Costco Wholesale Corporation (COST) Q2 2012 Earnings Report, Transcript and Summary

Good morning. My name is Dawn, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter and year-to-date operating results for fiscal year 2012 and February sales conference call. [Operator Instructions] Thank you. Mr. Richard Galanti, CFO, you may begin your conference, sir.

Thank you, Dawn. Good morning. This morning's press release reviewed our second quarter fiscal year 2012 operating results for the 12 weeks ended February 12 and our February sales results for the 4 weeks ended this past Sunday, February 26. As with every conference call, let me start by stating that the discussions we're having will include forward-looking statements within the meaning of the Private Securities and 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 results, for the quarter, earnings per share came in at $0.90, up 14% from last year's second quarter earnings per share of $0.79. This was on a 10% sales increase and there weren't any big unusual items either in this year's or last year's second quarter earnings. But as we go through our note, you'll note comparison includes not only a 10% overall sales increase, an 8% comp sales increase and normalized 7% comp increase, excluding gas inflation and FX impact. The FX impact on our foreign operations year-over-year in Q2, assuming flat year-over-year FX rate, essentially hit us by about $5 million pretax earnings in the second quarter. We had an 8% increase in membership fee income. This included very little impact from the recent announced fee increase, a little less than $1 million. This is due to the nature of deferred accounting, and I'll talk about that in a minute. We had a lower year-over-year gross margins as…

[Operator Instructions] Your first question comes from the line of Deborah Weinswig with Citi.

As we look out for the rest of fiscal '12 and you start to cycle much easier gross margin compares. How should we think about gross margins for the rest of the year, especially as one of your competitors talking about very aggressive price investments?

Well, I think -- needless to say, I can't give you any guidance since we don't guide -- but clearly, I think our message has been that we continue to invest in price and I think we do it more than talk about it, frankly, and so we'll continue to do that. But that's what we do. And I think the other message that we are trying to convey over the last couple of quarters and will continue to do so is, well, there's certainly a lot of tough competitors out there. This is us, not them, in terms of what we do for a living and we're not -- in our view, while every day, every competitor responds to one another, but overall, we are responding to ourselves here more than anything.

Okay, and then can you talk about anything you're doing in terms of improving productivity on the floor?

Well, I mean it's a never-ending battle. I mean, we constantly are working to speed the front-end line, whether it's redoing the software for credit and debit, pruning out, all the things that all of us do out there. Just last year, I know one focus, and these are all anecdotal, has been in operations. Again, I think this is where Greg has put a lot of effort into, given his operations background, operators that put a focus on overtime hours. You're always going to have overtime hours whether it's because of weather or people didn't come in if they're sick or holidays where you misjudged something, whatever it is, or physical inventories. But that being said, with a focus on it, and I think that's the key word, focus, we saw just in the last couple of quarters a few million dollars just by having fewer actual hours. And so saying those hours, even if they were still worked, those hours worked as regular hours rather than overtime hours. That extra half was a reduction. So those are the types of things we're doing. I think we still get a lot of benefit from, again, what I talked about over the last couple of years, sustainability. Again, it's not all us; it's everybody. It's the vendors. We're all working towards this end, but it's taking grams of resin out of water bottles and packaging into square containers instead of round, and making liquid everything, detergents and the like, more concentrated. All those things are having, I think, real benefits to all of us. I think we do a good job of managing health care and worker's comp and relative to -- in our view, relative to what our third-party providers tell us they're seeing elsewhere. But it's a lot of blocking and tackling and trying to not do things that we're doing that we don't need to be doing. So in the last 3 or 4 years, our active SKU count has come down from 4,100, 4,100-plus down to 3,800, 3,750. That again was our doing a conscious effort to say if the top 200 items out of roughly 4,000 are 35% to 40% of sales, you can imagine what the bottom 200 are. And every time we can take a palette of something out, that doesn't make sense -- I mean, you’re always going to have some slow things because it makes sense for the small business owner, the restaurant owner, whoever it might be. But if every time you could take a palette out and mass quantity -- mass out something, some existing item bigger, you're going to have more productivity. So all those things that we do. I think for those of you who’ve followed us for many years, I feel that we have continued to do little things that have helped us and we’ve all been helped by what's happened in the economy and trying to be more efficient, but there's no one big thing.

Okay. And then lastly, throughout, I'd say this earning season, we've heard a lot about volume declines. Can you talk about maybe what's happening with the national brands and then maybe also with Kirkland signature?

Well, the first part of the question I heard the question, but what was the first part you said?

So we've heard a lot about volume declines throughout the quarter on the HBA [ph] and TPG [ph] side, so could you maybe talk about tapping national brands versus private label?

Again, sub-department-wise we haven't seen any of that kind of issue in general. I mean, you see the constant pressures on what we call media and 1-Hour Photo, but in terms of -- we see a continued increase in penetration of private label even within existing private label items, recognizing the bigger part of that increase tends, in my view, tends to be we continue to add items. In the last year, 1.5 years, we've continued to add some canned good items, as an example, canned vegetables, canned fruits and the like. We've got that great peanut butter pretzel that I love. So there's a lot of things out there that we're doing but we've not seen any giant change as it relates to the kind of impact we saw in the first half of calendar '09 right after the financial crisis. I think in a given year, we probably see 0.75 of a percent increase in penetration, maybe 0.5, maybe 1. But I remember in that 6 months, we saw 2 to 3 percentage points, just in 6 months. And again, that was again people's focusing on figuring how to save money. I think one of the things that we continue to see in backflow is when we introduce a private label item. It not only drives penetration to that item which generally is a better margin, but also gets the brand to choose and the answer is just to be more competitive because they're losing market share. So it's a win-win for us and our numbers.

Your next question comes from the line of Charles Grom with Deutsche Bank.

Richard, just on the price investments that you're doing, I'm just curious, are the number of SKUs increasing each month that you're lowering prices on? Or is it the same basket of products each month? And I guess the second follow-up would be, how are you guys measuring the success of those price investments? Are you seeing a big increase in unit velocity when you do the price investments?

Well, we are not the most formal when it comes to trying to analyze did it work or not. I remember years -- when we had rampant inflation in the middle of '08 and we lowered the price of our chicken. At the end of '08, when we saw comps going towards 0 and I gave examples, I think over a 4-week period, we had about $32 million of actual markdowns on a limited number of highly visible items and one of them was the rotisserie chicken that had gone from $4.99 to $5.99 and we brought it back to $4.99. Well, if you put a dollar divided by 6, by the $5.99, that was very close, in my view, to the margin, the entire margin. So no matter how many more chickens you sold, it didn't help margin; it hurt it. So we're merchants at heart, and we attempt to drive the top line. I'll give you another anecdotal example. Last August or so, in Canada, where historically the soda and hotdog was at CAD $1.99. Well, many years ago the Canadian dollar was about $0.65 on the U.S. dollar. Well, in one fell swoop, Jim said take it down to $1.50. Well, that's just because that's the right thing to do. Clearly, that impacted the bottom line negatively. But I got to tell you, in a country where they've had a good economy and there's a lot of talk about inflation up there, we got national attention of being the only game in town that's lowering the prices on anything. So we saw increases in traffic and certainly increases in food court as well. So that's what we do and we feel good about the quarter in that we're getting our improvement from expense leverage and buying back a little stock and the like. And certainly, the membership fee as that improves in deferred accounting, that helps you. But we feel good about what we do with pricing and we'll continue to do it but we've really shown that when we need a little margin over time, we figure out ways to do it and do it the right way.

Can you just remind me in late 2008, when you did do the price investments, did it last for more than a few quarters or was it longer than that?

Well, that was more of what I'd call back then the perfect storm. Again, we're heading towards 0 and we wanted to go into Christmas and early January with some -- driving it. And whether that was the reason, comps did turn around a little bit then. This is more that we feel that we're strong. We've got a lot of good things going on. We're always reminded by Jim and now by Craig, let's not get too ahead of ourselves in terms of our success and let’s keep driving that top line. So again, I can't give you guidance it's going to be for another 6 weeks or another 25 weeks or -- but we don't worry about it, honestly, and not because we're cavalier, because we know that we have the ability to continue to drive sales. And if we need a little margin over time, we feel we can get it.

And then just a little surprised only $145 million of buyback in the quarter with the cash balance. I mean I know you got the $900 million tranche coming due in a couple of weeks. But what are the board's thoughts on accelerating the buyback here? Clearly, trying to open up more than 20 to 25 stores a year has been challenging because of delays and your cash position's only going to continue to grow. What are you guys going to -- I mean, what's the priority here?

Well, the board every quarter talks about it. Needless to say, what we do, they're certainly knowledgeable of and comfortable with. To do with the strength in our stock price and we kind of look at it on a -- periodically update it to kind of [indiscernible] pricing, buying more as the stock goes down and less as it goes up a little bit and then adjust that upward over time as the stock has gone up. There are a number of weeks in the Q, in the quarter, where again, on a given daily basis, we bought a little less. But we feel comfortable, we'll continue to look at it. I don't want to judge what I and the board will consider and do. We recognize that we have a high-quality challenge with cash. You've heard it before, but I still mean it. I am confident that we will continue to increase our expansion, and some of that expansion is going to be more expensive given the international rate of expansion. And over time, all things being equal, I would guess we'd increase it. But again, we're not going to feel pressure to do it this Thursday or next week. But you'll continue to see us buy stock back and the board is supportive of that. That's a vague answer, sorry.

Your next question comes from the line of Robert Carroll with UBS.

Just drilling down on the pricing investment a little bit more. I know given kind of the 10 basis-point decline in kind of core business, I mean, is that at the rough level that we should think about until things start to anniversary in Q4?

Again, we can't guide you.

Okay. All right. No problem. And then just in terms of the precedents, I guess, from this time last year when gas prices started accelerating meaningfully, I mean, are there any lessons learned from that period that you guys will be putting in place as we see, let's just say, gas prices catch a bit of a tailwind?

Well, I mean, I think the big thing is that our frequency. There's nothing -- it's a very low-margin business and to try to hedge yourself a little but all you're doing is, if you will, maybe smoothing the profitability out. But that there's a cost to that hedge on a low margin business, that's a big cost, so we don't. And so that's going to continue to be volatile. Whenever it's been a big year-over-year impact to earnings, we talk about it. It's a few cents better or worse or $0.05 better or worse. Clearly, I think last year, in the fourth quarter, we had a huge profits in gas and we shared that with you at the time. But when prices rise, we get more action. We're on the news more, people -- there's more frequency, I looked at some statistics recently in U.S. gallon consumption not just Costco but the U.S. consumers gallons consumption, which in good economies, is up a couple of percent, 1% or 2%, had been done 3% or 4% and of late, has been down 5% or 6%, I believe. I have to check that. And we're still up in the mid-single digits. So we're driving people into the parking lot, no pun intended, and a portion of them come in to shop. So we're -- it's just reinforcing that image.

And then for the gas sales penetration I know you said it was up year-over-year. Do you have that number?

I don't -- gas sales penetration. I think it wasn't as much as Q1. I think it was up about 1%. I think it was around 8.5% and the low 9%s.

Your next question comes from the line of Brian Nagel with Oppenheimer. Brian W. Nagel - Oppenheimer & Co. Inc., Research Division: I also had a question regarding the pricing actions you're taking and then the result and impact we've seen on your core gross margins. So we’ve seen it now for, I guess, a few quarters. First question I have is, as you think about the actions you're taking within your clubs, what's driving, so to say, the cadence of those? Are you going product category-by-product category? Or is it a reflection to some extent the underlying input costs in those products where you're deciding to make actions? And then the second question I have along those same lines is, after these actions are taken, how are you priced relative to some of your competitors? We’ve talked a lot about -- other questions asked you about competitive pricing out there, but are you, generally speaking, lowering prices below competitors or are you matching competitors, et cetera?

Well, first of all, we're always going to match or try to be lower than our competitors. Keep in mind, I don't know if it's half or more of our business are very competitive commodity items, whether it’s milk, cheese and butter or soda pop or Advil or diapers or you name it. Private label helps that impact with us and others as well. I really do mean it. It's kind of like all the merchants are -- going into Christmas as an example. The merchants were directed in every categories, come up with some ideas of where we could get sharper and be exciting out there and -- have hot buys and have hot items at hot selling prices. So that's what we do. When we do price comp, price shops and we do it most importantly, directly with -- Sam's and BJ's are the 2 warehouse club operators. We're not comparing every price. Are the fresh food buyers looking at the ground beef ads and the chicken dryer ads or whatever else? Yes. But we're not comp shopping supermarkets. Because keep in mind our margins are, on average 11% and theirs are in the mid-20s or more in some cases; or the home-improvement retailers in the low to mid-30s. So but when you look at the most direct warehouse club competition where we're across the street from each other or down the road from each other, on key commodity items, which is, I don't know if it's 40% or 60% of our business, call it half, we're all very close. When we look at it on exact items, we're going to be lower. It could be a 0.25%. It could be 1.5%, 2%, but it's small. Where we find the big differences is on those non-commodity or highly competitive items. Where we're selling a better quality item, there's not as much of a price comp, a direct price comparison because it’s not the exact item on a lot of things like domestics and housewares, and that's -- or the quality of some of the home meal replacement items at Costco versus elsewhere. So that's where others we feel can make a little more margin and we can too, but not as much. And again, that's what we do is merchant stuff, and so it really is all over the board.

Your next question comes from the line of Adrianne Shapira with Goldman Sachs.

Richard, if I recall, the last time you made some price investments, it was ahead of easing prices. You were the first to lower and it obviously paid off remarkably well with strong share. Is that true this time around as well? Maybe give us a sense of what you're seeing in terms of inflationary pressures potentially easing especially in food?

Again, the example that I talked about and as you've just mentioned as well is in late calendar '08, the economy crisis, the rampant inflation of mid-calendar '08 towards the -- the fall of calendar '08, there was rising gas prices, rapid inflation, that came to an -- that was coming to an abrupt end. Well, in many instances, our suppliers, who had committed to raw materials, it was going to be 4, 6, 8 weeks out before the underlying prices to us and to other retailers was going to come down. Well, we saw our comps heading towards 0 and again, I think, again we call it the perfect storm. That is completely different. That was a, hopefully, a onetime perfect storm and we acted upon it. I think this has more to do with the fact that we were very strong, we feel. We're driving sales and comps. We're seeing increasing relative levels of profitabilities in some of these other countries. And it's a constant reminder, constant internal reminder again for years and by Jim and now by Craig, let's not be too sure of ourselves. Let's keep doing what we’re -- as long as we're growing the company and growing earnings, we'll do that. As Jim used to say, we still, we think, we deserve to make more and we will.

I understand it's different and that it's not as abrupt. But maybe shed some light in terms of are you seeing any easing of some of the inflation that we saw last year?

Oh, I'm sorry, yes, we are. As an example, while there's a very minor LIFO charge, I mean, I think using 100.00 as the starting point of the beginning of fiscal year for LIFO indices, I think we're up 11 basis points for the first half of the -- first 24 weeks of the year, so virtually nothing. And that includes gas, which is a chunk of that. So are we seeing some declines? I know as an example, cotton prices have come down from its peak. So we will see some declines going forward. So yes, there's some of that. Clearly, to the extent that we self-inflicted tend to lag when there is inflation -- even if there's less inflation that there's no lag to be lagging on. So did that answer it?

I think the point is that, while we saw sequentially some degradation in core merchandise margins, if we're seeing some easing cost pressures, perhaps going forward, we shouldn't see as negative of a hit on the margins going forward if you're seeing some relief there.

Well, I'm going to bet on you then.

Okay. And then my next question, as it relates to with gas prices, obviously, that would seem as if, as you mentioned, the frequency in the traffic should continue to at least hold, if not get better. How to think about -- are you starting to see -- how are you addressing the throughput issues? I would imagine some warehouse is given what is just unbelievable traffic trends, what are you doing to kind of accommodate this kind of frequency? I know Jim was very focused on making sure the lines were not too long. What, if anything, is going on to accommodate what's just fantastic traffic?

Well, there's pretty much 2 things you can do. Other than trying to speed up the register a little bit. You could put more people upfront which we do. The worst thing is, when you have long lines and registers that aren't open, and that's a no-no. Clearly, one of those slides we've shown at conferences that show the number of units that are doing 200 to 250 and 250 to 300 and more than 300, there are more of them. We look for more sites and we've taken a couple of units over in Asia that were in the 300-plus range and have opened sites. That impacts cannibalization, but that's what we have to do, and we'll continue to do that. So we recognize that's a high quality problem and we have to continue to address it. And again, those 3 things you can add more people, you can improve technology little bit -- that's an ongoing iterative thing, but not a lot, other than when you can just push the basket through the archway and it tells you what you owe -- and then open more units. We're also remodeling and expanding. I mean this is anecdotal, but an example is we're under construction in Maui. We're adding a significant amount of parking. I forget how many square feet we're adding to the physical building itself, and we're adding a gas station. But most importantly, we're adding parking. If any of you have been over there, it's approaching 300 million and it's mind-boggling how small the parking lot and the building is.

And then just my last question as it relates to online, you talked a little bit, maybe give us a sense of where is that business in terms of sales profitability, how pleased you are with it. And you talked about some tweaks and some changes coming in this year, as well as sort of expansion overseas. Maybe kind of give us a sense of what we should expect online and what sort of trajectory you'd be pleased with as that channel continues to grow.

Yes, well, look, as you know, we are a little different than others. We have few items on it, more big ticket items. We cater mostly to our members. It's a product extension of what we do. We don't have 100,000 or a million items on there. I think the re-platforming is a no-brainer from the standpoint that I think I said it last call, you go online and punch in [indiscernible] or something, and you don't get costco.com and because our platform is an old platform that doesn't allow search engines to crawl on it. Well, that’s a duh. And that'll happen at the end of the summer. And then it takes several months for the hits to improve your pole position, if you will. Beyond that, we found success in, again, big-ticket items, white glove items, whether it's furniture or I like big-ticket electronics, and it's a lower gross margin business and a higher pretax as a percent of sales business. And so it feels small relative to our company. And for a company that's going to do $95-plus billion this year, it's 2.5-ish so it's small. And does it drive us crazy when others do a lot of business? Yes, but we recognize we do some things that they can't do and they do things that we're not going to do. So we want to do better, and we will, and we're growing, but we can always do better on it.

Your next question comes from the line of Greg Melich with ISI.

Just a follow-up on that last question, Richard, when you talked about dot.com, is that dynamic of lower gross margin, higher pretax profit, is that entirely because of mix or does it have to do with the business itself?

Say that again, Greg, I'm sorry.

That dynamic on dot.com that you described, lower gross margin rate, higher pretax profitability? Is that entirely driven by mix or is it something with the actual business?

Well, it's certainly bigger ticket items help but I think -- I would guess and I'm just shooting from the hip here, the biggest thing is lower operating cost. A high percentage of the items, I don't know if it's 70 or 80 today or more, is factory direct shipped, and so the cost is the electronics, is running the physical system and the buyers and not a hell of a lot more.

Got it, great. And then you mentioned inventory up $1 million for Club globally, FX not an impact, but inflation was key there. Could you help us quantify that a little bit more? Was inflation all of it, half of it?

Yes, well, on a year-over-year basis, my guess is inflation was 2 to 3, probably closer to 3. I don't have the exact number. And -- yes, 2.5, so call it 2.5, so that was rough number on $10 million, $250,000. The rest of it is, I know we tend to have more electronics right now, but a little bit. I mean, it really was across the board. Historically, it was in 1 or 2 categories, but I think it's partly driving the business.

And is that -- it sounds like with fewer SKUs, but then inflation being $250,000, it means there's $750,000 of actual more depth in the SKUs you have.

More depth and higher tickets. Not just because of inflation.

Got it. Okay, great. And then, lastly, on gasoline, could you highlight a little bit the -- I think you mentioned gas profitability in the Ancillary, I imagine that’s because of the rate of increase and the replenishment of your inventory? Could you just give maybe a little more color on that? But that dynamic, was that what hit you in this quarter?

In the Ancillary, that hit us. The food court I mentioned, I think, that's a big chunk of it as well and that's, again, that's I think I talked about that in a couple of the last 3 or 4 quarters. And again, that is clearly us. I mean we've held the price of pizza when cheese prices skyrocketed and again it's still profitable, needless to say, but it's at a lower level of profitability.

But that negative 4 bps to gross margin, you mentioned the food court, but the part that's gas margin, I imagine that's not -- that's not just the fact that gas mix went up. That's the actual top [indiscernible] profit of gas?

Yes.

Okay, great. And just given the cadence of what we're seeing, there's no reason to think that, that would change. In fact, could it get worse here before it gets better?

Well, first of all, with gas, who knows what happens? It was just a few days ago that everybody was talking about gas. There was speculators and there's no reason it should be going up so much, but then, in the same breath, everybody's saying that summer gas prices rise starting Memorial Day. And so when gas prices rise, our profitability lessens. There are weeks when we lose money in gas. And that being said, I mentioned I think last summer is when we made a lot of money, and I imagine prices were going down at the time. So it's hard to say. That's why we try to point out gas because it is such a volatile thing.

Your next question comes from the line of Chris Horvers with JPMorgan. Christopher Horvers - JP Morgan Chase & Co, Research Division: So, Richard, continuing the long tread on gross margin, maybe going at it in another way. When we last met, you talked about how the first membership fee years ago, Jim basically said to all the merchants, hey we have an extra $20 million in price investment that we can create. So as you think about going forward and the fact that MFI growth really accelerates in the back half as you talked about, do you think that, that will allow you to accelerate the price investment?

Maybe yes, maybe no. We, as always, looked at it, again -- and I think the example you're talking about is probably something from 20 years ago literally. There's lots of reasons we are competitive on pricing. There's direct competition, private label, given competition geographically in a given state or country, our level of strong profitability I mean and -- is the success of our membership fee income a factor in how we operate our business? Yes, but by no means any different than all the other factors. Some are bigger than others and sometimes they're not. Again, I can't give you any direction. Our goal is not to drive you guys crazy with what we do. It's to drive our business in the right direction. Christopher Horvers - JP Morgan Chase & Co, Research Division: Understood. And then is there any -- how much of the price investment maybe relates to what's going on in Canada? It seems like there's a war brewing with Wal-Mart accelerating and Target launching next year?

Well, again, I'm not going to comment specifically. What we do everywhere in the world as we enter a new state in the United States as somebody comes into one of our markets, we're more competitive. We respond -- usually, our most direct response and impact of that direct response is when it's direct warehouse club-to-warehouse club. And certainly, as Target, which is a new entrant into the Canadian retail market, and Wal-Mart, a very strong retailer up there as well, and other Canadian retailers, there's going to be a lot of pricing competition and advertising and certainly, we're going to continue to drive our business. So again, that's what we do -- that's one of the things we do but we do those things elsewhere as well. Christopher Horvers - JP Morgan Chase & Co, Research Division: Understood. And final question on the weather, our other favorite topic. So it seems like there's some speculation out there whether or not this is core consumer getting better or maybe January and February is seeing a lift out of weather. Is there anything you can say to that topic or anything you're seeing on the category level that you think is instructive?

Bob was whispering that this year was a little better than last year weather-wise but not a big impact, in our view.

Your next question comes from the line of Mark Wiltamuth with Morgan Stanley.

Richard, it's Mark Wiltamuth. I wanted to get your thoughts on foreign exchange drag that we could see in the second half of the year at this point.

Well, yes, who knows? I mean it depends on what's going on. I was looking back at the last several quarters. For a long time, the dollar weakened and then it strengthened dramatically and then it's coming off of that strength. Right now it's slightly negative. There's nothing giant brewing out there. The euro thing is less of an impact but who knows? I don’t know.

Okay, and then looking back through the holiday period, you were clearly one of the holiday winners in terms of sales trend. If you look at those margin investments you did make, were those all planned investments? Or did you have any of that holiday promotion that was kind of reactionary?

I don't think anything we did was reactionary. It was all done in advance. I mean there may be 1 or 2 things, but I don't even remember thinking, hearing about that.

Okay. And then as you look at how things are going on expenses right now, what level of comps do you think you need to lever SG&A in the back half of the year?

You know, for the last several years, we've tried not to predict because we realize we don't know. I think whatever x is, it's a little bit lower sales comp number than it used to be because we, like everybody, has gotten a little more efficient in the last few years with the economy. I hesitate to know what it would be.

Your next question comes from the line of Robby Ohmes with Bank of America.

Richard, just a couple of quick questions. I just want to follow up on your answer to Greg Melich's question where you said higher tickets but not just because of inflation. And I was wondering if you could just give us a little more insight to the type of category shifts that you've been seeing recently and what maybe you expect for this year that could be different from what you've seen in the last couple of years? Are you adding higher ticket items to the assortment broadly? Or is it on the Softlines category? Or maybe just a little help helping us see what you may be feeling. We won't hold you to it, but any changes you're seeing?

Look, it’s all over the board. I mean jewelry is up, needless to say, because of inflation. The average price point of a TV is up a little bit versus being down typically year-over-year. Cameras are up a little bit. Both of those have to do with the earthquake in Japan and the floods in Thailand I think in regard to cameras and hard drives or whatever. So some of those things haven't been deflationary. I noticed, again, I'm telling you this as a shopper. Some of the private label items we've had, canned goods, are 8 packs, not 6 packs. Those are things we do out there. And I know we have a few more home meal replacement items. So I think it's really all over the board. I would think some of it also is more physical units out there, because it can't all be [indiscernible]. But again, our inventories are clean and our shrink numbers midyear were great.

And just one other question, on the online, are you guys contemplating a change in how you charge for shipping related to this redo?

I'll tell you soon as I know. I don't know what plans that I have or haven't heard about yet. We keep doing what we do.

Your next question comes from the line of Chuck Cerankosky with Northcoast Research.

Richard, first thing, just a data point, do you have the square footage at the end of the quarter?

Yes, it is 84,998,000.

Alright. I want to poke around in another category, apparel. How did that behave during the quarter and any comments on what you might be doing there?

Apparel was up in the mid- to mid-high single digits and we get brands and we continue to try to divert brands that won't sell us, but no, it's been relatively decent.

And then on the electronics category, you mentioned before on the comp commentary was, I think you said just below 0, but you had some dollar increases in TVs, so how are units tracking overall in electronics?

Well, needless to say, it's a little bit below “below 0.” But I don't have that in front of me. My guess it's in the low to mid. It's not dramatically different than that.

When you're looking at the cash the company has, you’re going to pay down a chunk of debt. How about the dividend? What's the board’s or management's thought on boosting the dividend meaningfully?

Again, we talk about it. There's a formal discussion every year in our April board meeting and but there's no -- again, I can't give any direction of what we discuss until we announce it.

Your next question comes from the line of Mark Miller with William Blair. Mark R. Miller - William Blair & Company L.L.C., Research Division: On the club opening delays you're seeing, that was also down from the prior plan, but trying to think of many comparable situations for companies that have such strong consumer demand, high comps, great return on capital. I mean is it your fate at this point to be driving around 3% footage growth due to the size? Or are there any changes you can make to reaccelerate unit openings, expanding the real estate team or changes in property siting?

We have expanded the real estate team in the last year or so, including putting people on the ground in a few of these other countries, more so than we had in the past. We clearly are focused more internationally, which has a little longer time line. There is a lot in the pipeline. Craig clearly is committed to that and I hope we can all sit here soon and say, okay, it finally happened. One of the things that I've said before as we reflect on this question is that one of our -- in our view, one of our strengths, in some people's view relative to how quickly we open units, people think it's a shortcoming -- is we're very hands-on. And we, particularly in -- I kind of viewed it as a real positive in terms of rapid rate of expansion for years between the 3 countries and Japan, 3 in Taiwan. Between the 3 countries, we had about 20 units, so 6 or 7, 5 to 8 per country. And between those 3 units, we may open 1 or 2 a year in total between those 3 countries. That was 6 in the last year, I think, and it'll be more going forward. So we've got more in the plate and I think you should see that turn somewhat at least directionally upward. But I'm tired of listening to me also. Mark R. Miller - William Blair & Company L.L.C., Research Division: On the pipeline, and that sounds encouraging, is that -- I mean is there I guess a figure you could share with us in terms of sites that have been approved or, I guess, some way for us to look at '13 and whether that number can push higher?

At the end of the day, I would assume, and I'm sure you [indiscernible], the number should be in the mid-20s, which would give me more comfort that at least it'll be in the low 20s but we’ll have to see. We’ve got a lot going on, a lot more -- we have more going on now than we had a year ago or 2 years ago.

Your next question comes from the line of John Heinbockel with Guggenheim Securities.

Richard, a couple of things. When you look -- I mean, obviously, your customer's very loyal. But when you looked at loyalty, is the Fresh Foods customer and/or the Kirkland customer, when you look at those 2, are they significantly more loyal than people that don't put as much Fresh Food or Kirkland in their basket? Have you looked at that?

I have not, so I'm happy to, but I have not.

Secondly, with respect to real estate, is there more -- the sites you're looking at, because there's less -- there seems to be fewer people looking to grow as there had been, the quality of sites that you would look at, is that now opening up a bit or not? That's still not where you'd like it to be in terms of availability.

It's certainly up a bit from pre-financial crisis, but while there's some slowing, there are still people growing out there. And the other impact aspect of that particularly in, let's say the U.S. and Canada where we are, locations are more pinpoint shots rather than live blasts at geographic area, and anything within a 5-mile radius. We’re looking within this mile radius because it's between 2 locations, 6 to 8 miles in each direction. So that becomes a little more challenging. But that's why there's more effort being put into it. And yes, the answer is yes, the economy has helped that process, but it's not like gone from difficult to easy.

And do we ever get to a point where you think about playing around with the size of the box to open up the potential number of locations, a lot smaller or...

Not yet. Years ago, it was probably 15-plus, 15 or 17 years ago, in the Northwest, we opened 4 units: the coast, Astoria, Oregon; Juneau, Alaska; Kamloops, British Columbia; and one more, I can't remember which one. And they were 72,000-foot units. And over time, we've changed 3 of them into 140,000-, 145,000-foot units and they're doing quite well. And so again, our focus is keeping it focused on what we do.

All right. And then finally, so are health care costs now into the single digits in terms of growth or not yet?

I think they actually were in Q2. I don't have the sheet in front of me, but as I -- given the total sales increase was 10 and we increased -- we had a basis -- a few basis points improvement, the answer is most likely yes.

And that's not -- you haven't done anything differently with the plan? And I'm not talking about being less generous. I'm talking about just sort of being more diligent about how that money gets spent. Has that been the case or it's just more -- it's going to happen more naturally?

It's mostly more naturally. We haven't done anything to plan in terms of detriment-ing, improving the bottom line of the cost of it by casting something on to the employee. We have not done that. I think that we're always doing -- in the last several years, we focused a lot more on preventative stuff, needless to say, and getting people back to work and workers' comp. But beyond that, there's nothing to speak of. I know our, what we call high-cost claims, which are $100,000 and over, are down a little bit in terms of frequency.

Then just lastly, wage growth in comparable stores that hasn't changed much during the last couple of quarters, has it? And I'm sort of thinking about within that 6.5% growth, wherever wages were growing [indiscernible], whatever, 3% to 3.5%, that hasn't changed.

I don't think it was. To the extent that we're opening more units overseas, some of those countries have a lower effective wage than the U.S. does, but still very well compensated relative to that country's regular retail rates. So that slight change there probably helps you a little bit.

And at your request, Mr. Galanti, there are no further questions. I'll turn the floor back over to you for any closing remarks.

Well, thank you very much. Bob and Jeff and I are here and we'll talk to you soon. Thank you.

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