Costco 2004 Annual Report Download - page 17

Preopening Expenses
Preopening expenses totaled $30,451, or 0.07% of net sales, during fiscal 2004 compared to $36,643, or
0.09% of net sales, during fiscal 2003. This reduction was due to fewer warehouse openings. During fiscal 2004,
the Company opened 20 new warehouses compared to 29 new warehouses (including 5 relocations) during fiscal
2003. Pre-opening expenses also include costs related to remodels and expanded ancillary operations at existing
warehouses.
Provision for Impaired Assets and Closing Costs, net
The net provision for impaired assets and closing costs was $1,000 in fiscal 2004, compared to $19,500 in
fiscal 2003. The provision includes costs related to impairment of long-lived assets, future lease obligations of
warehouses that have been relocated to new facilities, and losses or gains resulting from the sale of real property.
The provision for fiscal 2004 included charges of $16,548 for warehouse closing expenses that were offset by
gains of $15,548 on the sale of real property. The provision for fiscal 2003 included charges of $11,836 for
warehouse closing expenses, $4,697 for impairment of long-lived assets and $2,967 for net losses on the sale of
real property. At August 29, 2004, the reserve for warehouse closing costs was $10,367, of which $9,184 related
to future lease obligations. This compares to a reserve for warehouse closing costs of $8,609 at August 31, 2003,
of which $7,833 related to future lease obligations.
Interest Expense
Interest expense totaled $36,651 in fiscal 2004, compared to $36,920 in fiscal 2003. Interest expense in both
fiscal 2004 and 2003 includes interest on the 3
1
⁄ 2 % Zero Coupon Notes, 7
1
⁄ 8 %and5
1
⁄ 2 % Senior Notes and on
balances outstanding under the Company’s bank credit facilities and promissory notes. The decrease was primar-
ily a result of the Company’s reduction in short-term borrowings, principally related to its foreign subsidiaries.
This decrease was substantially offset by increases in interest rates on the Senior Notes due to interest rate swap
agreements converting the interest rate from fixed to floating.
Interest Income and Other
Interest income and other totaled $51,627 in fiscal 2004, compared to $38,525 in fiscal 2003. The increase
primarily reflects greater interest earned on higher cash and cash equivalents balances and short-term invest-
ments. In addition, a reduction in the expense to record minority interest in the earnings of foreign subsidiaries
was reported in fiscal 2004 as the Company increased its ownership in Costco Wholesale UK Limited to 100%.
Provision for Income Taxes
The effective income tax rate on earnings was 37% in fiscal 2004 and 37.75% in fiscal 2003. The decrease
in the effective income tax rate is primarily attributable to lower statutory income tax rates for foreign operations
and one-time benefits associated with certain tax planning strategies.
Comparison of Fiscal 2003 (52 weeks) and Fiscal 2002 (52 weeks):
(dollars in thousands, except earnings per share)
Net Income
Net income for fiscal 2003 increased 3.0% to $721,000, or $1.53 per diluted share, from $699,983, or $1.48
per diluted share during fiscal year 2002.
Net Sales
Net sales increased 9.7% to $41,692,699 in fiscal 2003 from $37,993,093 in fiscal 2002. Approximately
55% of the increase was due to an increase in comparable warehouse sales, that is sales in warehouses open for at
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