Costco 2005 Annual Report Download

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YEAR ENDED AUGUST 28, 2005
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2005
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Table of contents

  • Page 1
    Annual Report 2005 2005 YEAR ENDED AUGUST 28, 2005

  • Page 2
    ... joint venture. CONTENTS Financial Highlights ...Letter to Shareholders ...Map of Warehouse Locations ...Business Overview ...Number of Warehouses/Ancillary Businesses ...Market for Costco Common Stock ...Dividend Policy ...Ten Year Operating and Financial Highlights ...Management's Discussion and...

  • Page 3
    ...,137 34,000 600 602 0 2001 2002 2003 2004 2005 At Fiscal Year End 0 2001 2002 2003 2004 Fiscal Year 2005 0 2001 2002 2003 2004 Fiscal Year 2005 Comparable Sales Growth 18 12% 17 10% 10% 16 Membership Gold Star Members 5.2 Business Members 5.050 5.0 16.233 4.810 4.8 14.984 15.018 Percent...

  • Page 4
    ...rate. Our Executive Membership category continues to expand and currently has 4.2 million members. We continue to add buildings in our successful markets, and without exception we find that our new locations help us grow our business and add significantly to our sales in the local area. When we open...

  • Page 5
    ... applications. Teaming our Ecommerce site with our warehouses, we now have the Costco Photo Center, accessible through costco.com, where members can upload their images online and pick up prints at their local warehouse in as little as an hour. This partnership helped our 1-Hour Photo sales increase...

  • Page 6
    ... Home, the Company's free-standing, high-end furniture warehouse business, opened its second facility this year in Tempe, Arizona. Opening day sales were the eighth largest first-day sales results in Costco history. Sales from the two buildings represent a 132% increase over 2004 sales, and profits...

  • Page 7
    ... our strong cash and cash flow positions, which can more than accommodate our planned expansion plans. We are in business not for the short term, but for the long haul. Our strategy aims at expanding our operations and increasing our sales and profits over the succeeding years. As our partners, you...

  • Page 8
    ... Ogden Orem St. George Salt Lake City Sandy VERMONT (1) Colchester VIRGINIA (14) Cranberry Harrisburg King of Prussia Chantilly Chesterfield Aurora Village Bellingham Burlington Clarkston Everett Federal Way Fife - Bus. Ctr. Issaquah Kennewick Kirkland Kirkland - Costco Home Lynnwood - Bus. Ctr...

  • Page 9
    ... cashing checks at the point of sale when they have presented dishonored checks to Costco. Costco's policy is generally to limit marketing and promotional expenses to new warehouse openings, occasional direct mail marketing to prospective new members and direct marketing programs to existing members...

  • Page 10
    ..., jewelry, housewares, media, home furnishings and small appliances) ...Other (including gas stations, pharmacy, food court, optical, one-hour photo, hearing aid and print shop) ... 31% 29% 16% 12% 12% 100% 31% 29% 16% 13% 11% 100% 30% 30% 16% 14% 10% 100% Costco has direct buying relationships...

  • Page 11
    ... fee of $100. The Executive Membership program offers members additional savings and benefits on various business and consumer services offered by Costco, such as merchant credit card processing, small business loans, auto and home insurance, long-distance telephone service, check printing, and...

  • Page 12
    ... boosting sales in certain stores, while home shopping and electronic commerce over the Internet is becoming increasingly popular. Regulation Certain state laws require that the Company apply minimum markups to its selling prices for specific goods, such as tobacco products and alcoholic beverages...

  • Page 13
    ...number of ancillary businesses, including the following as of December 31, 2005: ANCILLARY BUSINESSES United States Canada Other International Total Pharmacy ...Optical Dispensing Centers ...One-Hour Photo ...Food Court and Hot Dog Stands ...Hearing Aid Centers ...Copy Centers ...Print Shops ...Gas...

  • Page 14
    ... to pay dividends on a quarterly basis. EQUITY COMPENSATION PLANS Information related to the Company's equity compensation plans is incorporated herein by reference to the Proxy Statement. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of...

  • Page 15
    TEN YEAR OPERATING AND FINANCIAL HIGHLIGHTS (dollars in millions, except per share data) WAREHOUSES IN OPERATIONS Beginning of year ...Openings ...Closings ...End of year ...OPERATING RESULTS Revenue Net Sales ...Membership fees and other ...Total revenue ...Operating expenses Merchandise costs ......

  • Page 16
    2001 313 39 (7) 345 2000 292 25 (4) 313 1999 278 21 (7) 292 1998 261 18 (1) 278 1997 252 17 (8) 261 1996 240 20 (8) 252 $34,137 660 34,797 30,598 3,129 60 18 33,805 992 (32) 43 1,003 401 602 - $ 602 100.0% 1.9 101.9 89.6 9.2 0.2 - 99.0 2.9 (0.1) 0.1 2.9 1.1 1.8 - 1.8 $31,621 543 32,164 28,...

  • Page 17
    ...filed with the Securities and Exchange Commission. Executive Overview and Selected Consolidated Statements of Income Data (dollars in thousands, except earnings per share) Overview Costco operates membership warehouses based on the concept that offering members very low prices on a limited selection...

  • Page 18
    ...settlement of a transfer pricing dispute between the United States and Canada (covering the years 1996-2003); a cumulative pre-tax, non-cash charge to preopening expenses of $15,999 (approximately $.02 per diluted share) related to a correction to the Company's method of accounting for ground leases...

  • Page 19
    ... 2.04% of net sales, in fiscal 2004. This increase was primarily due to additional membership sign-ups at the 16 new warehouses opened in fiscal 2005, increased penetration of the Company's Executive membership and high overall member renewal rates consistent with recent years, currently 86%. Gross...

  • Page 20
    ...adjusted its method of accounting for leases (entered into over the past twenty years), primarily related to ground leases at certain warehouse locations that did not require rental payments during the period of construction. As a result, the Company recorded a cumulative pre-tax, non-cash charge of...

  • Page 21
    ... sign-ups at the 20 new warehouses opened in fiscal 2004; increased penetration of the Company's Executive membership, including the rollout of the program into Canada, which began in the first quarter of fiscal 2004; and high overall member renewal rates consistent with recent years, currently...

  • Page 22
    ... year-overyear by approximately 21 basis points, primarily due to increased expense leverage of warehouse payroll, benefits (primarily health care), utility and workers' compensation costs. During the latter half of fiscal 2004, the Company implemented changes to its employee healthcare plans...

  • Page 23
    ...income tax rates for foreign operations and one-time benefits associated with certain tax planning strategies. Liquidity and Capital Resources (dollars in thousands, except per share amounts) Cash Flows The Company's primary sources of liquidity are cash flows generated from warehouse operations and...

  • Page 24
    ... of expansion plans in its international operations, including the United Kingdom and Asia, along with other international markets. At present, the Company is planning to open three additional warehouses in the U.K during fiscal 2006. Costco Mexico plans to open two to three new warehouse clubs...

  • Page 25
    ...% equity interest in Costco Wholesale UK Limited for cash of $95,153, bringing Costco's ownership in Costco Wholesale UK Limited to 100%. Bank Credit Facilities and Commercial Paper Programs (all amounts stated in thousands of US dollars) The Company has a $500,000 commercial paper program supported...

  • Page 26
    ... the Company's 3 1⁄ 2% Zero Coupon Convertible Subordinated Notes were converted by note holders into 9,910,011 shares of common stock. Derivatives The Company has limited involvement with derivative financial instruments and uses them only to manage well-defined interest rate and foreign exchange...

  • Page 27
    ...000,000 of Costco common stock. Under the program, which contains no expiration date, the Company may repurchase shares at any time in the open market or in private transactions as market conditions warrant. Critical Accounting Policies The preparation of the Company's financial statements requires...

  • Page 28
    ...Insurance/Self Insurance Liabilities The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for workers' compensation, general liability, property damage, director and officers' liability, vehicle liability and employee health care benefits...

  • Page 29
    ... have a material impact on the Company's consolidated financial position, results of operations or cash flows. In December 2004, the FASB issued SFAS No. 123R, "Share-based Payments." SFAS 123R revises SFAS 123, "Accounting for Stock-Based Compensation," which the Company adopted as of the beginning...

  • Page 30
    ...debt can be expected to vary as a result of future business requirements, market conditions and other factors. As of August 28, 2005, the Company's fixed rate long-term debt includes its $415,246 principal amount at maturity Zero Coupon Subordinated Notes carried at $274,071 and additional notes and...

  • Page 31
    ... of three months to five years from the purchase date. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. As the majority of...

  • Page 32
    ... Our management, including the Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act, as of August 28, 2005. Based...

  • Page 33
    ...the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act...

  • Page 34
    ...the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act...

  • Page 35
    ... and our report dated November 9, 2005 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. Our report refers to the Company's change in method of accounting for cash consideration received from a vendor to conform...

  • Page 36
    ...of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of August 28, 2005 and August 29 2004, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for the 52 weeks ended August 28...

  • Page 37
    ... $15,092,548 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowings ...$ 54,356 $ 21,595 Accounts payable ...4,213,724 3,600,200 Accrued salaries and benefits ...1,025,181 904,209 Accrued sales and other taxes ...263,899 223,009 Deferred membership income ...500,558 453,881...

  • Page 38
    COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data) 52 Weeks Ended August 28, 2005 52 Weeks Ended August 29, 2004 52 Weeks Ended August 31, 2003 REVENUE Net sales ...Membership fees ...Total revenue ...OPERATING EXPENSES Merchandise costs ......

  • Page 39
    COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME For the 52 weeks ended August 28, 2005, August 29, 2004 and August 31, 2003 (in thousands) Common Stock Shares Amount Additional Paid-In Capital Other Accumulated Comprehensive Income/(Loss) ...

  • Page 40
    ... provided by operating activities: Depreciation, amortization and other non-cash items ...477,868 440,721 Accretion of discount on zero coupon notes ...11,855 18,421 Stock-based compensation ...67,937 36,508 Undistributed equity earnings in joint ventures ...(26,459) (23,517) Net loss/(gain) on sale...

  • Page 41
    ...and 2003 were 52-week years. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase and proceeds due from credit and debit card transactions with settlement terms of less than five days to be cash equivalents. Of the total...

  • Page 42
    ... Fiscal 2005 Unrealized Unrealized Gains Losses Recorded Basis Certificates of deposit ...U.S. government and agency securities ...Money market mutual funds ...Corporate notes and bonds ...Asset and mortgage backed securities ...Total short-term investments ... $ 43,719 562,370 49,372 696,267 52...

  • Page 43
    ... LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. The Company records an adjustment each quarter if necessary, for the expected annual effect of inflation and these estimates are adjusted to actual results determined at year-end...

  • Page 44
    ... which the checks were drawn. Insurance/Self Insurance Liabilities The Company uses a combination of insurance and self-insurance mechanisms to provide for workers' compensation, general liability, property damage, director and officers' liability, vehicle liability and employee health care benefits...

  • Page 45
    ... in the Costco Mexico joint venture, are translated at the exchange rate on the balance sheet date. Translation adjustments resulting from this process are charged or credited to other accumulated comprehensive income (loss). Revenue and expenses of the Company's consolidated foreign operations are...

  • Page 46
    ... to support warehouse operations. Marketing and Promotional Expenses Costco's policy is generally to limit marketing and promotional expenses to new warehouse openings, occasional direct mail marketing to prospective new members and direct mail marketing programs to existing members promoting...

  • Page 47
    ... value of the Company's financial instruments, including cash and cash equivalents, receivables and accounts payable approximate fair value due to their short-term nature or variable interest rates. Short-term investments classified as available for sale are recorded at market value with unrealized...

  • Page 48
    ...52 Weeks Ended August 31, 2003 Net income available to common stockholders used in basic net income per share ...Interest on convertible bonds, net of tax ...Net income available to common stockholders after assumed conversions of dilutive securities ...Weighted average number of common shares used...

  • Page 49
    ...no expiration date, the Company may repurchase shares at any time in the open market or in private transactions as market conditions warrant. Subsequent to the Company's fiscal 2005 year end and through October 28, 2005, the Company purchased an additional 2,247,000 shares at an average price of $45...

  • Page 50
    ... impact on its consolidated financial position, results of operations or cash flows. In December 2004, the FASB issued SFAS No. 123R, "Share-based Payments". SFAS 123R revises SFAS 123, "Accounting for Stock-Based Compensation," which the Company adopted as of the beginning of its fiscal 2003...

  • Page 51
    ... that are recorded directly to stockholders' equity. Comprehensive income was $1,204,987 for fiscal 2005, $976,517 for fiscal 2004 and $800,745 for fiscal 2003. Foreign currency translation adjustments and unrealized gains and losses on short-term investments are the primary components applied to...

  • Page 52
    Note 3-Debt Bank Credit Facilities and Commercial Paper Programs (all amounts stated in U.S. dollars) The Company has a $500,000 commercial paper program supported by a $150,000 bank credit facility ($300,000 at August 29, 2004) with a group of nine banks, which expires on November 15, 2005, and is ...

  • Page 53
    ...15, 2005 from its cash and cash equivalents balance. The interest rate swap agreement on the 7 1⁄ 8% Senior Notes also expired upon repayment of the underlying notes. In March 2002, the Company issued $300,000 of 5 1⁄ 2% Senior Notes due March 15, 2007. Interest is payable semi-annually on March...

  • Page 54
    ...2012. The Company, at its option, may redeem the Notes (at the discounted issue price plus accrued interest to date of redemption) any time on or after August 19, 2002. As of August 28, 2005, $329,163 in principal amount of the Zero Coupon Notes had been converted by note holders to shares of Costco...

  • Page 55
    ...(dollars in thousands, except per share data) (Continued) Note 4-Leases The Company leases land and/or warehouse buildings at 102 of the 433 warehouses open at August 28, 2005, and certain other office and distribution facilities under operating leases with remaining terms ranging from 1 to 42 years...

  • Page 56
    ... ...Expected dividend yield ... 4.28% 6.6 years 38% 1.11% 3.38% 6.2 years 44% 1.04% 3.30% 6.0 years 46% 0% Stock option transactions relating to the aggregate of the 1993 and 2002 plans are summarized below (shares in thousands): 2005 Shares Price(1) 2004 Shares Price(1) 2003 Shares Price...

  • Page 57
    ... on hours worked and years of service. The Company has a defined contribution plan for Canadian and United Kingdom employees and contributes a percentage of each employee's salary. The Company complies with government requirements related to retirement benefits for other international operations and...

  • Page 58
    ... rate in fiscal 2005 from fiscal 2004 is primarily attributable to a $54,155 income tax benefit resulting from the settlement of a transfer pricing dispute between the United States and Canada (covering the years 1996-2003) and a net tax benefit on unremitted foreign earnings of $20,592. The Company...

  • Page 59
    ... overtime pay. The Company is also a defendant in an action purportedly brought as a class action on behalf of present and former hourly employees in California, in which plaintiffs allege that Costco did not properly compensate and record hours worked by employees, and failed to provide meal and...

  • Page 60
    ... the table below, as it is accounted for under the equity method and its operations are not consolidated in the Company's financial statements. United States Operations Canadian Operations Other International Operations Total Year Ended August 28, 2005 Total revenue ...$43,051,603 Operating income...

  • Page 61
    ... ...Dividends per share ...$ $ $ (a) Includes a cumulative pre-tax, non-cash charge of $15,999 (approximately $.02 per diluted share) related to a correction of the Company's method of accounting for ground leases (entered into over the past twenty years) that did not require rental payments...

  • Page 62
    ... used in calculation (000's) Basic ...Diluted ...Dividends per share ...$ Note 11-Subsequent Event $ $ $ $ Subsequent to year end the Company experienced some business interruption in its Florida locations due to hurricane damage. Warehouses sustained only minor structural damage, although due...

  • Page 63
    ... Vice President, Pharmacy Roger A. Campbell Senior Vice President, General Manager- Southeast Region Richard C. Chavez Senior Vice President, Costco Wholesale Industries & Business Development Richard D. DiCerchio Senior Executive Vice President, COO- Global Operations, Distribution & Construction...

  • Page 64
    ... Division Alan Bubitz GMM-Food Services & Food Court Debbie Cain GMM-Foods-Northwest Region Deborah Calhoun GMM-Foods-San Diego Region Patrick Callans Member Services Richard Chang Country Manager-Taiwan Jeff Cole U.S. Gas Purchasing & Operations Victor Curtis Pharmacy Richard Delie GMM-Corporate...

  • Page 65
    ... James Klauer GMM-Corporate Non-Foods Gary Kotzen GMM-Corporate Foods Paul Latham Marketing, Membership & Costco Travel Robert Leuck Operations-Northeast Region Gerry Liben GMM-Ancillaries-Canadian Division Phil Lind Business Centers Steve Mantanona GMM-Merchandising-Mexico Tracy Mauldin-Avery...

  • Page 66
    ... be provided to any shareholder upon written request directed to Investor Relations, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027. Internet users can access recent sales and earnings releases, the annual report and SEC filings, as well as our Costco Online web site, at...

  • Page 67
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