Costco Call, Part 4 (Bore Port) October 13, 1999

Boring Portfolio
Costco Call
Part 4

By Dale Wettlaufer (TMF Ralegh)

ALEXANDRIA, VA (Oct. 13, 1999) -- This is a continuation from Part 3 of Costco Wholesale's (Nasdaq: COST) Q4 financial results conference call. The following is a summary of the comments made by Richard Galanti, CFO.

Q3 Expansion

The 18th and 19th units in Mexico will open during the quarter -- one in Xalapa and one in Pueblo as well as a relocation in San Francisco. The company has also planned an infill unit north of Seattle, in Burlington, Washington. The fourth Salt Lake City unit in the city of Sandy will open as well as the third and fourth Chicago units. The third one is planned near Lincoln Park, near downtown, and the fourth will be located in Niles, a power center in a former Builders Square. Costco and Target will be the anchor tenants here. Also, in terms of infill units, Costco will open its 12th unit in San Diego.

In addition to these, there are 10 more planned for the fiscal year in the third and fourth quarter, with many of those on the brink of being signed, which will be announced as they occur. These will include some new markets as well as some infills. Lastly, demolition for the site at 116th Street and East River Drive in Manhattan is planned for January, 2000. Costco and Home Depot will be the anchors in a half-million-square-foot retail redevelopment on this site. Costco is also looking at several other sites in Manhattan and the other New York City boroughs.

Question and Answer

Q: What are your thoughts on the company's sales momentum and how long you can sustain a double-digit increase in comps?

A: "We don't know. I say that sincerely.�" In asking the company's buyers what they generally think about comps, they've said they don't look at comps -- they just look at sales, how to drive sales, and how to come up with new products. "They're very positive right now. I don't want to assume, though, that we're going to be at 10-11-12%. I don't know when it's going to end.� I'm happy it hasn't and certainly we've started the first few days of this month pretty good. I think the good news is, unlike the '80s when we had 30 locations in our whole company and if you did something, it worked and you did it in all 30 in about six months, and then a year later it anniversarried and that kick is done. Now it's coming from a lot of different things. It's coming from little things like adding a few more pharmacies, adding gas stations, it's coming from adding new products like the Whirlpool, where historically we've had almost no presence in white goods -- we're going to do $70 million to $80 million in the first year in white goods� because of the Kirkland Signature-Whirlpool relationship."

"We're adding apparel items -- we've just gone crazy with these cashmere sweaters for men and women at $39 and $49. People are coming in and buying 10 and 15 literally at a time for themselves because they're 75% less than at department stores. The deal we did with Microsoft on selling the [Microsoft Network Internet service provider account] at 40% less than they're selling it themselves for. I think there's just a lot of merchandising momentum. There are some of the new things -- expanding fresh foods, and not being complacent there, but every month we're coming out with a new item in the baked goods area....The fact is we've stayed true to the philosophy of driving prices down.... I think all these things help us.

The American Express deal is helping us. I think the first Amex mailing to their constituency on their monthly bills included a one-day pass -- now you can use the Amex card at Costco. I'm sure we got some new signups in the first few weeks of that. The good news is that [the strong same-store sales growth] comes from a lot of things, but it's not going to last forever. We're building bigger units, we're still spending well over $100 million on our cap. ex. each year on remodel activities, which includes adding some of these ancillary businesses and expanding fresh foods. I would still say that our budget for 7% [comp-store sales gains] we can continue to beat and that we can beat it by 3 1/2% as we did in the first month [of Q1 FY 2000]."

Q: Without giving away too much, can you give us some idea of the areas we're looking at to improve merchandising?

A: "On the hard-line side, first of all, there are still opportunities for us to buy direct where we haven't been able to in the past -- on certain electronics items and office products. Even some vendors that sell us certain things directly don't sell us other things directly. In the apparel area, I'm amazed by some of the private label things we're doing, like the cashmere sweaters, with the men's dress shirts in the half-size...." On the food side, the company has been successful with co-branding items like those cooked with Kirkland Signature by Tyson or Foster Farm, where they're able to up the size, improve the quality, and lower the price-per-pound and drive sales. "So, some of those co-branded opportunities still exist. There's not a lot on the food side where people won't sell us, what I call grocery-related items. We've always been able to buy a lot of those. We keep coming up with new stuff."

Q: Could you shed a little light numbers-wise on Executive membership goals for the next fiscal year or two. And given the real strong numbers and favorable outlook, what's the chance you might even uptick the expansion program further than the present uptick?

A: "Our only goal right now is to go from 120,000+ to 300,000+, which would mean an extra $7 million in additional revenues (on a deferred basis -- $10 million on a cash basis) and to continue to add services....

"In terms of an uptick in expansion, we are going as fast as we are going, and it's certainly possible [to go faster]. When I talked about 10 more [units in the second half], I think that would actually put us above the stated goal of 25 new units for the year...."

Q&A Continued on Friday.

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