Q4 2004 Earnings Conference Call and September Sales Results Costco Wholesale Corporation - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning. My name is Wes and I will be your conference facilitator today. At this time I would like to welcome everyone to the Costco Wholesale Corporation' 2004 fiscal year year end conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. [Caller instructions.] Mr. Galanti, you may begin your conference.

RICHARD GALANTI, CFO, EVP, AND DIRECTOR, COSTCO WHOLESALE CORPORATION: Thank you, Wes, good morning. As usual I would like to review with you several items To begin with our 16 week fourth quarter of fiscal 2004 operating results. It was a very good fiscal quarter and fiscal year, for that matter. For the quarter we came in at 62 cents a share, up 11 cents a share from last year's reported earnings of 51 cents a share. In terms of dollars, net income increased 57% - - I'm sorry, $57 million, or 24%, from $239 million last year to $296.8 million this year. These results were well above the 56 to 57 cent EPS guidance I had provided you in May on our third quarter conference call. and 4 cents above current first call consensus estimate of 58 cents. As I'll discuss pretty much all of the income statement metrics, membership fees, gross margins and SG&A trended in a positive direction in terms of both the quarter over quarter and the year over year comparisons. For the fiscal year we came in at $1.85 a share, up 32 cents, or 21% versus last year's earnings EPS of $1.53 per share. And again up 4 cents per share versus first call. In terms of sales for the quarter as previously reported our 16 week comp sales figures showed an increase of 8%. That's a 9 if you do it on an apples-to-apples basis with regard to the EITF 3-10 accounting issue this year.

And for the fiscal year a reported increase of 10% or again on an apples to be apples basis, 11 adjusted for the impact of the EITF 3-10. And regarding our comps for the 5 week reporting month of September, these trended back up from August 4% reported comp figure to a reported 8% increase for September. And again, excluding the impact of EITF the 8% reported would have been 9. Other topics of interest I'll review with you this morning, our opening plans. For the past fiscal year we opened a total of 20 net new locations during the year fiscal '04 which ended this past August 29. 18 new in the U.S. and 2 in Canada. These 20 of course are consolidated into our operating results as well in Mexico which we account for on an equity basis we opened 3 additional warehouses in this past fiscal year. Of note the 20 net new warehouses in our consolidated figures; 3 quarters of these 20 opened in existing markets versus new markets. This a continuing change in mix if you will from '01 and '02 when 3 quarters of those openings, those 61 aggregate openings were in new markets. I will also discuss our planned higher level of expansion for fiscal 2005 which began August 30 of this year.

Also this morning I'll review with you the 2 EITF pronouncements as it relates to how it impacts our financial statements. I'll talk about our ancillary business results, Costco online, membership trends, give you - - provide you the balance sheet information for the fiscal year just ended and update some guidance for the upcoming first quarter and fiscal year. As with every conference call let me start by stating that these discussions we are having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. And these statements involve risks and uncertainties that may cause actual events results and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include but are not limited to those outlined in today's call, as well as other risks identified from time to time in the Company's public statements and reports filed with the SEC. So with that said, again sales for the quarter were $14.8 billion, up 11% in total sales from last year's fourth quarter sales of 13.4. For the quarter our 8% reported comp sales results were a combination of an average transaction increase of about 6% for the quarter, of which about 1 percentage point of that was FX. And an average frequency increase of about 2% up from the quarter.

Our average sales per warehouse for all warehouses if you recall in fiscal '03 on our annual report the average Company-wide warehouse generated $105 million in sales. That was on a 5% comp from the prior year. And if you look at the U.S. only during '03 it was 112 million. What we will show you in this year's upcoming annual report that for fiscal '04, Company-wide and again we enjoyed a 10% comp this past year, was $115 million average Company-wide location. And in the U.S. only $121 million during fiscal '04. In terms of our sales results for the 5 weeks of September, retail reporting period which we are also reporting today, sales were $4.53 billion, up 11% versus 4.07 billion last year. And up 8% on a comparable basis. Regarding September 8% reported comp, it was pretty much evenly split between average frequency which was up a little more than 4% - - I'm sorry, average transaction which was up a little more than 4% and average frequency which was just a shade under 4%. So each about 4%.

In terms of sales comparisons be geographic region, generally speaking the established longer term U.S. regions like the West Coast and parts of the Atlantic, MidAtlantic and Northeast, were up in the 5% to 7% range, about 6% overall. The newer regions which includes parts of the Southeast as well as Texas and the Midwest were up in the mid to high teens and in fact Texas was actually in the low 20s. And overall that would generate 8% for the U.S. Canada expressed in U.S. dollars was 6% but as we've seen all year this per year it remained relatively flat. I think in the fourth quarter was down 1% and September was flat in local currency. Other international, again given the weak dollar the 8% local increase in comps and local currency rather for other international for the second quarter was a representative of 16% when converted in U.S. dollars. So all told an 8% reported comp for the Company for the 5 weeks of the queer.

In terms of merchandise categories; food and sundries which as an 8% in the fourth quarter, was a 7% in September. Hard lines which was a 5 in the fourth quarter, was up to 7% in September. Soft lines which was flat in the fourth quarter, which was the 16 week fourth quarter, was up 2%. Fresh foods continues strong, up 11 in the quarter and 13 in September. And ancillary businesses, which were up 29% in the fourth quarter, although parenthetically 18% up without gasoline given the high inflation year over year in the quarter: in the fourth quarter - - I'm sorry in the 5 weeks of September ancillary was a 15% both with and without gas. A little color on September 8% comp sales increase, within the food and sundry 7% comp in September, tobacco which is about 7% of total business and close to 15% of just the food and sundry business, was down about a percent, we're up against the price increase a year earlier, we also within food and sundries had strength in sundries. Within the 7% hard lines comp, what we refer to as majors was the strongest subcategory, with toys and seasonal being slightly negative in terms of comp. Talking to the buyers a combination of a little bit less commitment this year on our part to the Halloween season as well as some more spreading out of when some of the seasonal Christmas stuff comes in.

Within the 2% soft lines, pretty mixed across the board, housewares, domestics, home furnishings, jewelry were the stronger subcategories, offset by the weaker ones which included media. In the case of media there haven't been a whole lot of big hits lately, although there's some a few coming up like "Shrek 2" and the like. Photo camera, flat to down slightly and apparel. Within fresh foods again these areas continue to be strong for us, a 13% comp and not only strong but a frequency driver and we believe into our locations. And lastly ancillary businesses as usual strong, again looking at it without the inflation of gas, up 18% in the quarter and up 15% without gas in September. Moving down to the line items on the income statement, we will start with membership fees. In the fourth quarter reported membership fees were $306.4 million or 2.07% of sales. Up 4 basis points and up $33 million from a year ago $272 million.

So again on a top line sales growth of about, top line sales growth of about 11%, a 12% increase in membership fees. Again a good showing in membership fees particularly given strong comp sales. In terms of membership we continue to benefit from the same things, strong renewal rates and increasing penetration of our $100 per year Executive Membership which included the roll-out of that program in Canada at the beginning of fiscal '04. In terms of number of members at fiscal year end we had 15.0 million Gold Star members, 4.8 million primary business members, 3.6 million business add-ons for a total of 23.4 million members. That compares to a year earlier of 22.6 or up about 5%. And including the free spouse cards 42 million people at fiscal year end hopefully …