Costco 2009 Annual Report Download - page 32

the Executive Membership two-percent reward program negatively affected gross margin by six basis
points. In addition, gross margin was favorably impacted by nine basis points due to reversing the $32
LIFO reserve established in the prior year as we experienced net deflation, year-over-year, in the cost
of our merchandise inventories.
Foreign currencies, particularly in Canada, the United Kingdom and Korea, weakened against the U.S.
dollar, which negatively impacted gross margin for 2009 by approximately $258.
2008 vs. 2007
Gross margin, as a percent of net sales, increased one basis point compared to 2007. Excluding the
unusual items affecting net sales and gross margin in 2007, adjusted gross margin as a percent of
adjusted net sales decreased five basis points in 2008 as compared to 2007. This decrease was
largely due to a net 12 basis point decrease in our warehouse ancillary businesses, particularly in
one-hour photo, tire shop and food services, partially offset by an increase in our gasoline business; a
$32, or five basis point LIFO charge, resulting from price increases in certain food items and gasoline;
and a three basis point decrease resulting from the increased penetration of the Executive Membership
two-percent reward program and increased spending by Executive members. These decreases were
partially offset by a net 15 basis point increase from our merchandise departments, particularly fresh
foods, food and sundries, Costco Online and our international operations, partially offset by a decrease
in softlines.
Selling, General and Administrative Expenses
2009 2008 2007
Selling, general and administrative expenses ......... $7,252 $6,954 $6,273
Unusual items ................................... — — (47)
SG&A, as adjusted ............................... $7,252 $6,954 $6,226
SG&A as a percent of net sales .................... 10.38% 9.80% 9.94%
Adjusted SG&A as percent of adjusted net sales ...... 10.38% 9.80% 9.80%
2009 vs. 2008
SG&A expenses, as a percent of net sales, increased 58 basis points compared to 2008. Increased
warehouse operating and central administrative costs, as a percent of net sales, negatively impacted
SG&A by approximately 56 basis points, resulting primarily from lower sales levels and higher
employee health care costs. Higher stock-based compensation expense had a negative impact of one
basis point. In addition, we recorded an adjustment to the net realizable value of the cash surrender
value of employee life insurance contracts, which negatively impacted SG&A, as a percent of net
sales, by two basis points. The net realizable value of the insurance contracts is largely based on
changes in investment assets underlying the policies and is subject to conditions generally affecting
equity and debt markets. In 2008, we recorded a $16 reserve in connection with a legal settlement,
which positively impacted the comparison to current year’s SG&A expense, as a percent of net sales,
by two basis points.
SG&A expenses, as a percent of net sales, for 2009 were adversely impacted by the decrease in the
price of gasoline, as it produced a decline in sales dollars without a comparative reduction in labor or
other administrative costs. Foreign currencies, particularly in Canada, the United Kingdom, and Korea,
weakened against the U.S. dollar, which positively impacted SG&A for 2009 by approximately $217.
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