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Article by DailyStocks_admin    (04-10-08 09:44 AM)

The Daily Warren Buffett Stock is COST. Berkshire Hathaway owns 5,254,000 shares. As of Dec 31,2007, this represents 0.53% percent of portfolio.

BUSINESS OVERVIEW

Costco Wholesale Corporation (“Costco” or the “Company”) began operations in 1983 in Seattle, Washington. In October 1993, we merged with The Price Company, which had pioneered the membership warehouse concept, to form Price/Costco, Inc., a Delaware corporation. In January 1997, after the spin-off of most of our non-warehouse assets to Price Enterprises, Inc., we changed our name to Costco Companies, Inc. On August 30, 1999, we reincorporated from Delaware to Washington and changed our name to Costco Wholesale Corporation. Our common stock trades on the NASDAQ under the symbol “COST.”

General

We operate membership warehouses based on the concept that offering our members very low prices on a limited selection of nationally branded and selected private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. This rapid inventory turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, enables us to operate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets and supercenters.

We buy the majority of our merchandise directly from manufacturers and route it to a cross-docking consolidation point (“depot”) or directly to our warehouses. Our depots receive container-based shipments from manufacturers and reallocate these goods for shipment to our individual warehouses, generally in less than twenty-four hours. This maximizes freight volume and handling efficiencies, thereby lowering our receiving costs by eliminating many of the costs associated with multiple step distribution channels, which include purchasing from distributors as opposed to manufacturers, use of central receiving, storing and distributing warehouses, and storage of merchandise in locations off the sales floor.

Because of our high sales volume and rapid inventory turnover, we generally have the opportunity to sell and be paid for inventory before we are required to pay many of our merchandise vendors, even though we take advantage of early payment discounts whenever available to us. As sales increase and inventory turnover becomes more rapid, a greater percentage of inventory is financed through payment terms provided by vendors rather than by our working capital.

Our typical warehouse format averages approximately 140,000 square feet; newer units tend to be larger. Floor plans are designed for economy and efficiency in the use of selling space, the handling of merchandise and the control of inventory. Because shoppers are attracted principally by the quality of merchandise and the availability of low prices, our warehouses need not have elaborate facilities. By strictly controlling the entrances and exits of our warehouses and using a membership format, we have limited inventory losses to less than two-tenths of one percent of net sales in each of the last three fiscal years—well below those of typical discount retail operations.

We generally limit marketing and promotional activities to new warehouse openings, occasional direct mail marketing to prospective new members and regular direct marketing programs (such as The Costco Connection, a magazine we publish for our members, and coupon mailers) to existing members promoting selected merchandise. These practices result in lower marketing expenses as compared to typical retailers. In connection with new warehouse openings, our marketing teams personally contact businesses in the area that are potential wholesale members. These contacts are supported by direct mailings during the period immediately prior to opening. Potential Gold Star (individual) members are contacted by direct mail or by providing membership offerings to be distributed through employee associations and other entities. After a membership base is established in an area, most new memberships result from word-of-mouth advertising, follow-up messages distributed through regular payroll or other organizational communications to employee groups and ongoing direct solicitations to prospective Business and Gold Star members.

Our warehouses generally operate on a seven-day, 69-hour week. Generally, warehouses are open weekdays between 10:00 a.m. and 8:30 p.m., with earlier closing hours on the weekend. Gasoline operations generally have extended hours. Because the hours of operation are shorter than those of traditional retailers, discount retailers and supermarkets and due to other efficiencies inherent in a warehouse-type operation, labor costs are lower relative to the volume of sales. Merchandise is generally stored on racks above the sales floor and displayed on pallets containing large quantities of each item, thereby reducing labor required for handling and stocking.

Our merchandising strategy is to provide our members with a broad range of high quality merchandise at prices consistently lower than could be obtained elsewhere. An important element of this strategy is to carry only those products on which we can provide our members significant savings. We seek to limit specific items in each product line to fast-selling models, sizes and colors. Therefore, we carry an average of approximately 4,000 active stockkeeping units (SKUs) per warehouse in our core warehouse business, as opposed to discount retailers and supermarkets that normally stock 40,000 SKUs or more. Many consumable products are offered for sale in case, carton or multiple-pack quantities only.

In keeping with our policy of member satisfaction, we generally accept returns of merchandise. In fiscal 2007, we introduced a 90-day return policy in the United States on certain electronic items. Additionally, we now provide, free of charge, technical support service, as well as an extended warranty on certain electronic items.

Warehouses operated by our Mexico joint venture are not included above. At September 2, 2007, our 50% owned joint venture in Mexico operated 30 warehouses.

Our electronic commerce businesses, costco.com in the U.S. and costco.ca in Canada, provide our members additional products generally not found in our warehouses, in addition to services such as digital photo processing, pharmacy, travel and membership services.

Our warehouses accept cash, checks, certain debit cards, American Express and a private label Costco credit card. Losses associated with dishonored checks have been minimal as members who have issued dishonored checks are identified and prevented from cashing checks at the point of sale until restitution is made.

We have direct buying relationships with many producers of national brand name merchandise. No significant portion of merchandise is obtained from any one of these or any other single supplier. We have not experienced any difficulty in obtaining sufficient quantities of merchandise, and believe that if one or more of our current sources of supply became unavailable, we would be able to obtain alternative sources without experiencing a substantial disruption of our business. We also purchase selected private label merchandise, as long as quality and customer demand are comparable and the value to our members is greater.

Financial information of our segments and geographic areas is included in Note 12, Segment Reporting, to the accompanying consolidated financial statements.

We report on a 52/53-week fiscal year, consisting of thirteen four-week periods and ending on the Sunday nearest the end of August. The first, second and third quarters consist of three periods each, and the fourth quarter consists of four periods (five weeks in the thirteenth period in a 53-week year). There is no material seasonal impact on our operations, except an increased level of net sales and earnings during the winter holiday season. Fiscal years 2007 and 2005 each consisted of 52 weeks, and fiscal year 2006 was a 53-week year.

Membership Policy

Our membership format is designed to reinforce customer loyalty and provide a continuing source of membership fee revenue, which allows us to offer low prices.

Members can utilize their memberships at any Costco warehouse location in any country. We have two primary types of members: Business, and Gold Star (individual). In addition, U.S. and Canadian members can upgrade to an Executive Membership. We continue to experience strong member renewal rates, currently at 87%. Businesses, including individuals with a business license, retail sales license or other evidence of business existence, may become Business members. Business members generally pay an annual membership fee of $50 for the primary and spouse membership card, with add-on membership cards available for an annual fee of $40 (including a free spouse card). A significant number of our business members also shop at Costco for their personal needs.

Individual memberships (Gold Star memberships) are available to individuals who do not qualify for a Business membership. Individual members generally pay an annual membership fee of $50, which includes a spouse card.

The rates for Business and Gold Star members discussed above reflect the $5 increase that went into effect on May 1, 2006 for new members and July 1, 2006 for existing members.

Executive Membership is available to all members in the U.S. and Canada for an annual fee of $100. The Executive Membership program offers members additional savings and benefits on various business and consumer services offered by Costco, such as merchant credit card processing, small business loans, auto and home insurance, business telephone service, check printing, and real estate and mortgage services. The services offered are generally provided by third-party providers and vary by state. In addition, Executive members qualify for a 2% reward (which can be redeemed at Costco warehouses), up to a maximum of $500 per year, on all qualified purchases made at Costco. At the end of fiscal 2007 and 2006, Executive members represented 23% and 20%, respectively, of our primary membership base and the percentage of our net sales attributable to these members continues to increase.

These numbers exclude approximately 9,000 and 8,000 individuals who were employed by Costco Mexico (a 50%-owned joint venture) as of September 2, 2007 and September 3, 2006, respectively, which is not consolidated in our financial statements, but is accounted for using the equity method. Approximately 13,900 hourly employees in certain of our locations in California, Maryland, New Jersey, New York and one warehouse in Virginia are represented by the International Brotherhood of Teamsters. All remaining employees are non-union. We consider our employee relations to be very good.

Competition

Our industry is highly competitive, based on factors such as price, merchandise quality and selection, warehouse location and member service. Over 1,200 warehouse club locations exist across the U.S. and Canada, including our 454 North American warehouses, and every major metropolitan area has one, if not several, club operations. In addition to other membership warehouse operators such as Wal-Mart’s Sam’s Club and BJ’s Wholesale Club, we compete with a wide range of national and regional retailers and wholesalers, including supermarkets, supercenters, general merchandise chains, specialty chains, gasoline stations, as well as electronic commerce businesses. Wal-Mart, Target and Kohl’s are significant general merchandise retail competitors. We also compete with low-cost operators selling a single category or narrow range of merchandise, such as Lowe’s, Home Depot, Office Depot, PetSmart, Staples, Trader Joe’s, Whole Foods, Best Buy and Barnes & Noble.

Regulation

Certain state laws require that we apply minimum markups to our selling prices for specific goods, such as tobacco products, alcoholic beverages and gasoline. While compliance with such laws may cause us to charge somewhat higher prices than we otherwise would charge, other retailers are also typically governed by the same restrictions, and we believe that compliance with such laws does not have a material adverse effect on our operations.

It is our policy to sell at lower than manufacturers’ suggested retail prices. Some manufacturers attempt to maintain the resale price of their products by refusing to sell to us or to other purchasers that do not adhere to suggested retail prices or that otherwise sell at discounted prices. To date, we believe that we have not been materially affected by our inability to purchase directly from such manufacturers. Both federal and state legislation is proposed from time to time which, if enacted, would restrict our ability to purchase goods or extend the application of laws enabling the establishment of minimum prices. We cannot predict the effect on our business of the enactment of such federal or state legislation.

Certain states, counties and municipalities have enacted or proposed laws and regulations that would prevent or restrict the operations or expansion plans of certain large retailers and warehouse clubs, including us, within their jurisdictions. We believe that, if enacted, such laws and regulations could have a material adverse affect on our operations.

CEO BACKGROUND

James D. Sinegal is the President and Chief Executive Officer of the Company. Mr. Sinegal is a co-founder of the Company and has been a director since its inception.



Jeffrey H. Brotman is the Chairman of the Board of the Company. Mr. Brotman is a co-founder of the Company and has been a director since its inception.



Benjamin S. Carson, Sr., M.D. has been a director of the Company since May 1999. Since 1984 he has been the Director of Pediatric Neurosurgery at Johns Hopkins University. Dr. Carson is also a director of Kellogg Company.



Susan L. Decker has been a director of the Company since October 2004. She has been the President of Yahoo! Inc. since June 2007. From December 2006 to June 2007 she served as the head of its Advertiser and Publisher Group. She served as the Chief Financial Officer of Yahoo! Inc. from June 2000 through June 2007. From August 1986 to May 2000, Ms. Decker held several positions for Donaldson, Lufkin & Jenrette, including Director of Global Research from 1998 to 2000. She is also a director of Intel Corporation and Berkshire Hathaway Inc.



Richard D. DiCerchio is the Senior Executive Vice President, Chief Operating Officer, Global Operations, Distribution and Construction, Manufacturing and Ancillary Businesses. Mr. DiCerchio has been a Senior Executive Vice President of the Company since 1997. During fiscal 2004 Mr. DiCerchio assumed the responsibilities of Global Operations and Manufacturing and Ancillary Businesses and relinquished the role over Merchandising, which he had held since August 1994. He has been a director since 1986.



Daniel J. Evans has been a director of the Company since January 2003. He has been the chairman of Daniel J. Evans Associates, a consulting firm, since 1989. From 1983 through 1989, he served as the U.S. Senator for the State of Washington, and he was the President of The Evergreen State College from 1977 through 1983. From 1965 through 1977, he served as Governor of the State of Washington. Mr. Evans serves on the boards of NIC Inc. and Archimedes Technology Group.



Richard A. Galanti has been a director of the Company since January 1995, and Executive Vice President and Chief Financial Officer of the Company since October 1993.



William H. Gates has been a director of the Company since January 2003. He has been the Co-Chair of the Bill & Melinda Gates Foundation since its inception. Mr. Gates serves on the Board of Regents of the University of Washington. He has served as trustee, officer and volunteer for more than two dozen Northwest organizations, including the Greater Seattle Chamber of Commerce and King County United Way. In 1995, he founded the Technology Alliance. From 1964 until 1994 Mr. Gates was a partner in the law firm of Preston, Gates & Ellis and predecessor firms.



Hamilton E. James has been a director of the Company since August 1988 and the lead independent director since 2005. He is President and Chief Operating Officer of The Blackstone Group and a member of the board of directors of its general partner, Blackstone Group Management L.L.C.



Richard M. Libenson has been a director of the Company since October 1993. He was a director of The Price Company from its formation in 1976 until October 1993 and was an executive officer of The Price Company from 1976 until October 1989.

John W. Meisenbach has been a director of the Company since its inception. He is President of MCM, A Meisenbach Company, a financial services company, which he founded in 1962. He also currently serves as a director of Expeditors International and M Financial Holdings. Mr. Meisenbach is a trustee of the Elite Fund, an investment company registered under the Investment Company Act of 1940.



Charles T. Munger has been a director of the Company since January 1997. For more than the last five years he has been a director and Vice Chairman of the Board of Berkshire Hathaway Inc., Chairman of the Board of Directors of Daily Journal Corporation, and Chairman of the Board of Directors and Chief Executive Officer of Wesco Financial Corporation.



Jill S. Ruckelshaus has been a director of the Company since February 1996. Ms. Ruckelshaus serves on the boards of Lincoln National Corporation and various other organizations.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Our fiscal year ends on the Sunday closest to the end of August. Fiscal years 2007 and 2005 included 52 weeks. Fiscal year 2006 included 53 weeks, with the extra week included in the fiscal fourth quarter.

Key items for fiscal year 2007 included:




Net sales in fiscal 2007 (52 weeks) increased 7.0% over fiscal 2006 (53 weeks), driven by an increase in comparable sales (sales in warehouses open for at least one year) of 6% and the opening of 30 new warehouses;




Membership fees for fiscal 2007 increased 10.5%, to $1.31 billion, primarily due to the $5 increase in our annual membership fee in 2006 for our non-Executive members;




Gross margin (net sales less merchandise costs) as a percentage of net sales decreased 3 basis points over the prior year;




Selling, general and administrative (SG&A) expenses as a percentage of net sales increased 22 basis points over the prior year;




Net income for fiscal 2007 was $1.08 billion, or $2.37 per diluted share, compared to $1.10 billion, or $2.30 per diluted share, in fiscal 2006;




On February 20, 2007, we issued $900 million of 5.3% Senior Notes due March 15, 2012 and $1.1 billion of 5.5% Senior Notes due March 15, 2017;




The Board of Directors approved an increase in the quarterly cash dividend from $0.13 to $0.145 per share in April 2007; and




We repurchased 36.4 million shares of our common stock, expending approximately $1.98 billion at an average cost of $54.39 per share.

Results of Operations (dollars in thousands, except per share and warehouse number data)

The following unusual items impacted fiscal 2007 results:




Sales returns reserve: In connection with changes to our consumer electronics returns policy, we completed a review of historical data of trends in sales returns, which indicated a longer timeframe over which returns are received than was previously estimated. We revised our estimate of our sales returns reserve to include the longer timeframe, as well as a lower realization rate on certain returned items. The effect of the revisions to our estimated reserve resulted in a decrease in net sales of $452.6 million and a charge to gross margin of approximately $94.3 million.




Employee tax consequences on stock options: In connection with the review of stock option grants and guidance issued by the U.S. Internal Revenue Service on November 30, 2006, the Compensation Committee of the Board of Directors approved a program intended to protect approximately 1,000 employees who are United States taxpayers from certain adverse tax consequences arising from that review. The program involved increasing the exercise prices on certain stock options granted from 2000 to 2003 and, in turn, making payments to employees in an amount approximately equal to the increase in the exercise price. While we are still examining the availability of similar alternatives for employees outside the United States, we recorded a charge in fiscal 2007 for the estimated amount to remedy adverse tax consequences related to stock options held and previously exercised by employees outside the United States. In aggregate, these charges totaled $47.3 million.



Excise tax refund: We received a $10.1 million refund, related to fiscal 2002 through fiscal 2006, as a result of a settlement with the U.S. Internal Revenue Service relating to excise taxes previously paid.




Deferred membership: In the fourth quarter of fiscal 2007, we performed a detailed analysis of the timing of recognition of membership fees based on each member’s specific renewal date (daily convention) as this methodology represented an improvement over our historical method (based on the period in which the fee was collected). This review resulted in a $56.2 million reduction to membership fee revenue and a corresponding increase to deferred membership fees on our consolidated balance sheet. This adjustment includes both a change in method of applying an accounting principle to a preferable method and a correction for cumulative timing errors. Prospectively, we will account for membership fee revenue on a deferred basis over the specific membership term using the daily convention.

2007 vs. 2006

Net sales increased $4.13 billion, or 7.0% to $63.09 billion in fiscal 2007 (a 52-week fiscal year) from $58.96 billion in fiscal 2006 (a 53-week fiscal year). The $4.13 billion increase in net sales is comprised of $2.10 billion from the increase in comparable warehouse sales and $2.03 billion from sales at new warehouses opened during fiscal 2007 and 2006, partially offset by the change in the reserve for estimated sales returns.

Changes in prices of merchandise did not materially affect the sales increase. Gasoline sales contributed to the $4.13 billion net sales growth by approximately $356.1 million, with approximately $17.8 million of this increase related to the increase in gasoline sales prices.

Most of the comparable sales growth derived from increased amounts spent by members visiting our warehouses, while increases in frequency of shopping contributed slightly. Reported comparable sales growth includes the negative impact of cannibalization (established warehouses losing sales to our newly opened locations). Gasoline sales did not have a material impact on comparable warehouse sales growth. Changes in foreign currencies positively impacted comparable sales by approximately $418.4 million, or 72 basis points.

In our fourth fiscal quarter, the decrease in our estimated sales returns reserve resulted in an increase to net sales of $57.9 million as compared to the fourth quarter of fiscal 2006 where our reserve was increased, resulting in a decrease to net sales of $33.1 million. This improvement is primarily a result of the changes to our consumer electronics returns policy implemented in the spring of 2007.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations (dollars in thousands, except earnings per share and warehouse number data)

Net sales increased 12.2% to $16.62 billion during the second quarter of fiscal 2008, from $14.80 billion during the second quarter of fiscal 2007. Excluding the impact of the change in the estimated sales returns reserve in the second quarter of fiscal 2007, net sales increased $1.59 billion, or 10.6% in the second quarter of fiscal 2008 as compared to the previous year. The $1.59 billion increase in adjusted net sales is comprised of $1.09 billion from the increase in comparable warehouse sales and $500.8 million primarily from sales at 27 new warehouses opened (31 opened and 4 closed due to relocations) since the end of the second quarter of fiscal 2007. Significantly stronger foreign currencies, particularly in Canada, positively impacted adjusted net sales by approximately $348.9 million, or 230 basis points.

Changes in prices of merchandise, with the exception of gasoline, did not materially affect the sales increase. Gasoline sales contributed to the $1.59 billion adjusted net sales growth by approximately $398.8 million, with approximately $288.7 million of this increase related to the increase in gasoline sales prices, which, on average, increased approximately 29% over the second quarter of fiscal 2007.

Most of the comparable sales growth was derived from increased amounts spent by members, with a smaller contribution from increases in shopping frequency. Gasoline sales positively impacted comparable warehouse sales growth by approximately $346.7 million, or 245 basis points. Significantly stronger foreign currencies, particularly in Canada, positively impacted comparable sales by approximately $332.8 million, or 220 basis points. Reported comparable sales growth includes the negative impact of cannibalization (established warehouses losing sales to our newly opened locations).

For the first half of fiscal 2008, net sales increased 12.0% to $32.09 billion from $28.66 billion during the first half of fiscal 2007. Excluding the impact of the change in the estimated sales returns reserve in the second quarter of fiscal 2007, net sales increased $3.21 billion, or 11.1% in the first half of fiscal 2008 as compared to the previous year. The $3.21 billion increase in adjusted net sales is comprised of $2.19 billion from the increase in comparable warehouse sales and $1.02 billion primarily from sales at 27 new warehouses opened (31 opened and 4 closed due to relocations) since the end of the second quarter of fiscal 2007. Significantly stronger foreign currencies, particularly in Canada, positively impacted adjusted net sales by approximately $703.7 million, or 245 basis points.

Changes in prices of merchandise, with the exception of gasoline, did not materially affect the sales increase. Gasoline sales contributed to the $3.21 billion adjusted net sales growth by approximately $707.1 million, with approximately $503.0 million of this increase related to the increase in gasoline sales prices, which, on average, increased approximately 25% over the first half of fiscal 2007.

Most of the comparable sales growth was derived from increased amounts spent by members, with a smaller contribution from increases in shopping frequency. Gasoline sales positively impacted comparable warehouse sales growth by approximately $592.1 million, or 220 basis points. Significantly stronger foreign currencies, particularly in Canada, positively impacted comparable sales by approximately $676.2 million, or 235 basis points.

Membership fees increased 11.6% to $342.9 million, or 2.06% of net sales, in the second quarter of fiscal 2008, from $307.3 million, or 2.08% of net sales, in the second quarter of fiscal 2007, and increased 12.3% to $681.0 million, or 2.12% of net sales, in the first half of fiscal 2008 from $606.6 million, or 2.12% of net sales, in the first half of fiscal 2007. The increase was primarily due to additional membership sign-ups at the 27 new warehouses opened since the second quarter of fiscal 2007, increased penetration of the higher-fee Executive Membership program, as well as the $5 increase in our annual membership fee in the second half of fiscal 2006 for non-Executive members. Our member renewal rate, currently at 87%, is consistent with recent years.

Gross Margin

Gross margin was $1.78 billion, or 10.73% of net sales, in the second quarter of fiscal 2008, compared to $1.55 billion, or 10.49% of net sales, in the second quarter of fiscal 2007. Excluding the unusual items affecting net sales and gross margin, gross margin as a percentage of net sales increased 13 basis points in the second quarter of fiscal 2008, from 10.60% in the second quarter of fiscal 2007. This increase was due to a 29 basis point increase in our merchandise departments, particularly food and sundries and hardlines. This increase was offset by a net twelve basis point decrease primarily from our warehouse ancillary businesses, which reflected decreases in pharmacy, food services and tire shop, partially offset by an increase in our gasoline business. In addition, increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members negatively affected gross margin by four basis points.

Gross margin was $3.43 billion, or 10.69% of net sales, in the first half of fiscal 2008, compared to $3.02 billion, or 10.53% of net sales, in the first half of fiscal 2007. Excluding the unusual items affecting net sales and gross margin, gross margin as a percentage of net sales increased 11 basis points in the first half of fiscal 2008, from 10.58% in the first half of fiscal 2007. This net 11 basis point increase reflected an increase of 34 basis points in our merchandise departments, particularly food and sundries and hardlines. This increase was offset by a decrease of 19 basis points in our warehouse ancillary businesses, primarily tire shop, gas and food services. In addition, increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members negatively affected gross margin by four basis points.

SG&A totaled $1.62 billion, or 9.72% of net sales, during the second quarter of fiscal 2008, compared to $1.49 billion, or 10.05% of net sales, during the second quarter of fiscal 2007. Excluding the unusual items affecting net sales and SG&A expenses in the second quarter of fiscal 2007, SG&A as a percentage of net sales increased 12 basis points in the second quarter of fiscal 2008 as compared to the previous year. Warehouse operating and central administrative costs negatively impacted SG&A comparisons, on a net basis, by approximately eight basis points, partially due to the increase in the entry-level hourly wage rate, which was effective in March 2007. Stock compensation expense increased four basis points in the second quarter of fiscal 2008 as compared to fiscal 2007, primarily due to a higher closing stock price on the date that our October 2007 RSU grant was valued as compared to previous grants.

SG&A totaled $3.19 billion, or 9.93% of net sales, during the first half of fiscal 2008 compared to $2.87 billion, or 10.02% of net sales, during the first half of fiscal 2007. Excluding the unusual items affecting net sales and SG&A expenses in the first half of fiscal 2007, SG&A as a percentage of net sales increased 15 basis points in the first half of fiscal 2008 as compared to the previous year. Warehouse operating and central administrative costs negatively impacted SG&A comparisons, on a net basis, by approximately nine basis points, partially due to the increase in the entry-level hourly wage rate, which was effective in March 2007. Stock compensation expense increased three basis points in the first half of fiscal 2008 as compared to fiscal 2007. Additionally, in the first quarter of fiscal 2008, we accrued approximately $9 million, or three basis points, for compensation adjustments we made to employees enrolled in our medical and dental plans related to a decision to share a portion of the health plan’s savings that we achieved, beyond what was expected in fiscal 2007.

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