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Costco (NASDAQ:COST)

December Sales Results Call

January 10, 2008 8:30 am ET

Executives

Bob Nelson – Head of Finance and Investor Relations

Bob Nelson

Good morning and thank you for calling. I’m Bob Nelson, Head of Finance and Investor Relations here at Costco. This morning I will review with you our sales results for the five-week retail month of December, which for us started on Monday, December 3rd and ended on Sunday, January 6th.

For comparable sales results, this five-week period is compared to the same five-week period last year; specifically Monday, December 4, 2006 through Sunday, January 7, 2007. So our results are like- like weeks compared to last year.

Before I begin and as usual, let me start by stating that the following discussion 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, results or performance to differ materially from those indicated by such statements.

These risks and uncertainties include, but are not limited to, domestic and international economic conditions, including exchange rates, the effects of competition and regulation; consumer and small business spending patterns and debt levels; conditions affecting the acquisition, development, ownership or use of real estate; actions of vendors; rising costs associated with employees, including healthcare and workers’ compensation costs; rising costs associated with the acquisition of merchandising, including the direct and indirect effects of the rising cost of petroleum-based products and fuel and energy costs; geopolitical conditions and other risks identified from time to time in the company’s public statements and reports filed with the Securities and Exchange Commission.

The company does not undertake any obligation to update these discussions due to subsequent events or circumstances.

Now let’s get going. With regard to sales, as reported today in our press release, December net sales came in at $7.55 billion for the five weeks ended January 6, 2008 and that’s an increase of 10% from the $6.84 billion in the same five-week period of the prior fiscal year.

For the first 18 weeks of the fiscal year 2008 reporting period ended January 6, 2008, net sales came in at $24.53 billion and that is an increase of 11% from the $22.04 billion reported during the comparable period of the prior year. Comparable sales increases for the five-week retail month of December and the 18 week year-to-date period were as follows.

First, the five-weeks. In the U.S., we were up 5%, a strong 5%; International plus 16% and total company’s then was a plus 7%, in fact a very strong 7% coming at just under a few basis points below 7.5%.

For the 18 week year-to-date period, the U.S. is at plus 5%; again a very strong 5%, about 5.5% year-to-date; International plus 17%, and total company plus 8%.

The retail month of December included both the Christmas and New Year holidays, both this year and last year and as a result it resulted in 33 selling days for both years, so no calendar anomalies or shifts. The effects of foreign currency, cannibalization, gasoline inflation, some severe weather that we had during the month and other items on the reported sales numbers will be addressed later in this recording.

In terms of regional and merchandising categories, the general highlights are as follows:

First on a regional and country basis, the U.S. regions with the strongest results were the Southeast, the Midwest, the Northwest and the Texas regions. On an international basis and in their local currencies, we are seeing the strongest results in Korea, Taiwan and in Canada.

The benefit to comp sales from foreign currency strength resulted in an overall benefit in December of plus 225 basis points and that compares to the 290 basis points reported last month in November. So about minus 65 basis points less benefit in December than what we reported to you a month ago in November.

The Canadian dollar and the UK pound sterling showed continued year-over-year strength compared to last year and accounted for the majority of the 225 basis point FX benefit.

Total international comps for the five weeks came in at plus 5.5% in local currencies, but resulted in a reported comp of plus 16% in US dollars.

Now moving to our merchandising categories. Within our food and sundries category we saw strength in deli, cooler, candy and foods and somewhat softer negative comp sales in our tobacco business. The overall reported comp for the month of December was negatively impacted by approximately minus 75 basis points due to softer year-over-year tobacco sales. While we finally anniversaried the Imperial Tobacco impact in Canada, our U.S. tobacco sales were softer compared to last year.

We did have a price increase last year in the U.S. which resulted in large tobacco purchases from our members in anticipation of that price increase. This accounted for the majority of the detriment in tobacco.

Moving on to hard lines, within our hard lines category, we saw strength in sporting goods, specifically in the exercise category. Automotive and tires and majors, which consist of electronics, audio, video, computers and white goods.

Specific strength in majors came in TVs with high single-digit comps and in cameras and camcorders where we were up about 20% for the month.

Within our soft lines category, we had our best results in small appliances, media and men’s and woman’s apparel and somewhat softer sales in housewares and in jewelry.

Our fresh foods categories showed the strongest results in produce and service deli, although we did have a pretty good month in meat as well.

Within our ancillary business sales, our gasoline stations, our optical shops and our hearing aids showed the strongest results. Our gasoline business in December was very strong as we continued to benefit from the inflationary environment with the average price per gallon of gas in December at $2.94 a gallon this year compared to $2.31 a gallon last year. So this 27% increase year over year in the price per gallon positively impacted our overall comps by approximately plus 160 basis points. That is down about 70 basis points from the plus 230 basis point benefit we reported last month for November. So not quite the benefit we reported and talked about a month ago.

We did experienced an unusual amount of bad weather during the month of December this year, including heavy snow in Eastern Canada and the Northeast during week 2 of the reporting period, as well as heavy rains or winds and floods in California during week 5 of the month. We estimate that in total, this negatively impacted our overall comparable sales of December by approximately minus 50 basis points, or about 0.5 point.

The average transaction in December was up a little less than plus 6%, which of course included the benefit of gasoline inflation and FX while traffic counts for the month came in higher year over year by a little more than 1.5%. That is down a little bit from November where we reported plus 2.5% and was negatively impacted, we believe, from the bad weather mentioned above.

Cannibalization within existing markets came down a little bit and negatively impacted the overall comp number by approximately minus 90 basis points, again slightly lower than last month in November, where we reported minus 105 basis points of cannibalization.

So to recap, our reported December comp sales results of plus 7% and as I said, a strong 7%, coming in at about 7.5%. Comps were benefited by strengthening foreign currencies plus 225 basis points and gasoline inflation, plus 160 basis points.

Comps were negatively impacted by lower tobacco sales, minus 75 basis points. Cannibalization of minus 90 basis points and unusually bad weather to the tune of about minus 50 basis points.

In terms of the January sales outlook, which is a four-week reporting month, there are no holiday shifts, timing issues or calendar anomalies which should impact our sales results materially. There are 28 selling days in this year’s January reporting period which for us ends on February 3, the same as last year.

The MLK, Martin Luther King holiday, falls in January this year as it did last year and every year but our warehouses will be open for business on that day as they were a year ago.

We began our annual wallet coupon promotion this past Monday, January 7 and that is consistent and in line with the promotional periods from a year ago. We will report our January sales results on Thursday, February 7.

Costco currently operates 529 warehouses worldwide, including 389 in the U.S. and Puerto Rico, 75 in Canada, 19 in the UK, five in Korea, six in Japan, five in Taiwan and 30 in Mexico. We plan to open 20 to 23 new warehouses, including four or five relocations, prior to the end of our 2008 fiscal year which ends on August 31, 2008.

If you have any other questions regarding our December sales results or any other investor relations questions, please do not hesitate to call Jeff Elliott at 425-313-8264 or myself, Bob Nelson, at 425-313-8255. This recording will be available until 5:00 pm Friday, January 11.

Thanks for calling Costco Wholesale Corporation. Happy New Year to all of you, and make it a great day. Thanks a lot.

Question-and-Answer Session

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