Costco 2004 Annual Report Download - page 4

December 10, 2004
Dear Costco Shareholders:
Fiscal 2004 was an exciting year for Costco, where we were able to show solid growth, not only in our mer-
chandising and sales efforts, but also substantial progress in operational controls, which when combined, resulted
in an improved bottom line. After three years of rapid expansion into many new markets; a rising cost structure,
associated not only with this expansion, but also with highly inflationary healthcare and workers’ compensation
expenses; and earnings growth of just under 5% per year during that period, we are pleased to report that fiscal
2004 was a banner year for Costco, highlighted by record sales and earnings! Most of the Company’s fiscal 2004
financial goals were met or exceeded; and in addition to record sales and profits, we grew and strengthened our
membership base; leveraged our strong sales results to reduce our operating expense percentages; expanded our
operations worldwide with 23 new warehouse openings; and declared our first quarterly cash dividend. We ach-
ieved these results by focusing on what we do best—fulfilling our corporate mission and sticking to our game
plan.
Our 2004 fiscal year ended August 29th, with net sales of $47.1 billion, an increase of 13% over 2003’s
$41.7 billion. On a comparable warehouse basis, comparing sales of buildings that had been open at least a year,
our sales were up 10% in 2004, double our 2003 increase of 5%. We also increased our gross margin in 2004,
bringing it up to 10.72%, from 10.69% in 2003. Equally important, after four years of increasing operating ex-
pense percentages, we reduced our expense ratio from 9.83% in 2003 to 9.75% in 2004, an improvement of eight
basis points as a percentage of sales. These are trends that we hope will continue.
Costco is now the fifth largest retailer in the United States and the 11th largest in the world, standing at
number 29 in the Fortune 500. We finished fiscal 2004 with 441 warehouses operating in 36 U.S. states, Puerto
Rico and seven countries. Typically, our per unit sales are nearly double those of our nearest competitor. In fiscal
2004, our average annual sales per warehouse were $115 million, up from $105 million in 2003. For U.S. build-
ings, the 2004 average was $121 million. We are committed to continue driving higher levels of sales by doing
what we do best—being the most innovative merchant and providing our members the best merchandise and
services at the lowest overall prices.
Our ongoing goal of increasing shareholder value is accomplished by conscientiously living our mission
statement and code of ethics each and every day… To bring the highest quality goods and services to market at
the lowest possible prices… and to obey the law, take care of our members, take care of our employees, respect
our suppliers and reward our shareholders.
As Costco’s founders, we take personal pride in the highly ethical way Costco conducts business—day in
and day out. Throughout our 21 years in business, we have come to be viewed as the Company that has achieved
unquestioned “pricing and value authority”—a position we have earned and that we value. We assure you that
we will continue to work hard to maintain that reputation. Our priorities demand that we continue to delight our
members every day. We want each shopping experience to be the best in terms of quality, value and service—
and we want it to be fun. We strive to keep an undercurrent of excitement in our buildings, where our members
can shop with the anticipation of finding unexpected treasures, while purchasing their everyday needs with the
assurance they have received the best value—price and quality—available. This past year, we increased our staff-
ing at the front-end registers, expediting the checkout process and enhancing our members’ overall shopping
experience, leading, we believe, to more frequent shops and higher sales with minimal increases in expense.
We continued our expansion in fiscal 2004, opening 23 new warehouses, including three new warehouses in
our Mexico joint venture. Most of these new locations were added to existing markets, improving our accessi-
bility and service to our members. Experience has taught us that our strong markets can successfully support
many additional Costco warehouses. In fact, our results consistently show that existing locations profit from
“in-filling,” bringing us a significantly higher return on investment in a shorter period of time than is common in
new markets. Accordingly, we will increasingly tailor our growth plans to reflect a majority of new Costco build-
ings in existing markets, most likely resulting in more than two-thirds of our openings being located in existing
“in-fill” markets, rather than new markets.
2