Costco 2008 Annual Report Download - page 31

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2007 vs. 2006
Gross margin was $6.64 billion, or 10.52% of net sales in 2007, compared to $6.22 billion, or 10.55%
of net sales in 2006. Excluding the unusual items affecting net sales and gross margin in 2007,
adjusted gross margin as a percentage of adjusted net sales was 10.58%, or an increase of three
basis points as compared to 2006. This increase was primarily due to a 24 basis point increase in
certain merchandise departments, largely food and sundries, as well as smaller increases in certain
warehouse ancillary businesses, costco.com and our international operations, offset by a decrease in
our hardlines and softlines categories of approximately 15 basis points. In addition, increased
penetration of the Executive Membership two-percent reward program and increased spending by
Executive members negatively affected gross margin by six basis points.
Selling, General and Administrative Expenses
2008 2007 2006
Selling, general and administrative
expenses (SG&A) ................... $6,953,804 $6,273,096 $5,732,141
Unusual items ........................ — (46,815) —
SG&A, as adjusted .................... $6,953,804 $6,226,281 $5,732,141
SG&A as a percent of net sales ......... 9.80% 9.94% 9.72%
Adjusted SG&A as percent of adjusted net
sales ............................. 9.80% 9.80% 9.72%
2008 vs. 2007
SG&A totaled $6.95 billion, or 9.80% of net sales in 2008, compared to $6.27 billion, or 9.94% of net
sales in 2007. Excluding the unusual items affecting net sales and SG&A expenses in 2007, adjusted
SG&A as a percentage of adjusted net sales was 9.80% in 2007. Warehouse operating and central
administrative costs positively impacted adjusted SG&A comparisons, on a net basis, by approximately
seven basis points, primarily due to decreased payroll and benefits costs as a percent of adjusted net
sales. Stock-based compensation expense negatively impacted adjusted SG&A comparisons by three
basis points, primarily due to a higher closing stock price on the date that our October 2007 RSU grant
was valued as compared to previous grants. Additionally, we recorded a $15.9 million reserve in
connection with a litigation settlement and accrued approximately $9 million for compensation
adjustments we made to employees enrolled in our medical and dental plans related to a decision to
share a portion of the health plan’s savings that we achieved. These two items negatively impacted
adjusted SG&A comparisons by four basis points.
2007 vs. 2006
SG&A totaled $6.27 billion, or 9.94% of net sales in 2007, compared to $5.73 billion, or 9.72% of net
sales in 2006. Excluding the unusual items affecting net sales and SG&A expenses in 2007, adjusted
SG&A as a percentage of adjusted net sales was 9.80%, an increase of eight basis points. Of this
increase, three basis points were primarily due to an increase in stock-based compensation, and a net
five basis points were due to an increase in warehouse payroll and benefits costs. The payroll increase
was largely attributed to hourly rate increases that went into effect in March 2007 and a lower overall
comparable warehouse sales increase.
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