Costco 2001 Annual Report Download - page 4

December 13, 2001
Dear Costco Shareholder:
We had many things to keep us busy during the past year, and Costco was able to achieve several significant
results despite the challenges of a weakened economy, both domestically and abroad; currency dilution in all six
non-U.S. countries in which we operate; and significant costs related to our major ramp-up in warehouse club
expansion. Some of the things that we are proud of this past year include: record sales of over $34 billion,
representing an eight percent increase over the prior year’s 53 weeks of sales; record expansion of 39 warehouse
openings, including seven relocations, six openings in existing markets, and 26 openings in a number of new
markets; the consolidation of our Canadian administrative functions to a new Ottawa office; and the celebration
of our 25th year of operations since our founding of the membership warehouse club industry in San Diego in
1976. We, of course, are not proud that our fiscal 2001 earnings were below our original operating budget, and
5% below earnings of the prior fiscal year; however, we firmly believe that our Company is strong and enters the
new fiscal year very well positioned for earnings growth, both in fiscal 2002 and beyond.
In terms of expansion, fiscal 2001 represented the largest financial commitment to growth in Costco’s
corporate history. Nearly $1.5 billion was expended during the fiscal year—including over $1 billion for new
warehouses and relocations; and over $150 million on remodeling efforts to continually upgrade and expand our
existing base of more than 300 warehouses. Of course this rapid expansion required that we strengthen our
support facilities, and we spent approximately $200 million on expanding our depot (‘‘cross-dock’’) operations.
New market openings in fiscal year 2001 included one warehouse in the greater Kansas City market, as well as
one in St. Peters, Missouri; one in Minneapolis, Minnesota; seven warehouses in Texas, in the Dallas/Ft. Worth,
Houston, and Austin markets; two units in North Carolina; our fifth Chicago unit; and one each in Charleston,
South Carolina; Huntsville, Alabama; and Tampa and Jacksonville, Florida. Expansion plans for fiscal 2002
include three openings in Puerto Rico (two of which are now open); two additional units in both Kansas and
North Carolina; two warehouses in the Pittsburgh, Pennsylvania market (one of which is open); two locations in
San Antonio, Texas (one of which is open); three more in the United Kingdom; as well as infills in many existing
markets, for a total of 45 new warehouses—including eight planned relocations of existing warehouses to bigger
and better-located facilities. We believe we are well positioned to expand our operations and increase market
share, given our competitive advantage and our strong financial position, despite the current turbulent economic
conditions. And we feel that the value of the Costco membership and the quality of goods and services we
provide our members are best evidenced by our 86% membership renewal rate, the highest rate of membership
renewal in our Company’s history, and the fact that despite heavy infilling in existing markets our warehouses
that have been open for more than a year continue to improve. Comparable sales for last year grew by 4%,
which is significant considering the average Costco warehouse does over $100 million in annual sales.
In addition to actual physical expansion of our operations during fiscal 2001, considerable resources of both
personnel and dollars were dedicated to activities that both strengthen our position with our members and
distinguish us from the competition. On the merchandising front, new initiatives included the U.S. rollout of our
Special Order Kiosk program, whereby we are able to offer our members, on a special-order basis, up to 40%
savings on ‘‘big-ticket’’ items, such as Kohler and Grohe bathroom fixtures, Sealy mattresses, high performance
tires, brand name furniture, and hundreds of additional products. We continued the rollout of our ancillary
departments, such as pharmacy and optical shops and gasoline stations; introduced several new Kirkland
Signature items, such as clothing items, baby formula, health products, and frozen food and delicatessen items,
whereby additional savings on quality merchandise is offered to our members; and added several important new
merchandise vendors including Titleist, Levi, Thomasville, Elizabeth Arden, and Sony computers.
Outside of merchandising, we have seen continued expansion in our e-commerce business, including the
introduction of a new business-to-business (B2B) e-commerce offering to our Business Members. Our Executive
Membership Program achieved our fiscal year target of having one million Executive Members (each paying
Costco a $100 annual membership fee) by fiscal year end. And as we commence fiscal 2002, Executive Member
sign-ups (both new and through conversions) have averaged more than 10,000 per week during the first twelve
weeks of this new fiscal year. Importantly, the number of additional services being offered under our Executive
Membership Program continues to increase. Finally, our partnership with American Express, and the continuing
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