Costco 2007 Annual Report Download - page 26

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITON
AND RESULTS OF OPERATIONS
Overview
Our fiscal year ends on the Sunday closest to the end of August. Fiscal years 2007 and 2005 included
52 weeks. Fiscal year 2006 included 53 weeks, with the extra week included in the fiscal fourth quarter.
Key items for fiscal year 2007 included:
• Net sales in fiscal 2007 (52 weeks) increased 7.0% over fiscal 2006 (53 weeks), driven by an
increase in comparable sales (sales in warehouses open for at least one year) of 6% and the
opening of 30 new warehouses;
• Membership fees for fiscal 2007 increased 10.5%, to $1.31 billion, primarily due to the $5
increase in our annual membership fee in 2006 for our non-Executive members;
• Gross margin (net sales less merchandise costs) as a percentage of net sales decreased 3
basis points over the prior year;
• Selling, general and administrative (SG&A) expenses as a percentage of net sales increased
22 basis points over the prior year;
• Net income for fiscal 2007 was $1.08 billion, or $2.37 per diluted share, compared to
$1.10 billion, or $2.30 per diluted share, in fiscal 2006;
• On February 20, 2007, we issued $900 million of 5.3% Senior Notes due March 15, 2012
and $1.1 billion of 5.5% Senior Notes due March 15, 2017;
• The Board of Directors approved an increase in the quarterly cash dividend from $0.13 to
$0.145 per share in April 2007; and
• We repurchased 36.4 million shares of our common stock, expending approximately
$1.98 billion at an average cost of $54.39 per share.
Results of Operations (dollars in thousands, except per share and warehouse number data)
The following unusual items impacted fiscal 2007 results:
• Sales returns reserve: In connection with changes to our consumer electronics returns policy,
we completed a review of historical data of trends in sales returns, which indicated a longer
timeframe over which returns are received than was previously estimated. We revised our
estimate of our sales returns reserve to include the longer timeframe, as well as a lower
realization rate on certain returned items. The effect of the revisions to our estimated reserve
resulted in a decrease in net sales of $452.6 million and a charge to gross margin of
approximately $94.3 million.
• Employee tax consequences on stock options: In connection with the review of stock option
grants and guidance issued by the U.S. Internal Revenue Service on November 30, 2006,
the Compensation Committee of the Board of Directors approved a program intended to
protect approximately 1,000 employees who are United States taxpayers from certain
adverse tax consequences arising from that review. The program involved increasing the
exercise prices on certain stock options granted from 2000 to 2003 and, in turn, making
payments to employees in an amount approximately equal to the increase in the exercise
price. While we are still examining the availability of similar alternatives for employees
outside the United States, we recorded a charge in fiscal 2007 for the estimated amount to
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