Costco Wholesale Corporation Q4 2011 Earnings and September Sales Release Conference Call Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Robby Ohmes - Bank of America-Merrill Lynch - Analyst : Good morning. Hey, Richard, how are you?

Question: Robby Ohmes - Bank of America-Merrill Lynch - Analyst : Hey, I was hoping you could just maybe elaborate more on the fee increase, the timing of it. I know it is something that you guys had talked about, but the timing of it this year and also the expected response, if any, from your customers. Do you think you will lose anybody related to it? And I think also you mentioned something about allowing you to give even better values. Is there an anticipated impact over the next two years on what your store level margin structure could look like or the way you are passing on inflation, etc. related to taking this membership fee increase? Thanks. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. OCTOBER 05, 2011 / 2:00PM, COST.OQ - Q4 2011 Costco Wholesale Corporation Earnings and September

Question: Robby Ohmes - Bank of America-Merrill Lynch - Analyst : Great, thanks a lot.

Question: Mark Miller - William Blair & Co. - Analyst : Hey, good morning, Richard. On the net store expansion now expecting 20 for fiscal '12, I think last quarter you commented you thought it would be closer to 25. So I guess I am curious is there something that caused Costco to slow it down or I guess something previously unexpected in the marketplace?

Question: Mark Miller - William Blair & Co. - Analyst : Okay.

Question: Mark Miller - William Blair & Co. - Analyst : Okay and then with half the clubs going outside the US in fiscal '12, I guess I am trying to integrate that into how we should think about international profitability. It looks like you should be about or now more than 45% of your profits outside the US for all of fiscal '11. I don't know if you can share that exact number. But when do you think we get to more than 50% outside the US? Do you think you get there in fiscal '12? I know FX also is a factor.

Question: Mark Miller - William Blair & Co. - Analyst : Okay. And finally, then I will turn it over, the new member sign-up going up 6% outside of the new international club openings, was there any anomalies to that figure or what do you think explains that acceleration? Thanks, Richard.

Question: Mark Miller - William Blair & Co. - Analyst : No, the new member sign-ups. I think you said -- LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. OCTOBER 05, 2011 / 2:00PM, COST.OQ - Q4 2011 Costco Wholesale Corporation Earnings and September

Question: Mark Wiltamuth - Morgan Stanley - Analyst : Hi, Richard. I wanted to ask about the inflation passthrough on food. Are you having any margin drag from that? Obviously we had the LIFO charge here, but if you take the LIFO out, what is the effect on margins here?

Question: Mark Wiltamuth - Morgan Stanley - Analyst : And on that front, we just saw some softening in some of the underlying core commodities with corn cooling off last week. How long does it take for that to really hit your stores before it cycles through the packaged food companies and then gets to you?

Question: Mark Wiltamuth - Morgan Stanley - Analyst : Okay, thank you.

Question: Mark Wiltamuth - Morgan Stanley - Analyst : Okay, thanks.

Question: Dan Binder - Jefferies & Co. - Analyst : Hi, good morning. A couple of questions. First on the core gross margin, if I -- I think I have it apples-to-apples. It looks like your core was up plus 2 basis points this quarter compared to more substantial gains in recent quarters. I am just curious if there is anything that you want to point out to a change in that pace and what we should kind of expect going forward. That was the first question. The second question was on the membership, the Executive membership with regard to the increase in the rebate. I am just curious what the sort of incremental drag is to that giveback to the customer. In other words, I am sure there is probably a few members that were exceeding that $500 rebate, so now they actually have to pay them. What kind of a drag does that bring to the P&L?

Question: Dan Binder - Jefferies & Co. - Analyst : The core gross margin.

Question: Dan Binder - Jefferies & Co. - Analyst : Okay. And then just one final. On the other income line, when we consider that Mexico is not in that number this year, it is up quite substantially just versus where you were in the first three quarters and you mentioned FX contracts. I am just wondering if there are some bigger items in there that you can identify.

Question: Dan Binder - Jefferies & Co. - Analyst : Okay, thanks.

Question: Chris Horvers - JPMorgan - Analyst : Thanks, good morning. So Richard, on the LIFO, do you think that, based on September's experience, that this would actually turn out to be a benefit in the fourth quarter if we kind of stay where we are? And then can we just run rate that as we think about the experience into next year and the 3Q and perhaps that list gets better? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. OCTOBER 05, 2011 / 2:00PM, COST.OQ - Q4 2011 Costco Wholesale Corporation Earnings and September

Question: Chris Horvers - JPMorgan - Analyst : Right. So it is not a comparison issue; it is prices actually have to come down to see the credit?

Question: Chris Horvers - JPMorgan - Analyst : Obviously, we are also sensitive to what is going on with the consumer. Was there anything particular about the cadence in September that you would call out either positively or negatively?

Question: Chris Horvers - JPMorgan - Analyst : Right. And then one final quick one. It seems like the FX will probably turn on you in the coming months from a top-line perspective and get a bit worse in the spring if we just held today's rates. How does that flow through to the margin structure if it does turn in the other direction?

Question: Chris Horvers - JPMorgan - Analyst : Fair enough. Thanks.

Question: Peter Benedict - Robert W. Baird - Analyst : Hey, Richard, a couple of questions. In the past, you have walked us through the, at least qualitatively, the gross margin trend within the four main categories. Could you give us a sense of how that fleshed out in the fourth quarter?

Question: Peter Benedict - Robert W. Baird - Analyst : Okay, perfect. Thank you.

Question: Peter Benedict - Robert W. Baird - Analyst : That is helpful. How would you characterize kind of the mood internally in terms of that core margin line? I mean is the goal still to kind of maintain and increase that or are you more willing to kind of give back some of that now that you have raised the fee?

Question: Peter Benedict - Robert W. Baird - Analyst : All right. Fair enough. And then I may have missed this, but any early read on kind of the holiday product? You guys bring your stuff in so early. It would be interesting to hear -- I know September overall was good, but how about those kind of holiday,

Question: Peter Benedict - Robert W. Baird - Analyst : Great. Thanks very much.

Question: Colin McGranahan - Sanford Bernstein - Analyst : Good morning, Richard. I wanted to focus on the Executive membership fee increase given that you have never had one -- a couple of questions. One is do you think there is anything different there about sensitivity renewal rates and whatnot? Secondly, can you give us any sense of the number of Executive members that spend between $2500 and $2750? Because just obviously on plain math, those are the ones that wouldn't make sense to be an Executive member anymore given the $50 to $55 differential? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. OCTOBER 05, 2011 / 2:00PM, COST.OQ - Q4 2011 Costco Wholesale Corporation Earnings and September And then thirdly, just the same topic, but thirdly, in the past, you have said Executive members spend more and obviously you have wanted to make more and more members Executive, but is there a cart and horse thing there? I mean when people when they become an Executive member actually spend more or people who are spending more naturally became Executive members?

Question: Colin McGranahan - Sanford Bernstein - Analyst : Okay, so just to follow up on that, is the number still today roughly 2 million to 2.5 million members that would be on the margin mathematically?

Question: Colin McGranahan - Sanford Bernstein - Analyst : Okay, (inaudible) and then I will get off the phone, but you are not concerned about the risk of, as you are closing the differential, you were incentivizing more Executive members who then spend more. Now you are widening the differential and you're going to lose some Executive members because mathematically it doesn't work and theoretically as they become off-award members, they would spend less?

Question: Colin McGranahan - Sanford Bernstein - Analyst : Okay. Fair enough. Thank you.

Question: Chuck Cerankosky - Northcoast Research - Analyst : Good morning, everyone. Richard, when you are looking at the two-year store opening total, it sounds like you're saying you want to be conservative in fiscal '12, but we could see some blip in the first quarter of fiscal '13. Would you be willing to talk about a two year, that it would be fiscal '12 and fiscal '13 store opening number in square footage growth rate?

Question: Chuck Cerankosky - Northcoast Research - Analyst : So maybe approaching 50 in total? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. OCTOBER 05, 2011 / 2:00PM, COST.OQ - Q4 2011 Costco Wholesale Corporation Earnings and September

Question: Chuck Cerankosky - Northcoast Research - Analyst : Switching to another subject, looking at member attitudes as they are shopping the stores and comparing third-quarter to the fourth-quarter sales mix, what are you seeing, what are you noticing in how shoppers are behaving in your clubs?

Question: Chuck Cerankosky - Northcoast Research - Analyst : Thanks a lot.

Question: Charles Grom - Deutsche Bank - Analyst : Thanks, good morning. Just to circle back on Dan's question on the core on core. Again, I think everybody is probably pretty surprised, including myself, that's only up 2 basis points relative to the past couple of quarters. And I know you're not concerned about it, but can you dig in to at least on fresh foods why if your comps have been running up high single to low double in that category throughout the quarter that your margins would be down in that category? Just trying to get my hands around why.

Question: Charles Grom - Deutsche Bank - Analyst : Okay. And then were there any other categories within the four key business segments that was negative or was just fresh foods down?

Question: Charles Grom - Deutsche Bank - Analyst : Okay, okay, fair enough. And then I know when you guys report the 10-K that you will break out the segment margins between the US, Canada and international, but just wondering if you had that handy for 2011 now that we have completed the year?

Question: Charles Grom - Deutsche Bank - Analyst : Okay. And then just on the membership fee, just wondering why $110. What was so magical about that number? I know in prior conversations that we have had, you've suggested maybe it would be $125 and you do like a $20 coupon. So I guess just trying to get a sense for why $110 and looking ahead, when would you look to raise the fee in Asia and UK and Australia?

Question: Charles Grom - Deutsche Bank - Analyst : And then outside the US, plans to raise it?

Question: Charles Grom - Deutsche Bank - Analyst : Okay, great. Thanks.

Question: Nathan Rich - Citigroup - Analyst : Hi, Richard. This is Nathan Rich filling in for Deb today. My first question is just on the competitive environment. Are you seeing any change in promotional intensity or pricing it -- either the supermarkets or any of your club competitors?

Question: Nathan Rich - Citigroup - Analyst : Okay, great. And then I just wanted to comment or to clarify your comments on inflation. You said that you are seeing inflation in food and sundries and fresh fruits in the low to mid-single digit range. Are you expecting that to moderate kind of as we go through the next quarter or so?

Question: Nathan Rich - Citigroup - Analyst : Great, thanks. And then just my last question, do you have the private-label penetration for the year handy and can you just discuss your kind of long-term target for private label?

Question: Robby Ohmes - Bank of America-Merrill Lynch - Analyst : Great, thank you.

Question: Laura Champine - Cowen and Co. - Analyst : Richard, just briefly, you mentioned that you are seeing a change in trend in electronics. Is that just lapping the deflationary issues over the past year or is there something really changing in the product cycle there?

Question: Laura Champine - Cowen and Co. - Analyst : Thank you.

Question: Michael Montani - ISI Group - Analyst : Hey, guys. This is Mike on for Greg Melich, how are you?

Question: Michael Montani - ISI Group - Analyst : Richard, just two quick ones. The first one was on dotcom. Did you mention and perhaps I had missed it, but is dotcom now about $2 billion of sales?

Question: Michael Montani - ISI Group - Analyst : Okay. And then just on the traffic side, for the US, can you help us understand -- I think it was about 4% traffic trend in the quarter, but how would that split out for the US versus international?

Question: Michael Montani - ISI Group - Analyst : Okay, so similar. And I guess just lastly, I was going to ask about, from the Executive membership standpoint, can you share what percentage of the Executive members today spend enough to reach the 2% off maximum of $500?

Question: Michael Montani - ISI Group - Analyst : Okay, thank you very much.

Question: Joe Feldman - Telsey Advisory Group - Analyst : Hi, good morning, guys. It's Joe Feldman here. A quick question -- a couple of questions. Again, to go back to the fee increase and the timing of it, Richard, in past calls and discussions with you guys, it seems like you have made commentary that you weren't likely to raise fees unless you felt the economy was in a better position or a little more stable, that your core customer could handle it assuming the economy was more stable. I mean should we read into the raise today that that is the case, that your view of the world is things are kind of stable and okay going forward?

Question: Joe Feldman - Telsey Advisory Group - Analyst : Okay. And then another question kind of on SG&A, I mean for as terrific a job as you guys do controlling expenses and costs, I guess we were a little surprised you didn't get a little more leverage with such a strong comp through the quarter and continues to be strong. And I guess I was wondering was there anything there? I know in the past you guys have done -- been generous towards your employees with giving -- helping offset some of the healthcare costs a little more than in the past. Anything that you did this quarter like that?

Question: Joe Feldman - Telsey Advisory Group - Analyst : Got it, thanks. And then if I could just ask one last question, kind of back to that whole customer behavior standpoint, are you guys seeing anything within the customer themselves like is your core customer -- are they trading down to some more of the private label so to speak or are they changing their tender, are you seeing more people use cash versus credit or the size of the transaction, is it smaller units per transaction, things like that?

Question: Joe Feldman - Telsey Advisory Group - Analyst : No, that's great. Thanks for your help.

Question: Joe Feldman - Telsey Advisory Group - Analyst : Got it. Thank you. Thanks for the help. Good luck with the quarter.

Question: Bob Drbul - Barclays Capital - Analyst : Hi, good morning, Richard. A couple of quick questions. First, can you give us the D&A from Q4? The second question I have is can you give us gas gallons in September? I don't know if you gave that out. And then the third question that I have is can LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. OCTOBER 05, 2011 / 2:00PM, COST.OQ - Q4 2011 Costco Wholesale Corporation Earnings and September you talk about the trends in audio? I think you are now cycling the loss of Apple in your stores. Could you maybe talk about the trends there a little bit?

Question: Bob Drbul - Barclays Capital - Analyst : Gas gallonage in September. Comp gallons.

Question: Bob Drbul - Barclays Capital - Analyst : Got it. And how about trends in audio? You are cycling the loss of Apple now, is that right?

Question: Bob Drbul - Barclays Capital - Analyst : Thanks very much.

Question: Sean Naughton - Piper Jaffray - Analyst : Hi, thanks for taking my question. Just on the -- another question on the private label for you. Is there a big difference between, in the international markets, the acceptance of the Kirkland brand there versus domestic?

Question: Sean Naughton - Piper Jaffray - Analyst : Okay, great. And then secondly, just also on international, you talked about half of the warehouses going international next year in fiscal '12. Can you talk about -- are you going to any new markets and when would those potentially be on the horizon if not?

Question: Sean Naughton - Piper Jaffray - Analyst : Okay, great. Thank you.

Question: Greg Melich - ISI Group - Analyst : Hi, it's Greg this time from ISI. Richard, the $1.5 billion CapEx, the $1.4 billion to $1.6 billion, do we consider that the new normal with around 20 openings because it is historically high and I just want to know if, as we go international, it is just more expensive or dotcom investment? What sort of -- what keeps it at that level?

Question: Greg Melich - ISI Group - Analyst : Great. And then secondly on the theory of less is more, if you were to look over all of last year, that 5% US comp, what would you say was the traffic versus ticket and the ticket, how much of that do you think was really inflation at the end of the day?

Question: Greg Melich - ISI Group - Analyst : Got it. Perfect. Thanks a lot.

Question: Greg Melich - ISI Group - Analyst : Sure.

Question: Greg Melich - ISI Group - Analyst : That's good.