Costco 2009 Annual Report Download - page 28

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in millions, except per share and warehouse number data)
Overview
Our fiscal year ends on the Sunday closest to August 31. References to 2009, 2008, and 2007 relate to
the 52-week years ended August 30, 2009, August 31, 2008, and September 2, 2007 respectively.
Key items for 2009 included:
• Net sales decreased 1.5% from the prior year to $69,889, attributable to a 4% decrease in
comparable sales (sales in warehouses open for at least one year, including relocated
warehouses), partially offset by the opening of 15 new warehouses (19 opened, two closed
due to relocation, and the closure of our two Costco Home locations) in 2009. Net sales were
significantly impacted by the year-over-year decrease in the price of gasoline and by certain
foreign exchange rates;
• Membership fees increased 1.8%, to $1,533, primarily due to new membership sign-ups at
warehouses opened in 2009, the continued benefit of membership sign-ups at warehouses
opened in 2008, and increased penetration of our higher-fee Executive Membership
program. Membership fees were negatively impacted by a $27 charge related to a proposed
litigation settlement concerning our membership renewal policy;
• Gross margin (net sales less merchandise costs) as a percentage of net sales increased 28
basis points over the prior year,
• Selling, general and administrative (SG&A) expenses as a percentage of net sales increased
58 basis points over the prior year;
• Net income decreased 15% to $1,086, or $2.47 per diluted share, in 2009 compared to
$1,283, or $2.89 per diluted share, in 2008;
• The Board of Directors approved an increase in the quarterly cash dividend from $0.16 to
$0.18 per share; and
• We repurchased 895,000 shares of our common stock, at an average cost of $63.84 per
share, totaling approximately $57.
As previously reported, 2007 was impacted by the following unusual items, the effects of which are
reflected in the table below:
• Sales returns reserve: We revised our estimate of our sales returns reserve to include a
longer timeframe for returns, as well as a lower realization rate on certain returned items.
• Employee tax consequences on stock options: We made payments to employees in
connection with changes in exercise prices designed to avoid adverse tax consequences for
employees and recorded a charge for the estimated amount to remedy adverse tax
consequences related to stock options held and previously exercised by employees outside
the United States.
• Excise tax refund: We received a refund related to 2002 through 2006, as a result of a
settlement with the U.S. Internal Revenue Service relating to excise taxes previously paid.
• Deferred membership: We analyzed the timing of recognition of membership fees, resulting
in a reduction to membership fee revenue and a corresponding increase to deferred
membership fees on our consolidated balance sheet.
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