Costco 2005 Annual Report Download - page 20

which negatively impacted SG&A as a percentage of net sales by five basis points and an increase in stock-based
compensation costs approximating six basis points year-over-year.
Preopening Expenses
Preopening expenses totaled $53,230, or 0.10% of net sales, during fiscal 2005 compared to $30,451, or
0.07% of net sales, during fiscal 2004. During the second quarter of fiscal 2005, in response to the Securities and
Exchange Commission’s February 7, 2005 letter related to leases, the Company adjusted its method of account-
ing 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 re-
corded a cumulative pre-tax, non-cash charge of $15,999 to preopening expense in the second quarter of fiscal
2005 to effect this accounting adjustment. Prior periods’ financial results have not been restated due to the imma-
teriality of this amount to the consolidated financial statements. Twenty-one warehouses (including five re-
locations) were opened in fiscal 2005 compared to the opening of 20 warehouses in fiscal 2004. 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 $16,393 in fiscal 2005, compared to $1,000 in
fiscal 2004. The provision includes costs related to impairment of long-lived assets, future lease obligations of
warehouses that have been relocated to new facilities, and any losses or gains resulting from the sale of real
property. The provision for fiscal 2005 included charges of $3,893 for impairment of long-lived assets, $11,619
for warehouse closing expenses and $881 for net losses on 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.
At August 28, 2005, the reserve for warehouse closing costs was $9,556, of which $9,118 related to future
lease obligations. This compares to a reserve for warehouse closing costs of $10,367 at August 29, 2004, of
which $9,184 related to future lease obligations.
Interest Expense
Interest expense totaled $34,437 in fiscal 2005, compared to $36,651 in fiscal 2004. Interest expense in both
fiscal 2005 and 2004 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 a decrease in interest on the Company’s 3
1
⁄ 2 % Zero Coupon Notes as note holders converted ap-
proximately $280,811 in principle amount of the Notes into common stock during fiscal 2005. Additionally,
capitalized interest increased year-over-year as interest rates and construction costs increased in fiscal 2005 over
fiscal 2004. These decreases were partially offset by increases in interest on the Senior Notes as these fixed rate
instruments were swapped into variable rate debt in November 2001 and March 2002, which was mitigated by
the fact that the 7
1
⁄ 8 % Senior Notes matured and were repaid on June 15, 2005.
Interest Income and Other
Interest income and other totaled $109,096 in fiscal 2005, compared to $51,627 in fiscal 2004. The increase
primarily reflects increased interest income resulting from higher cash and cash equivalents balances and short-
term investments on hand throughout fiscal 2005, as well as higher interest rates earned on the balances as com-
pared to fiscal 2004.
Provision for Income Taxes
The effective income tax rate on earnings was 31.4% in fiscal 2005 and 37% in fiscal 2004. The decrease in
the effective income tax rate is attributable to a one-time $54,155 income tax benefit resulting primarily from the
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