Walmart Inc.
Q1 2009 Earnings Call Transcript

Published: 14 May 2009

[Carol Schumacher:]

Welcome to the Wal-Mart Stores, Inc. First Quarter Earnings Call for Fiscal Year 2010. This is Carol Schumacher, Vice President of Investor Relations. Thanks for joining us today. The replay of this call and related materials about the quarter are available on our website. Here’s the lineup for today’s call. Mike Duke, Wal-Mart Stores, Inc. President and CEO will begin the call with comments on the company’s overall performance. Charley Holley, Executive Vice President, Finance and Treasurer will cover the consolidated financial details for the quarter. Eduardo Castro-Wright, Vice Chairman Wal-Mart Stores, Inc. will discuss the results for Wal-Mart US. Doug McMillon, President and CEO of Wal-Mart International will cover our operations outside the United States with details on our countries with the largest revenues. Brian Cornell, new to our company as President and CEO of Sam’s Club, will discuss that operating segment and Tom Schoewe, Executive Vice President and Chief Financial Officer will close with a report card on our financial metrics as well as guidance for the second quarter. Before Mike kicks it off we want to share details about changes to our reporting practices. As announced last week, we will no longer report sales results on a monthly basis. Our company will now provide comp store sales guidance and results on a 13 week basis in our quarterly earnings releases like we’re doing today. Instead of total US comp guidance, Wal-Mart US and Sam’s Club each will provide separate guidance for the 13 week period. You will hear more about this from Eduardo and Brian. We will continue to provide comp store sales results on a fiscal calendar basis in our Form 10-Q and 10-K filings with the SEC. Our investor communications policy which is posted on our website has been updated to reflect these changes. During today’s discussion please keep in mind that our first quarter last fiscal year, what we call, FY2009 included the benefit of one extra day, February 29th due to a leap year. This year’s first quarter has 91 days versus 92 days last year so in essence one less selling day. Effective February 1, 2009, Wal-Mart Stores, Inc. adopted Statement of Financial Accounting Standard Number 160 “Non-Controlling Interest in Consolidated Financial Statements.” This standard requires some accounting changes and minor modifications to financial statement presentation for minority interests and subsidiaries. These changes are reflected in our first quarter financial statements we’re releasing today. As a result during this call all references to income from continuing operations or earnings per share from continuing operations refer to income from continuing operations attributable to Wal-Mart or diluted income per share from continuing operations attributable to Wal-Mart respectively. Also, diluted net income per share from continuing operations refers to diluted income per share from continuing operations attributable to Wal-Mart. As a reminder, we consolidate and report our International business as follows. Canada and Puerto Rico report on the same calendar as our US operations which means that our first quarter runs from February 1st through April 30th. All other markets in Wal-Mart International report on the regular calendar basis meaning the first quarter news we are reporting today represents results from January 1st through March 31. Note that sales and other financial metrics are pegged to local currencies when referring to the specific international markets. Store counts, square footage updates and information on our financial metrics are available on our website www.WalMartStores.com/Investors under the reconciliation and financial measures. A full transcript of this call is posted approximately an hour after our call starts. Thanks for listening to our news about Wal-Mart’s first quarter of fiscal 2010.

[Mike Duke:]

We’re pleased to report that fiscal year 2010 is off to a very good start. Even though this is the most challenging economy we’ve faced in decades, certainly we feel good about the business. Wal-Mart continues to outperform the market. We’re strengthening customer loyalty and attracting and retaining millions of customers. Our company is stronger then ever because we deliver price leadership and value and help our customers save money so they can live better. Our success this quarter is due to the dedication and contributions of our over two million hard working associates around the world. We appreciate each and every one of them. I’m also proud of the depth and talent of our leadership team. They continue to make Wal-Mart a better company. We’re also broadening and accelerating our efforts to drive positive change on issues that matter to customers and associates. First let’s look at some of the key numbers. Diluted earnings per share were $0.77 at the top end of the range of guidance we provided. Total first quarter net sales were more than $93 billion which is down slightly from last year. However, this includes a negative impact from the valuation of many currencies against the US dollar. Without that impact net sales were over $98 billion. Last week we reported a total US comp for Wal-Mart and Sam’s Club without fuel of 3.7% for the first 13 weeks period of this year. I’m pleased that this comp surpassed our own expectations. Wal-Mart continues to be in great financial position. We have a strong balance sheet and great access to capital markets. Charles will get into the details but I’m also pleased with our free cash flow performance which continues to fund returns to shareholders through dividends and share repurchases. In March we announced a 15% increase to our dividend at a time when many other companies were reducing their dividends. Like other companies we are dealing with very complex economic circumstances. We all hear the news about interest rates, currency exchange and unemployment and uncertainty about how long the recession might last. Our business overall is stable but our customers are still concerned about economic issues. For the Wal-Mart customers, until unemployment eases and confidence really returns we remain cautiously optimistic about the timetable for economic recovery. The stability in our business comes from the clear path Sam Walton established with our EDLP philosophy. It’s more important than ever. We have unique insight into how our customers and members are weathering the economy. We know better than ever how to meet their needs and this is a tremendous competitive advantage. Consumers are turning to us in greater numbers. They know Wal-Mart is their advocate and that we can save them money so they can live better. They believe in our brand. Consumers are changing their thinking and their behavior. It’s a virtue to be thrifty and they’re proud to save money by shopping at Wal-Mart. Our regular customers are shopping us more often and for more items. We’re attracting more new customers. We’re running better stores and clubs. The business plans we have in place now are relevant for today and for the future when the economy recovers. We will always emphasize our price leadership and our role as advocates for customers and members. That’s the core of our competitive advantage. With all this in mind let me cover some reasons why we’re reporting such good results today. Eduardo Castro-Wright has said that the underlying business at Wal-Mart US remains strong. Wal-Mart delivered a 5.9% comp for the four weeks in April and a 3.6% comp for the first 13 weeks of the year. This is the strongest comp among major retailers and clearly exceeds expectations. The strength of these results comes from the truly integrated initiatives within Wal-Mart US. Never before have merchandising, operations and marketing been so aligned. Our associate engagement scores and productivity are up, inventory and prices are down. We have many new brands. Customers are delighted when they shop our stores. Like other retailers, Wal-Mart is cycling the stimulus checks which resulted in the higher sales comps in the second quarter last year, but, I’m confident with the plans the team put together. Customers will appreciate the American Summer Program that kicks off this month and there will be additional events, such as back-to-school, this quarter. Doug McMillon has hit the ground running with a smooth and speedy transition as the head of Wal-Mart International. Frankly, I’m glad to be sleeping in my own bed a little more now. I’m pleased that in almost every country, we grew the top line faster than the market despite the strong dollar and a recession that is even deeper in some countries than it is in the United States. ASDA had a standout quarter, leading on price and gaining market share. I can’t tell you how proud I am of our ASDA colleagues. In Mexico, the economy is a real challenge, but Wal-Mex continues to outperform its competition. In fact, in just about every market where we operate we’re outperforming our competition. We’ve assembled a great team at Sam’s Club, and we’re happy to have Brian Cornell as our new CEO of that business. The team there is renewing its focus on building and communicating the value of membership, and further improving product quality and freshness. We’re investing capital prudently for efficient growth and world class information systems. Across the company we will continue to build our brand, reduce costs, sharpen our merchandising and remodel our stores and clubs, and we’ll continue to employ our global leverage for the benefit of our customers and members. I’ve also indicated that we will broaden and accelerate our efforts on issues that are important to our customers, members and associates. In my first quarter as CEO, I’ve made a few trips to Washington, D.C. I’ve had collaborative meetings with the administration and lawmakers on a range of issues including the economy, health care and sustainability. People see that we are contributing constructively to the process and that we will continue to do so. Just one more thing before I turn it over to Charles. Many of you’ve asked if the success we’ve had recently is just a result of the economic downturn and will it last once the economy recovers. As I said earlier, customers have changed their behavior and their mindset. They’re proud to tell people that they shop at Wal-Mart. We believe the improvements we’ve made in merchandising, marketing and operations in the US and around the world are sustainable. This is not a short term phenomenon. Customers will always be interested in saving money, and they will always appreciate the value of getting better value. Our brand stands for better value, no matter the country or the language. We have enduring brand strength because the trust we’ve earned from our customers has never been stronger. As a result, we believe we’ll continue to gain market share. We are optimistic about the long term, and realistic about the short term. Certainly, I feel good about what I’m seeing at our retail operations all around the world. Now, I’d ask Charles to provide you with a detailed review of our results.

[Charles Holley:]

Before I get into the details, let me remind everyone of a few things that affect our consolidated results. The D&S results are now included in our consolidated reporting. Carol mentioned the impact of the comparison to last year being a leap year, so we have one less day this fiscal year. You’ll hear more about this from the operating segments. The Easter calendar shift also impacted the first quarter results within the International segment. Mike mentioned the impact of currency exchange rates and I’ll talk more about this shortly. Fiscal year 2010 is off to a good start. Total net sales for the company decreased slightly, by 0.6% to $93.5 billion. However, without the $4.8 billion effect of currency exchange rates, net sales would have increased by 4.5% to approximately $98.3 billion. The total US comp, without fuel, reported on a 13 week basis was 3.7%. Operating income was down $100 million or approximately 1.9% with income from continuing operations before income taxes down 1.5%. Currency exchange translation had a negative impact of approximately $252 million to operating income. Also, there was one less day for the quarter versus last year due to the leap year. Income from continuing operations for the first quarter was flat with last fiscal year at approximately $3 billion. Diluted net income per share from continuing operations was $0.77. This is at the high end of the guidance range we provided you for the first quarter of the fiscal year. As a reminder, this included the negative impact from the currency translation of approximately $0.04 per share. Consolidated gross profit for the first quarter was up 59 basis points compared with the prior year, due primarily to improvements by Wal-Mart US and Sam’s Club. In addition to better mix, Wal-Mart US continues to deliver strong inventory management and you’ll hear more details on this from Eduardo. Speaking of inventory, on a consolidated basis, this was another excellent story, primarily due to the Wal-Mart US segment. Our consolidated inventory was down 3.2% when compared to the same period last year, and that’s against a sales decrease of 0.6%. Payables as a percentage of inventories for the company was 83% at the end of the first quarter, which is up 1.3 percentage points from last year. As we mentioned with our February sales release, in connection with our finance transformation project, the company adjusted its classification of certain revenue and expense items for financial reporting purposes beginning February 1, 2009. These changes do not affect operating income or net income. Further, any changes in the classification of any revenue or expense items in our financial statements have been reflected in all prior periods presented. These changes primarily consisted of reclassifying certain other income items such as financial services income, from other income to net sales, and reporting discount fees paid on a customer’s use of a consumer credit card as operating expenses. Previously, these credit card discount fees were netted against sales. With these changes, we have improved the consistency of our reporting with others in the industry. Going forward, membership and other income primarily includes membership revenue, tenant lease income and some other miscellaneous income categories. Where we have one time items, such as the gain from the sale of real estate properties, they will be included in other income as well. Membership and other income decreased 14% compared to the same period last year. Membership income was down slightly year over year, as were several other miscellaneous income categories. Let’s move on to review expenses. Consolidated operating expenses as a percentage of sales were up 53 basis points over this period last year. Contributing to this increase were higher group health care costs across the US businesses. The corporate segment, which we commonly refer to as corporate expenses, was up almost 17% primarily due to increased spending on transformation projects and other technology enhanced initiatives. During the fourth quarter call, we explained that the investments we are making for future capacity in the merchandising, finance, and human resources systems would continue to be up versus last year for all of this fiscal year. We are committed to these programs as they will build global capabilities, leverage our scale, and optimize our investments for the company. Transformation costs this quarter were up significantly, approximately 150% over the same period last year. Without investments in transformation projects, expenses for the corporate segment were up 9.3% almost entirely driven by expenses in our technology area, as we continue to drive technology enhanced initiatives. Non-technology home office expenses this quarter were flat to the same quarter last year. Net interest expense was down 5.8% versus the comparable quarter last year. Despite additional debt related to the acquisition of D&S in Chile, our total debt balances were down versus last year and contributed to lower interest expense. Our effective tax rate for the quarter was 33.7%. We expect the tax rate for fiscal 2010 to be between 34% and 35%, although we will see some quarterly fluctuations. Factors which may impact our rate include changes in our assessment of certain tax matters and the mix of earnings among our US and International operations. During these challenging economic times, our balance sheet remains strong and we continue to have good access to the credit markets. Our debt to total capitalization was 41.0% below the 43.2% we reported at the same time last year. It’s important to note that according to Financial Accounting Standards Number 160, minority interest, now referred to as non-controlling interest, in our subsidiaries is now reported in the equity section of the company’s balance sheet. Our methodology and management of debt to total capitalization has not changed. We continue to define total capitalization as debt, plus total shareholder’s equity, which does not include the non-controlling interest. Mike highlighted one of our ongoing success stories earlier, continuing strong free cash flow generation. We are pleased to report that in the first quarter we generated free cash flow of $964 million. Now on face value, this is lower than the $1.3 billion we had at this time last year. However, when you consider the timing of payments of our US associate payroll on the last day of the quarter, and with one less day of operations versus leap year last year, our free cash flow is trending at or actually a little more than last year. This total also includes an increase in capital spending for the first quarter versus last year. Let’s review how we’re using the cash we generated. During this year’s first quarter, our capital expenditures were in line with our plans. We continue to expect our CapEx for the full year to be between $12.5 and $13.5 billion. Second, as we mentioned in the fourth quarter earnings call in February, we decided it was time to restart our share repurchase program. I am pleased to report we committed more than $960 million to repurchase approximately 19.2 million shares during the first quarter. We have slightly more than $4 billion remaining from the $15 billion share repurchase plan authorized by the board in May of 2007. Third, during the quarter, we paid a little more than $1 billion in dividends, which reflects the 15% dividend increase our board approved in March. As Mike noted, we are proud of our financial position and the attention of our operating and corporate teams to strong financial management. Now let’s move to the discussion of our operating segments. We’ll start with Wal-Mart US.

[Eduardo Castro-Wright:]

With the first quarter now behind us I’m happy to report that Wal-Mart US is building on the momentum of last year’s solid performance. We exceeded our expectations for top line growth. In spite of the leap year comparison, total net sales increased 3.8% to $61.2 billion. We feel very good about the way Wal-Mart is positioned today in the US marketplace. Consumers trust our brand and our save money, live better promise is more relevant today than ever before. Comparable store sales for the 13 week period of February through April grew 3.6% ahead of market expectations. There were three main drivers of our comp performance. First, traffic to our comp stores accelerated to levels we have not seen in several years. Clearly, declining gas prices compared to last year have had a role in driving traffic to our stores. But more important is the growing consumer need for value today. We find a large part of our growth is coming from new customers. In February, approximately 17% of our measurable growth in traffic came from new customers. Their average basket size is 40% higher than our average. We are committed to retaining these new customers through our new assortments and the way they experience the brand in our stores. Second, our focus on winning key seasonal events contributed to both increased transactions and conversion. For example, comp sales of Easter related merchandise grew 7.6% during the season and drove part of our 5.9% comp sales increase during the April four week period. Seasonal events will continue to be an important part of our growth strategy. Last, we believe each of our merchandising units is outperforming their respective competitors. The investments we have made in merchandising systems are starting to pay off. These enhancements, combined with our price leadership and the implementation of our win, play, show strategy are driving clarity of offering, leading to sustainable growth across multiple categories. Wal-Mart.com is also contributing to our growth and our Site to Store platform enables our customers to have seamless access to our brand through different channels. Our cumulative customer base to Site to Store has grown more than nine times over the last 12 months. I’m happy to report our online business is growing faster than the leading competitor based on that competitor’s latest quarterly release. Solid Wal-Mart US sales performance was complemented by a 52 basis point improvement in gross margin. The increase in gross margin was driven largely by a higher margin product mix, the result of improved sales performance in our more discretionary categories. Also benefiting gross margin was our ongoing progress in reducing inventory by flowing the right merchandise to the right stores at the right time. Inventory was reduced by 4.3% or slightly more than $1 billion on sales growth of 3.8%. The benefit of lower inventories touches many aspects of our operations including fewer markdowns, less shrink, lower store labor and logistics costs, and fewer accidents. Lower inventories also improve our customer’s shopping experience and provide a better working environment for our associates because of cleaner stores. Operating income for the quarter was $4.5 billion and increased 3.3% over the first quarter last year. As a percent to sales, operating income was relatively flat with the same quarter last year, reflecting unplanned expenses, which I will cover shortly. Operating expenses increased 5.8% or 37 basis points as a percentage of sales year over year, due primarily to higher group health insurance expenses. Improvements to our health benefit plans resulted in different health care purchasing and usage habits by our associates. Partly because of our better health care programs, we have seen lower turnover which has led to increased store labor productivity. We expect health care costs, as well as labor productivity, to grow faster then sales for the remainder of the year. We continue to find ways to leverage our growth in the current economic environment and manage expenses effectively. Let me highlight one such example; advertising. Media costs have come down rapidly during the last year because of the more difficult economic environment. As a result, our marketing team reduced advertising costs by more than 20% through efficient media buying and by a precise focus on our message. The result is greater efficiency in delivering our message and increased exposure of our brand and our save money, live better value proposition. Our share of voice increased 67% in the first quarter compared to last year. Lower gas prices and lower inventories have led to lower logistics costs, and we have passed these savings along to customers through lower prices. Excluding the benefit of declining fuel costs, our cost per case shipped was reduced by 5.5%. We continue to sweat the assets of our distribution network to drive improvements in return on investment. In fact, we have not built a distribution center in more than two years and have no plans to do so in the foreseeable future. We continue to make improvements with respect to associate productivity. Wages grew only 2.9% for the quarter, compared to last year, well below the rate of sales growth. You’ve been hearing about our investments in systems and this is where we’re getting a payout now. We continue to roll out our staffing initiatives to additional areas of the store supported by our proprietary technology solutions developed over the last couple of years. We expect to see ongoing financial benefits from these initiatives into the future. In addition to this scheduling system, other customer oriented initiatives are improving overall customer experience in our stores. This was the sixth consecutive quarter our overall customer experience scores posted quarter over quarter improvements. Each of our fast, friendly, and clean scores improved compared to the previous quarter. Another metric we track monthly is our customer’s perception about the value that Wal-Mart provides. Our price value score with a half million plus customers surveyed each month was the highest in April since we started these surveys. We find that each of these customer experience metrics correlates to future sales performance, so I’m excited by the high marks our customers continue to give us. From our early read of the project impacts remodels and new stores, we are pleased with what we see. Sales are exceeding our expectations and outperforming the respective control groups. Customer experience scores in the converted stores are growing at twice the rate of those at control stores, and inventory improvements are five to six times higher in project impact stores. As part of our capital efficiency model, investment decisions are based on driving sales productivity and return on investment. That is why we continue to prioritize the allocation of capital for expansions, remodels, and other high return projects. Our save money, live better strategic framework continues to galvanize the organization by singularly defining what it is that we stand for, how we go to market, and our expectations for how our customers experience the brand. Indeed, our associates are aligned around our business framework now more than ever. We recently received the annual results of our field associate engagement surveys. Let me share with you some of these exciting results. Our field associate engagement scores for the current year improved to 69%, a 700 basis point improvement from last year’s survey. In just two years alone our field engagement scores have improved by 28% which is just remarkable and speaks largely to the character and talent of the leadership we have in place in the field. Most importantly, I want to thank all associates who remain focused on providing a fast, friendly, and clean shopping experience for our customers each day. So, what should you expect moving forward? Short term, we are focused on the challenges in the second quarter. One such challenge will be continued moderations to the rate of food inflation. While we believe our grocery business continues to outperform leading competitors and is benefiting from increased distribution of government assistance programs, grocery comp sales are being modestly impacted by a slowdown in inflation. As consumers have more disposable income as a result of moderating food inflation, we have seen that customers are spending these savings in Wal-Mart on more discretionary categories. In addition to inflation, comp sales in the second quarter will also face the headwind of cycling last year’s stimulus checks, which contributed to our higher sales comp for that quarter. We estimate the impact to this year’s second quarter comp sales to be between 100 and 200 basis points. Despite these second quarter difficult comparisons we expect comp sales for the 13 week period ending July 31st to be between flat and 3%. Customer experience is at the center of everything our leadership team is focused on. We are making every effort to ensure that customers continue to believe that when the economy recovers, Wal-Mart continues to be the best alternative for them to shop across multiple categories. Longer term, our team is focused on three key areas

[Doug McMillon:]

What a great time to be leading Wal-Mart International. In my first quarter as President and CEO, I’ve visited almost every market where we operate and I’ve been pleased to see our team’s commitment to our customers, especially in these trying economic times. I want to take this opportunity to thank our country teams and our management for their focus and dedication. My most recent trip was to Shenzhen, China where we held our annual President’s roundtable, an assembly of the Regional CEOs and country Presidents. During that roundtable, we had the opportunity to discuss both the short and long term aspects of our business. The consensus of our President’s is that this global economy is pressuring our customers no matter where they are. Given this environment, it’s clear that our immediate focus is to concentrate on three key areas

[Brian Cornell:]

I’ve been here for a month now and I’m very excited to be leading the Sam’s Club business. The warehouse club channel is a great channel to be in and we will continue to build on our strengths. During the past month, I’ve spent time in the clubs talking with our associates and I’m eager to work with the Sam’s team. I’m also excited to introduce some new members of the senior management team. In March, Ignacio Pérez, or Nacho as he is called, joined the team as Sam’s Club EVP of Operations. Nacho is the former president and CEO of Wal-Mart Central America. Nacho has worked for Wal-Mart for the past 21 years and is a seasoned executive and operator. He has held senior leadership roles in Wal-Mart Mexico, Argentina and Puerto Rico and he was also responsible for the start up of the highly successful Sam’s Club business in Mexico. His passion for associates, coupled with high performance expectations, has created strong results wherever he has served. You already know Linda Hefner as the EVP and general manager of the home business at Wal-Mart US. Starting on May 15th, Linda will lead merchandising for Sam’s as EVP of Merchandising. I’m very excited to have Linda on the team. She has made significant changes and improvements to the Wal-Mart home business, as seen whenever you walk into one of our Wal-Mart stores today. Under her leadership, the home team redefined the merchandising assortment by focusing on brands, quality, and by enhancing the in store presentation. Prior to joining Wal-Mart, Linda was executive vice president of global strategy and business development at Kraft Foods. She has also held senior roles in Sara Lee’s apparel division. Linda’s experience and success in a wide variety of merchandise categories will help us take Sam’s Club’s focus on quality and value to the next level. Moving forward, Sam’s will continue to be a member driven business, promoting member trust and loyalty through outstanding quality at an outstanding value. It’s a message I’ve heard from our associates and members in each club I visit. I’ve also heard that our Business members are under pressure from the economy. We are seeing more just in time shopping versus making advance purchasing. We are seeing more frequent trips and business owners shopping themselves versus sending an employee in order to save money. We know that our members need Sam’s value and quality more than ever before and our entire team is working hard to constantly deliver value and quality to our members. With Nacho’s focus on club operations and with Linda’s focus on quality and value, we will meet the needs of both our Business and Advantage members. We will deliver on our value and quality commitment for every member, every month, every day, every time they shop. I look forward to personally leading this effort. Now, let’s turn to the results for the first quarter. Sam’s Club’s sales for Q1 of fiscal 2010 were $11 billion, that’s a decrease of 1.4% when compared to the same period last year. The decline in sales was due to lower fuel sales associated primarily with declining fuel prices. In addition, Sam’s had one less selling day in the quarter versus last year’s leap year. Excluding fuel for the quarter, Sam’s would have had sales increases of 3.1%. Comp club sales, excluding all fuel sales for the 13 week period, increased by 4.2%. Including fuel, the comp club sales number was down 50 basis points. The average retail price per gallon of fuel at Sam’s Club decreased 40% for the first quarter compared to last year. Traffic was positive every month in the quarter, with Advantage traffic growing faster than Business. Business member average ticket increased, while Advantage member ticket declined slightly. Both ticket and traffic measurements exclude fuel. Strong categories during Q1 were primarily in the fresh food, dry grocery and consumable areas. We continue to see member spending focused on food and consumable categories. In fresh food, members continue to recognize the extreme value Sam’s offers. Our meat, produce, bread and bakery categories have consistently shown strong comp sales increases. Additionally, we have improved our management of production planning at the club level, this allows us to drive sales, increase turns, and decrease shrink on our fresh items. Discretionary categories continue to experience sales pressures. Big ticket items continue to be challenged, with categories such as furniture, jewelry, and electronics remaining areas where members are spending less. Office electronics, which includes laptops, was a notable exception, with strong comp sales for the quarter. Price increases on tobacco products, related to the federal excise tax increase on April 1st drove strong sales for the tobacco category. Gross margin as a percent of total sales, both including and excluding the impact of fuel, increased for the first quarter versus the same period last year. The increase is attributable to a change in our merchandise mix as compared to prior periods. Sam’s expenses on a percentage to sales basis for first quarter were up versus the same period in the prior year. The increase was due largely to the impact of declining fuel prices on total sales. Other factors included higher group health care costs, similar to those experienced by Wal-Mart, and utilities. The clubs did a great job with labor productivity for the quarter, with costs increasing below the rate of sales growth, excluding fuel. Our continuing effort related to effective scheduling has produced labor productivity improvements in our core business. Membership income was slightly down versus the prior year, mainly as a result of previous sign ups and renewal challenges that occurred in the period following our 2006 fee increases, with the residual impact being felt longer because we defer membership income recognition over a 12 month period. Additionally, we are seeing some pressure in our business add on memberships, which are additional paid memberships associated with a business membership. This is due to many small businesses facing cost cutting pressures and employee cutbacks. In other membership areas, both Advantage and Business memberships showed positive trends during the quarter. Our invoice comparison program for small business continues to show positive results, increasing sign ups and renewals. On the Advantage side, our value proposition and marketing efforts continue to drive sign ups and renewals. During the first weekend in April, we hosted our first Taste of Spring, in which member savings stations showed prospective members the potential savings of shopping with Sam’s. The events drove both incremental traffic and sign ups. Our membership and marketing teams will continue to drive new member offerings, as well as new ways of showing the value of being a Sam’s Club member. We’ll be kicking off a new membership campaign at the end of May, building on the success of our October program. Other income decreased this quarter compared to the prior year period. For the first quarter of fiscal 2010, operating income increased as a percentage of sales to 3.58% versus the 3.53% last year. On a dollar basis, operating income for the quarter was even with the prior year at $393 million. Ending inventory for the quarter was up 1% when compared to the prior year. Considering the company’s goal of growing inventory at or less than half of the rate of sales growth, we met that metric when fuel is excluded from the calculation. On May 6th, we announced the closure of two clubs, one in Plymouth, Mass. and one located in Willoughby Hills, Ohio. We are actively assisting as many of our impacted associates as possible to locate new positions at neighboring clubs or Wal-Mart facilities. We are also working with members to transfer as many of them as possible to other Sam’s Club locations. The impact of the closures on the quarter’s financial results was not material. We’re approaching the second quarter sales environment with caution, as we are coming up against last year’s economic stimulus checks. Last year we saw members use their stimulus payments to purchase discretionary items, but with lower discretionary spending this year, there will be continued pressure on these categories. Additionally, we anticipate certain categories that were highly inflationary last year to experience declining rates of inflation or even deflation over the next several quarters. Given those considerations, we expect comp club sales for the 13 week period ending July 31st to be between flat and 3%. We plan to stay focused on driving efficiencies and controlling club expenses, while maximizing our top line sales potential, through the quality and value of our merchandise. We will continue to focus on meeting our member’s needs in today’s challenging environment. To conclude, let me say that I am encouraged by what I see in our clubs, by the opportunities to continue to grow this business, and by the enthusiasm of our associates. I’m excited to be leading the Sam’s Club team. Now, I’ll turn it over to Tom.

[Tom Schoewe:]

Let me kick off my discussion with a quarterly “report card” on our five financial metrics. Our first couple of metrics suggest that we like operating income to grow faster then sales and property, plant and equipment. For the reasons that Eduardo, Doug, and Brian discussed earlier, we don’t have a plus in either of these columns. Next, we want to grow payables faster than inventories. We do have a good story here. Simply put, payables are down 1.7% and inventories are down 3.2% when compared to the same period last year. That leads me to our next objective, increasing inventory at less than half the rate of our sales growth. We have strong performance in inventory management thanks mainly to continued progress that Wal-Mart US is making. You also heard Doug’s commitment to improve International’s inventory performance. Given the process improvements currently under way in our operations, we anticipate continued good news on this front. The real takeaway here, operating management is doing a marvelous job of managing working capital. Now let’s look at corporate expenses. We want them to grow at a slower rate than sales, so we need to look at these expenses three ways