just lastly, you had mentioned traffic seemed to have softened a little bit in February, down 1%. Anything to read across in terms of the success of the wallets program? Anything there to call out?

First of all, it was 0.75% versus 1.5%, so still up, traffic was still up in the quarter. I think the fact that those things work, certainly the strength last week I think is important, the last couple weeks is in part due to some of the mailers we have done. My guess is, at least for the first partial week of this year, of this month, I do not have a daily traffic number but our traffic is probably up a little bit from the 0.75%.

Bob is mentioning to me, and again we have been pretty good at not mentioning weather, but certainly the craziness with snow from the Midwest to the east coast has not helped.

Your next question comes from the line of David Strasser.

Thank you. When Wal-mart announced their fourth quarter, they talked about gross margins of Sam's being up. I guess the question is A, do you notice that? And B, do you take that into your consideration from a pricing standpoint, from a strategy standpoint, when you see their gross margins going up there?

Literally every location with nearby competition, Sam's or B.J.'s and in some cases others but principally those two, we are out there weekly and sometimes more than weekly comp shopping them, and react to whatever the competition is doing and try to stay ahead of them. I think part of their argument for improving margins is some of the greater level of global sourcing and collaborative buying with their parent that they have done over the last couple of years. One of the things that we have seen when we do -- we do also comp shops of like Sam's units where we are not competing with them in markets where they are by themselves and we have seen the spread of Sam's versus Sam's, competitive and non-competitive, expand a little bit over the last couple of years. Now, perhaps that is because we have hit them in a lot of markets where we were not before. We really do not use their comment that their margins are improving a little as giving us confidence that we can improve margins at all. We are very paranoid out there and we are out there every day and week comp shopping them.

One other question; you talked about the entry-level wages and you talked how you are always trying to raise the high-end of the wage. What about in the middle of the scale? As you raise your low-end, do you ultimately bring up the whole hourly wage structure?

In the old structure, it took an hourly full-time employee about a year, maybe a shade under a year, to get from $10 to $11 or $10.50 to $11.50, so there are a handful of new hires that will automatically go to the $11 and $11.50. They have been here six months and they went from $10 to $10.25 to $10.50. They might get that free six-month ride to $11, and so there is a little bit of that built into it as well. The top of the scale, somebody who has been at the top of the scale, we basically every year have increased that somewhere in the low two’s as a percentage of their hourly rate. We have done that every, essentially every three years we re-up it for three more years with that kind of 2% increase each year for the next three years, so we have always been able to do that.

Your next question comes from the line of Christine Augustine. Christine Augustine - Bear, Stearns & Co. : What are you hearing, if anything, about supermarket negotiations in southern California?

The only thing I have heard is what I have read, which says that there are some stumbling blocks, but I cannot imagine that the unions or the companies would allow to happen what happened last time, because it was not only short-term detrimental, it was a couple of years detrimental. But logic sometimes is not a word used in those negotiations. My guess is that even though you have heard some rumblings that there are some issues that are not surmountable, I have to believe they will figure it out. Christine Augustine - Bear, Stearns & Co. : What about workers' compensation in California? Is there still that talk about some people really got penalized and maybe it went too far and it needs to get reversed?

There is always an example of a person that can come in front of a regulatory presentation and talk about their particular case that was impacted negatively and unfairly by it. Again, I would assume -- we are not out there lobbying, but I would assume there are lots of lobbying activities going on on both sides. Again, we have not seen -- like anything in California, they are going to be proactive as a state in providing additional benefits to their citizens and being more fair, whether it is paid FMLA or you name it. My guess is over time, it slips a little bit, but we do not go back in that abyss. Christine Augustine - Bear, Stearns & Co. : But you are anticipating that benefits and workers' comp, in terms of how you are accruing for it, that that actually should continue to help you on the SG&A this year?

Yes, but the workers' comp is a much smaller piece, in fairness. Christine Augustine - Bear, Stearns & Co. : Okay, and then, how about on utilities or just overall energy costs this year versus last year? Are you still seeing increases? Have you been able to offset anything?

Well, if I look at total warehouses for year-to-date, which would be 24 weeks -- this is just our internal warehouse P&Ls -- utilities as a percent of sales are essentially flat year over year, so we must be doing something because the yields, the costs per hour are certainly a little higher. Christine Augustine - Bear, Stearns & Co. : How about international expansion? What is happening with Australia? Is there something going on there?

Well, like a couple of other countries that we are not in yet also, there has been something going on for many years, off and on. We have not made any announcements. We have, over the last several years, like six, seven years, we have had somebody there for a while and then they come back, so there is really nothing to say yet. That again is one of probably two or three countries that you could have used as an example. We constantly are looking at a few other countries. There is nothing on the horizon over the next 12 months but it does not mean that tomorrow that can change. I can assure you things have changed before, like when it is a done deal, we are going into a given country and then three months later, we are not going, so who knows? That would certainly be one of three countries that is a possibility over the next few years. Christine Augustine - Bear, Stearns & Co. : The last question I had was on Smart & Final. Did you guys look at that at all? Do you compete against them? Or do you not consider them competition? If so, do you think anything is going to change under different ownership?

Didn’t a buyout group buy them? Christine Augustine - Bear, Stearns & Co. : Yes, Apollo.

Retailers have only one way to be arrogant; it is when Harvard-educated buy-out people buy stuff. My guess is we are not terribly concerned about any changes there in their newest capacity. They have always been a competitor. Certainly they are a competitor for all the food service people that we serve, the food service customers that we serve. I do not think this is a real big deal. We are 0 for whatever when it comes to acquisitions, other than the merger of Price and Costco back in 1993. The only time we have ever looked at it is on the half-a-dozen times a year when it is a tab in an unsolicited presentation from an investment banker

Your next question comes from the line of Robert Drbul.

The question I have is, can you just elaborate a little bit more on the trends in the fresh business?

Well, they were generally positive. They were positive comps but produce was the standout. Maybe a little of that is pricing. There is nothing terribly unusual. I think again, if you look at some of the weather factors, if you look at commodity pricing was a little up in some of those areas, I am sure that hurts you a little bit. We do not really see anything that alarms us at this point.

Then, just sort of bigger picture, Richard; do you have any insights you would care to share with us around the consumer or the economy as you are seeing it from a business standpoint?

Not a whole lot that would I do, other than make some stuff up here. One of the things I think is continually gratifying when I look at our numbers is whether our comps were 4 or 12, the frequency has never -- in the last I bet you 60 months, the last five years, the last 10 years probably, the frequency other than a change of a number of days or something, but the daily frequency has never been below one. It has not been below 1% or above 2%. Probably three-quarters of those data points are within the zero to plus one. Whether sales are a little stronger or a little weaker, we generally are still getting an ever-so-slight positive frequency and that is good. That means we are doing our jobs as merchants, whether it is through coupons or mailers or diverting merchandise that people want, or having great pizzas, or whatever out there. From that standpoint, when I go to the budget meetings every month, I am still comforted by the fact that the merchants have a lot of things up their sleeves as it relates to new stuff that is coming in, whether it is new manufacturers, brands that historically outsell us, new fresh food items. I think merchandising-wise, we are still at the top of our game in a lot of that stuff. That did not really answer your question but at least it made me feel better.

The other question I have is I guess when you look near-term or the next couple of quarters, do you think gross margins can continue to improve or will start to improve, be a little bit higher? Can you just talk about your thoughts around gross margin a little bit more?

What I can say is as tough as competition out there, and it is ever so tough, it is not any tougher or less tougher, but it is ongoing and all the time. Arguably, when people say who is your toughest competitor, I sincerely say Jim. We already have that issue. I cannot tell you with confidence it is going to improve over the next year. I can tell you with some cautious optimism that the hit from executive membership will be less and start to be closer to zero than 10. I can tell you that Jim and the merchants are working on some initiatives that are real and it is not just willy-nilly raising the price of a few items. It is looking at some of the thing that we do that, you know, how do you improve margins? And it sometimes it includes effectively raising the cost and therefore getting a little more on something. But it is doing it without cheating while maintaining that philosophy. Jim is still committed to having pretax earnings, notwithstanding this year and last year, committed to trying to get pretax earnings to grow faster than top line sales. Again, all things being equal, I know that the rate of annual expansion will not be skyrocketing like it has from 15 to 25 to 31 or 32. It will be more in line with top-line growth. So even though those are existing market units, which are better than new market units out of the box, they are still much lower than average units, the average of all our units. So it is a higher level of tempering that will slow down. That is a positive. When you ask me how comfortable I am in Q3, give me more quarters and I will be more comfortable, more fiscal quarters. Clearly if I look just at electronics, which is what, 5% or 6% of sales, year over year you are talking a 100-plus basis points detriment in that department. That alone should help you a little bit. I think a combination of things out there. Unless competitors get crazy out there, but we are all crazy already, and we are all logical though, level-headed. There is fierce competition out there. I think we have been able to show we can do it. I mentioned to many of you before, let's not lose sight of the fact that on a cumulative basis since we started the 2% reward back five years ago, that has hit margin for 84 or 85 basis points. So even though reported margin the last year or two have been flat or down a little bit, our margins over the last five years have been up slightly, even with higher competition, stronger competition, and an 84 basis point hit from that. I am encouraged that we have the ability to do it. It sometimes does not come as smoothly and as quickly as we all like.

Your next question comes from the line of Mark Miller. Mark Miller - William Blair & Company: Just trying to understand a little bit better the gross margin trend and specifically talking about the merchandise margins down 11 basis points, where they were up 8 basis points last quarter. Were you saying that the change in that trend has been exacerbated by more returns in the second quarter, because presumably that was hurting you last quarter as well? Or is it more that there has been more deceleration in fresh food? Or is it something else?

I think it is both. First of all, we have our new methodology, which again, while most of it is cumulative, some of it is the quarter. In addition, we have even a percentage point or two of comps lower than you had planned originally. That hurts you a little bit, and a little deceleration in fresh foods hurts you a little bit. None of those are insurmountable, though. That is what we do for a living. Mark Miller - William Blair & Company: When you look at the comp trend over the last few months, any observations when you look at the business customer versus the individual customer?

Interestingly, the two customers have been pretty darn consistent, so we have not seen any dramatic change in trend between the two. Mark Miller - William Blair & Company: Last question would be on the traffic; how much do you think the in-store traffic has been impacted by the stabilization of gas prices year-on-year? My understanding is that half the people that go to get gas also come into the store, and as we lap higher oil and gas prices in the summer, should we think of that as a tougher comparison, or is that not material?

I do not know if we have ever looked at it that way. I think something that helps our comp a little bit, interestingly, is the in-fills. If we are now a 15-minute drive instead of a 30-minute drive from you, you are more likely to come a little more often. I think that as gas prices went from the high ones to the high twos, probably we saw some benefit from that. I am not so sure that it is discernible with all the other factors as it goes up or down $0.30.

Your next question comes from the line of Peter Benedict.

On the membership fee income, can you talk a little bit about what we should be expecting in terms of the growth rate in the back-half of the year? It looks like things grew about 14% in the first-half.

Again, without giving away the hat here, I would think that once the $5 increase was initiated, while it was initiated May 1st for new sign-ups, the bulk of people are existing members and that commenced July 1st. So from July 1st to June 30th, it should be a slightly ever-increasing benefit. That rate of growth should continue, if not improve a shade over the next quarter-and-a-half to two quarters.

Can you talk a little bit about maybe what you have seen consumers do with respect to spring product in markets where you have had a break in weather? Have you seen a meaningful pickup there?

Honestly, I have not looked at it. It is almost too early. I mean, the Florida’s and the Arizona’s and the southern California’s, they are used to it. I have not looked at it, I'm sorry.

Your next question comes from the line of Dan Geiman. Dan Geiman - McAdams, Wright & Ragen: Good morning. Regarding the wage increase, what was the methodology behind it? Is there anything you can add there, recognizing that obviously you are pretty generous with your employees? Also, when was the last increase that you took, and would you expect a similar interval going forward?

The methodology is clearly not as scientific as you might think or hope. Basically it is the ongoing discussions that we have every month with our operations people, with the challenges, one of the observations that in some markets, notably California or parts of New York, in some locations, over the last couple of years, last year-and-a-half, we have had to raise the starting wage in given locations just based on the ability to hire the right people. The fact that others have raised theirs, so the spread has come down some. I think it has been six years since we changed the bottom of the scale. You mitigate it a little bit by changing the hurdles. If your tranche is to get from bottom to top, 6 years ago was a full-timer, 3.5 years, and then it was 4 and it is maybe a little more. We have mitigated it a little bit that way, too but I cannot tell you when are we going to do it next. We like to have a good spread. We are more based on the observations that we see in some of our markets and we are not prepared to have different wage structures in different markets in the U.S.

Your final question comes from the line of Daniel Binder.

Just on your last comment about not having different wage structures across the country, just out of curiosity, what is the logic behind that? It would seem like in some of the lower cost of living markets, that would maybe be an opportunity to optimize it a bit.

Well, one would think. You will to have ask Jim that. It has always been that way from our inception. It is simple, it is easy to understand. We do have people transferring among locations and a lot of people, particularly when we have gone into new markets, some of which are smaller markets. The view of the operators and Jim has always been is that it is easy to -- maybe it is expensive, but it is easy to do. It eliminates any riffs that are sometimes caused when somebody is being transferred.

On the tobacco issue in Canada, in the past when we have seen price increases, whether it was in the U.S. or in Canada, typically it has been this one-month hit and then you go back to normal. This time around, it sounds like January and February were hit. Was that just because the price increase somehow straddled the month or were there two price increases?

It was the last week of January and the first week of February, so it did straddle it. That is the biggest reason.

So then next month it goes back to a more normal, I mean -- ?

I would think so, except for the Imperial piece, where the largest manufacturer of the most popular brands.

That was like a 25% hit before in prior months. Is that roughly what would you expect going forward?

Maybe there is a little piece that you catch up because people bought more before the price increase a year ago.

I know the Chinese New Year shift hurt you last month. How did that benefit the international and overall comps this month?

Wasn’t it the last week of January that helped us, Bob? Or was it this year? It was in February, hold on. I have it here. If I look at Korea and Taiwan, good example. In local currencies, Taiwan for the first two weeks of February, or the calendar February, were comping over 100%, and I think they were comping negative teens the two weeks prior to that, or negative 30%. Korea, same thing. Not over 100%, but between 50% and 80% in those first two weeks of the month. Interestingly, Canada -- remember Taiwan and Korea are nine locations. Canada is 70. Canada in local currency was ever so slightly negative, as it has been for a number -- it is actually much less negative than it had been in local currency. Then, actually the U.S. dollar, at least in the month of February, strengthened relative to it, so Canada in Canadian dollars in February was at minus 1 and in U.S. dollars was a minus 3. That more than offsets that plus 100% for those two weeks in Taiwan in four locations. Canada, of course, tobacco in Canada is hurting it too.

So if you isolate the Chinese New Year shift itself -- I guess I am just trying to get an understanding of what the run-rate is for international, if you take out some of these issues.

Year-to-date in local currencies, ex-Canada, international is at 11, in local currency. In U.S. currency, it is 17, because the dollar has been weaker.

Then, last question is related to the TV return policy. I think the conventional wisdom has been that there was about a $0.07 to $0.09 hit on earnings last year as a result of the excessive portion of the returns, I guess what you consider beyond normal. As that policy starts to kick in and gives you benefit, when we take into consideration that there are some costs associated with extending the warranty to two years and the concierge service, how much of that would you ultimately expect you could recoup over time?

Let me start by saying I think the $0.07 and $0.09, there has been a few of the analysts out there that have put out some numbers. We have not blessed any numbers, although we have not said they are out of sight or major wrong, either. Our view when we went into it was that the cost associated with making some of the changes like the extra warranty and the concierge 1-800 number, and maybe you still get 70%, 80% of the benefit back, but that again is not going to even start for several months.

Should we start to see some sort of benefit by Q4?

My guess, it would be no earlier than Q1. If you think about the fact that if a good chunk of your stuff is returned in the quarter, but then the other chunk is returned over the next six months, if I had to say give me your best single-point guess, and this is just a guess, it is easily six to nine months after you put the policy in place, which would imply the beginning or the end of Q1 of our fiscal year next year. Well, thank you, everyone, and we will be here. Good-bye.

This concludes today's Costco's February sales and Quarter 2 earnings conference call. You may now disconnect.