Costco Call, Part 3 (Bore Port) October 11, 1999

Boring Portfolio
Costco Call Part 3
CFO Discussion

By Dale Wettlaufer (TMF Ralegh)

ALEXANDRIA, VA (Oct. 11, 1999) -- This is a continuation from Part 2 of Costco Wholesale's (Nasdaq: COST) Q4 financial results conference call. The following is a summary of the comments made by Richard Galanti, CFO.

E-Commerce

Costco started on the Web almost a year ago, on November 2, 1998. From November to November, they'll do about $15 million in revenues in the first year. The company started very slowly, consciously slow with 400 SKUs (stock keeping units). Nobody knew about it, and the company didn't advertise it at the time. Today, there are 1,200 items on the site and by year-end, they plan to have around 2,000 items. There is a variety of merchandise categories: high-end electronics, appliances, high-end toys, high-end jewelry and watches, a floral program, lawn & garden, fragrances and cosmetics, about 80 ink and toner cartridges for business, housewares, and recently added member services and gift certificates. You can also sign up for and renew membership online.

Phase II: This is ongoing. Costco will have an expanded business-to-business area in about a month. They've expanded special order programs -- you can now build your own diamond. You can indicate style, color, cut, clarity and within 24 hours receive a quote on it. There is a mattress program, which is an extension of the program they have with Sealy in the warehouses. Those are factory-shipped according to custom order. You can now build your own computer online through a new program with Compaq. There is also a gift registry.

Annualized sales are around $25 million with the average sale being in the mid-$200 range. The sales budget for fiscal 2000 is around $60 million. In true Costco fashion, the fiscal 2000 marketing budget for the site is around $700,000. The philosophy driving this: 1) The company wants to make money doing this, and 2) they want to use it to bring customers back into the warehouses.

A couple more product categories will be added in September which can't be revealed right now.

California AB84 Bill: "The Anti-Big Box Bill"

This is a bill that was done at the midnight hour with no public discussion, launched by special interests who feel threatened economically by Costco. (See L.A. Times story here.)

Similar bills have been passed in Tucson and in Clarke County, Nevada. The company is in the process of formulating strategies to combat these bills. "We believe they will not hold water over time."

American Express Deal

The company has announced not only an Amex card acceptance deal, but they hope this can be a business alliance in many areas. There will be a co-branded card in November, for which details are forthcoming. That'll be in the U.S. and -- by the first half of calendar 2000 -- in Canada, where the company has never had anything other than its private label card. The relationship with Amex extends beyond just card acceptance. "We have two fantastic companies with very similar customer philosophies, great member loyalty, and a very... upscale member base. Surprisingly, among our nearly ten million members in these markets and their nearly ten million cardholders, only 25% of each overlaps. We think there are opportunities to get more membership sign-ups and on their side to get more credit cards out there."

Expansion

The company just opened its fourth unit in Atlanta a few weeks ago. The units that have been open for two to three years finished the year at about $65 million. Annualizing the last five weeks' sales, they're at about $75 million. Comps for those units are running at 40% for the last five weeks. In Philadelphia, they've opened King of Prussia and Montgomeryville, in 1997 and in July of this year, respectively. The last five weeks' comps in King of Prussia have been running at 26% and right at $1 million per week in sales. At the five units in Detroit, annualized sales are currently at $64 million and comps are running at 22% over the last five weeks. In Chicago, Costco opened two units last November, so there are no comps, but they're at $1 million per week and growing. In Brentwood, Tennessee, which is near Nashville, the company opened a warehouse in August. Sales are running at $800,000 per week, which is a good start in a competitive, smaller market.

Fiscal 1999 saw 21 openings, including seven relocations, so net openings were 14 to end the year with 292 units. On top of that, there are the 16 units in Mexico that are not consolidated. For fiscal 2000, in the first quarter, seven new openings are planned, with one relocation. Another unit has just been opened in Mexico, in Cancun. The company has already opened two of the above new units, one in Ft. Myers, Florida, and its fourth unit in the Atlanta metro area, in the city of Morrow, Georgia. In October, the company will open its Yonkers, New York location. Sudbury, Ontario will open in November. Two new units will open in Memphis, Tennessee in November. A unit will be relocated in southeast San Diego in November. Right before the quarter ends, the third unit will open near Salt Lake City, Utah, in Orem.

In the second quarter, four new units plus one relocation are on the schedule for opening. In December, Naples, Florida will open, plus the third Orlando unit. Also, the second unit in Taipei, which will be the third unit in Taiwan. The relocation will take place in central Washington State, in Kenwick, WA. In February, the first opening in Ohio will take place in Deerfield Township, a suburb in northeast Cincinnati.

Continued on Wednesday with discussion of expansion plans for Q3 and Q4, plus Part 1 of the Q&A

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