Costco Wholesale Corporation (COST) Q4 2012 Earnings Report, Transcript and Summary

Good morning, my name is Tabitha and I'll be your conference operator today. At this time, I'd like to welcome everyone to the fourth quarter and fiscal year-end operating results for 2012 conference call. (Operator Instructions). Thank you, Mr. Galanti, you may begin your conference. Richard A. Galanti – CFO, EVP and Director: Thank you, Tabitha, and good morning to everyone. This morning's report as it relates to our 17-week fourth quarter and 53-week fiscal year 2012 operating results, both which ended September 2nd. For comparison purposes, the fiscal quarter and year are compared to last year's 16-week and 52-week periods for the prior fiscal year '11. As with every conference call, I'll 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 resulting in our 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 SEC. For the fourth quarter, to begin with, our 17-week fourth quarter of fiscal 2012 operating results. We reported earnings of per share, of course, this morning of $1.39, up 29% from last year's reported fourth quarter earnings of $1.08. Sales for the quarter were up 14%, which of course, include the extra week in Q4 of this year. We ended at 17 weeks this year versus 16 weeks last year. Now comparable sales, which we do compare like 17-week periods both years, were up 5% on a reported basis and up 6% excluding gas and FX. Last year's fourth quarter results…

(Operator instructions).

At this time if you’d like to ask a question please press star 1 on your telephone keypad. Again that is star 1. Your first question comes from the line of John Heinbocket – Guggenheim Securities, LLC. John Heinbocket – Guggenheim Securities, LLC: Hi Richard, it’s actually Steve who is on for John today. Richard A. Galanti – CFO, EV and Director: Hi. John Heinbocket – Guggenheim Securities, LLC: Regarding inflation, when do you expect to see vendor price increases, and what magnitude are the company’s buyers talking about? Richard A. Galanti – CFO, EV and Director: Well this is very general, I mean, probably the standout area are things like protein. You know, pork, beef, and poultry. And the anticipation is over the next several months given some of the issues with wheat and corn, that that will continue to go up. Some of the bakery raw materials for the same reasons will go up, and they’re still talking in the mid-field digit or a little higher range, but that’s the guess at this point. I don’t hear a lot on the other areas. In fact in just our first month if you will of this fiscal year in September, we saw essentially company wide, as reflected through the LIFO calculation of almost exactly flat. I mean one basis point of inflation. And there was a little bit, you know again, well less than half a percentage point in the Food and Sundries categories and a little bit of deflation in things like apparel and electronics. And again, the apparel has more to do, I think, with – some of those prices are down from a year ago when they were quite high, and still higher than a few years ago. So, if you add it all up, modest…

Your next question comes from the line of Charles Grom – Deutsche Bank. Charles, your line is open. If you have placed your line on meet, please then meet. Hello? Yes your line is open, please go ahead. Okay there question has been withdrawn. Your neck question comes from the line of Chuck Cerankosky – North Coast Research. Charles E. Cerankosky – North Coast Research: How’s it going Richard? Richard A. Galanti – CFO, EV and Director: Hi. Charles E. Cerankosky – North Coast Research: I want to go through a couple of things with you to start with on the fuel. Could you talk about how profitable fuel was in the quarter and what the comp-gallons groups were? Richard A. Galanti – CFO, EV and Director: Well I think, first the profitability we never talked about how profitable it is. We talked about how it is year-over-year when there’s outsize changes to it, because it can fluctuate quite a bit. Actually on a quarter-over-quarter basis, year-over-year it was pretty, less than a penny I think of difference, so really nothing to speak of there. As you know when prices are going down, profits are up and there was some of that both this fiscal quarter, as well as in the fourth quarter of last year, so both quarters had some pretty good profits year-over-year. And in terms of Chuck the other question was? Charles E. Cerankosky – North Coast Research: Fuel comparable gallons? Richard A. Galanti – CFO, EV and Director: Yes the comp-gallons in the fourth quarter are 6%, and that compares to 8% in Q3, and quite a bit more in September for whatever reasons. I guess because prices were going back up. That’s it. Charles E. Cerankosky – North Coast Research: Excuse me, at the end…

Your next question comes from the line of Deborah Weinswig (Nathan Rich) – Citi. Deborah Weinswig (Nathan Rich) – Citi: Hi Richard, this is Nathan Rich filling in for Deb today. I wanted to go back to the decision that you guys made to accelerate club growth. I was just wondering if you could provide a little bit more detail on where the international expansion is going to come, in terms of what markets are focused on, and also are there any new markets internationally? Richard A. Galanti – CFO, EV and Director: Well the markets – in Canada we opened a couple of three a year, maybe sometimes one, maybe three, but probably two to three on average. In Mexico we’ll probably speed it up a little. Over the last five years I think we’ve opened two locations, so 0.4 locations a year historically over the last five years. You know it’s going to take a little time here, but you know, I would expect that to grow at least two or three years starting after this year. We have one or two in the U.K. this year after a few years of no growth. But the big expansion for us continues to be in the three Asian countries where we’re at, Korea, Taiwan, and Japan, and Australia. Now all those countries take a little longer because of the complexity, these are building up not out, you know multi-floors and it takes a little longer. But again, we had the pipeline full. The only other things we talked about is Europe and I can’t – we are pursuing in a couple of Western European countries, and if all goes well maybe five years from now we’ll have a few locations opened in each, but I cannot tell you whether…

Your next question comes from Michael Montani – ISI Group. Michael Montani – ISI Group: Hi, Richard. I was just going to ask you, on the inflation side, you know, you mentioned sort of a low-single digit increase this quarter for Food and Sundries. If you looked across the box, you know, can you just give us a feel for that? Are we talking 1 to 2% range across the store right now? Richard A. Galanti – CFO, EVP and Director: Well, low tenth of a single digit. It’s closer to 1, so not a whole lot. Michael Montani – ISI Group: And that’s across the store? Richard A. Galanti – CFO, EVP and Director: It’s all over the board. I mean, I was looking just at some items, I mean, these are, you know, again, these are anecdotal items, but you know, year over year eggs are up 22%. I’m looking down the list here. Blueberries up 37% year over year. Conversely, you’ve got items, always you’re going to have some electronic items, but beyond electronic items, I can’t tell you why, back is down 17%. Gasoline down a couple of percent. So it’s all over the board, but overall, when you think of a whole basket of things, up very little for the month. Michael Montani – ISI Group: And then just thinking about moving forward if you could see any single-digit type inflation on the food side, again, does that translate across the store to something, again, that’s maybe a couple 100 bits less than that just given the other categories? Richard A. Galanti – CFO, EVP and Director: Not necessarily. First of all, there’s no – when we talk about mid-single digit inflation, I was really talking about things like your expectations that our buyers have for things like meat and poultry and pork, which again, are more in the extreme inflation categories in terms of talking amongst the buyers. Again, Food overall is by no means that level and then, of course, as I mentioned, there’s a few things that are ever so slightly deflation right now like apparel and electronics. So really there’s no – and I guess the inflation is going to be very, very low single digits this year as we know of today. Life could change tomorrow. Michael Montani – ISI Group: And then just maybe for a minute on the competitive set, are you seeing anything that’s noteworthy versus this time last year in terms of how your club competitors are pricing or traditional grocers out there? Richard A. Galanti – CFO, EVP and Director: Not really. Michael Montani – ISI Group: Okay. Just one housekeeping thing is on the FX impact for membership income, I was getting to around the $7 million impact roughly. Does that makes sense to you? Richard A. Galanti – CFO, EVP and Director: I think – hold on a second. I think that’s close.

That’s correct. Richard A. Galanti – CFO, EVP and Director: $8 million. Michael Montani – ISI Group: $8 million, okay, great. And then just lastly with the new store openings accelerating and trying to go a bit more international in terms of the mix there, is it possible, Richard, to give us just an understanding a little bit of the pre-opening expense for International versus the U.S. origin and also on the CapEx side, given the step up, is there a way to bucketize that in terms of X amount goes towards IT versus new stores? Richard A. Galanti – CFO, EVP and Director: You know, it has more to do – International, generally, is more and you know, it could be – and these are, you know, if you were [inaudible], there’s other things put into openings too, like when we add a gas station or we open a depot or a – all those kinds of things. So you know, generally speaking, now remember, this goes back several years, but it used to be like a U.S. warehouse was a million, plus or minus a little and an International, I say International outside of North America might has been as much as 1.5 million or 1.75, but those are guesses. Yes, it’s more in some of those countries but you know, a big chunk of pre-opening is not just the – you can’t just take the pre-opening divided by the number of warehouses and that’s the average for the warehouse because you have a lot of other pre-openings. Every time we add a gas station, that’s’ going to – it’s a new operation. You know, we’ve done it consistently from day one, but there’s a lot of other things in there as well. Michael Montani – ISI Group:…

Your next question comes from the line of Peter Benedict of Robert W. Baird. Peter S. Benedict (Justin) – Robert W. Baird & Co. : Hey, Richard. It’s actually Justin for Pete. Just a question on the membership fee income. Can you help us understand how much that line item benefited for the extra week? Richard A. Galanti – CFO, EVP and Director: I think the simplest way to do it, and this is not exact, but I first take this number this year and subtract the 26 from it because we know the 26 is the [inaudible] accounting for the free increases. And from that number, I’d say, okay, this is 17 – I’m very sorry, divided by 17 and I’d subtract that amount from that number and then I compare the two. The adjusted number, and I think what you get is something in the 6 or 7% increase change in dollars. Peter S. Benedict (Justin) – Robert W. Baird & Co. : Okay, that’s helpful. Thanks. And then the $26 million of incremental MFI from the fee increase that you cited here in the fourth quarter, did that absolute dollar number – should we expect that to build over the next few quarters? Richard A. Galanti – CFO, EVP and Director: Yes. And It will build – well, it will build a little bit into Q1, recognizing Q1 is a 12-week quarter versus a 17-week quarter, so the absolute dollars will be a little low. It will build quite a little bit more in Q2. It will build – and then it will start going the other way, but still pretty sizable numbers in each of these four fiscal quarters. It’s $0.03 to $0.05 per quarter in each of these quarters. Peter S. Benedict (Justin) – Robert…

(Operator instructions). Your next question comes from the line of Charles Grom with Deutsche Bank. Charles X. Grom – Deutsche Bank AG: Thanks. Just on the – the new store growth going up to 25 to 30 clubs, should we expect that pace to continue to grow over the next few years? And it’s been a while since I heard you guys talk about a longer-term club target, but you know, with growth in Europe, Australia, more growth in Korea, Japan and Taiwan. Can you maybe refresh us in kind of where it your thoughts are? Richard A. Galanti – CFO, EVP and Director: Well, you know, given our history over the last several years of under-opening locations. I think we feel very good about this coming year that, that very high 20s and you know, we’re looking at numbers, we had a slide recently that showed over five years somewhere in the 125 to 150 locations, which we’ve implied 25 to 30 a year. Europe, again, if all goes well, maybe we’ll have, you know, five years from now five or six in Europe or eight on the outside, but more likely five or six. That’s if it continues to progress. There’s still a few hurdles to get over there in terms of timing. We will be there is my sense but it will take some time. So I think, again, part of the, as I mentioned earlier, part of the – perhaps the reduced level of confidence that we’ve got – we’ve got a lot more irons in the fire and particularly in those countries where the lead time to get openings done, you’ve got to work on more projects to get more opened and even thought it takes longer, again, for the last year or two, we’ve…

Thank you. That ends our conference call for today.