Costco 2003 Annual Report Download - page 6

All of these offerings augment our every-day exceptional mix of quality items, from paper goods to fine
jewelry. Providing our members the opportunity to purchase basic items at low cost so they can splurge on luxury
items that are value-priced is a big part of what makes Costco such an exciting place to shop. We continue to
develop new items for our high-value, private label, Kirkland Signature, as well as build relationships with new
merchandise vendors. Some of our new vendors this year are Crane and Co., See’s Candies, Sony electronics,
Nautica sportswear, Cuisinart, Black and Decker (DeWalt) tools, Jacob & Co. Watches, Bowflex, Schwinn Exer-
cise, Celestron Telescope, Head Ski Gloves, Kurt Adler, Fender Guitar, Gateway Computer and Krups household
appliances.
Of course, underlying Costco’s success are our 20+ million loyal members, representing 40+ million loyal
cardholders. Of these, 2.5 million are Executive Members, who pay $100 a year to utilize the many Executive
Member services the Company offers, as well as earn a 2% Executive Member reward on their qualified pur-
chases. Based on the success of the Executive Member program in the United States, we recently rolled out this
program in Canada. To date, we are very pleased with the Canadian program results. Evidencing the continued
value of the Costco membership, renewal rates are high for each member category and ran 86%, overall, in fiscal
2003.
Currently, the U.S. Executive Membership Program offers 17 services, including three services that were
added in 2003: home equity loans, roadside assistance and online investing. We are currently testing additional
services in fiscal year 2004 and would expect to roll out several of these over the next year.
While we are extremely proud of Costco’s achievements during Fiscal 2003, we want you to know that we
have many opportunities to improve our business, and we are not satisfied with our recent performance in
controlling expenses. Expense leverage continues to be our greatest challenge and, we believe, our greatest
opportunity.
While our fiscal 2003 sales and margins were fine, our operating expenses as a percent of sales continued to
climb, increasing from 9.41% in 2002 to 9.83% in 2003. For the past three fiscal years in the aggregate, our
operating expenses as a percent of sales are up 112 basis points. These figures are unacceptable, and we are
working hard to reverse this trend.
While sales and margins have been strong, we, like most companies, are dealing with escalating employee
health care costs and out-of-control workers’ compensation issues, particularly in California. Both of these fac-
tors have had a significant impact on our earnings. Some companies have chosen to pass these costs on to their
customers or to their employees, but we will not compromise the values that have made our Company great. We
prefer to find creative solutions to help us lower costs, while still having a positive impact on our earnings. We
are concentrating our energy in this area, challenging expenses at every level of our Company, and we are con-
fident that we can drive down our expense ratios and improve our profitability in the future, hopefully with visi-
ble results during the current fiscal year.
In terms of employee health care, we have designed new programs, which are currently being rolled out,
that call for our employees to participate more in their health care costs. We have also instituted a campaign to
teach them to be better consumers of health care. Even with these financial changes, our benefits programs are
still the best in our industry; and we intend to keep them that way. We have been and continue to be leaders in
workers’ compensation initiatives and legislation reform in California, and we will direct our attention to other
states, as needed, to help get these issues resolved in an equitable manner for all concerned. We have also made
changes that should enable us to better analyze and control our workers’ compensation costs. We are also hopeful
that legislative changes currently underway in California will help in getting these costs under control.
Utilizing our state-of-the-art depot system, we have recently instituted what we call “rapid receiving,” which
increases the efficiency and speed with which we can receive and stock dry goods in our buildings. We expect
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