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Earnings Calls: 
Costco Wholesale Earnings Call, Third Quarter 2008
Author: Maclintosh Kuhlengisa
Last Update: 5:32 PM EDT June 03 2008



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The financial services provider reported earnings of $295 million or 67 cents a share, up 37% from $224 million or 49 cents a share due to 13% revenue growth to $16 billion. Additionally, the firm reported membership fees of $350.9 million, up about 10.5% or $33 million. Costco gave back to employees about $8 million in healthcare benefits based on having some better than planned performance in reducing some healthcare costs in fiscal 2007.

Investors Question and Answers

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Peter Benedict (Wachovia): Of the 1,600 SKUs that you can work with on margin, can you give us a sense of maybe how many you have touched at this point?

Richard A. Galanti:Not really. When we bring in lawn and garden, us and Samís, while we both will carry the same Tide detergent and the same M&Mís and the same Snickers, 36 count of Snickers bars, when we bring in swing sets and patio furniture and doormats, or at Christmas time when we bring in a different SKU or pack size of wrapping paper or ribbons or snow globes with the music box, or gift packs, all these things are unique.

We are not going to make it by trying to make more money on fiercely competitive commodity items, which is just not going to do it competitively and where we can do it is on certain import items, certain seasonal items, and it is more of an item, just like our company is, an item driven basis of where we can do that.

Lisa Warner (Sanford C. Bernstein): Any update on how the newly opened international units are working out?

Richard A. Galanti:We have had two or three openings in Asia in the last few months. They have done particularly well. We opened a couple of units in Asia in the last few months which had more than 50,000 paid sign-ups on opening day.

Canada, while it is international, itís so much like the U.S. in terms of maturity and success and predictability that we really do not get surprised. Those are good, successful units for us from the get-go. But in terms of new markets, we have only opened up one in the U.K. in the last year, if that.

Lisa Warner (Sanford C. Bernstein): How is Australia progressing?

Richard A. Galanti: Australia is going. Spring 2009 would be the first unit and the second unit following within six to 12 months.

Lisa Warner (Sanford C. Bernstein): On the Internet sales, what is been driving the strong sales growth and what is going on with May?

Richard A. Galanti: Our average ticket has been in the low 400s and in the last couple of quarters, itís come down slightly.

Robert Drbul (Lehman Brothers): On the membership fee income stream, with the initiatives that you have underway, do you think you will be able to reaccelerate growth with what you are seeing over the last several quarters?

Richard A. Galanti: On 6% square footage growth, we are doing pretty well. Our membership department feels very good about the initiatives we have underway. What we are not doing is TV advertising or crazy stuff that is not on our list, and we are going to be focusing on the value proposition.

Sandra Baker (Mortez & Caldwell): Any comments you have about the competitive environment?

Richard A. Galanti: We and Samís continue to be fiercely competitive. When we look at our most competitive markets that we define as our new markets, where in the last six or eight years we have gone for the first time and they had been there for 15 years, like Texas, like the Midwest, on a market basket of 100 commodity items, thereís less than a half-a-percentage point different sometimes, and we are both in each otherís warehouses more than once a week club shopping key items.

BJís has gotten more competitive since some of their management changes of late. It seemed like for a couple of years, we were not club shopping them nearly as often because margins were so different. They are still not as tight as us versus Samís but we club shop to them more regularly.
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