Costco 2009 Annual Report Download - page 6

unique in retail; and we attempt to do this with each and every item we carry. At Costco we are
dedicated to working both sides of the value equation: increase quality, and whenever possible reduce
the price to our members. We accomplish this through successful partnerships with many of the
world’s leading corporations, and continually focus on developing new relationships with suppliers of
high quality merchandise. The current economic climate has helped us establish beginning
relationships with some exciting new suppliers that you will find introduced this winter and spring. We
also provide value to Costco members by developing our private label Kirkland Signature products,
where we have been able to maintain or enhance quality, build special product sizes and pallet
configurations, while offering lower prices and becoming even more competitive in the marketplace.
Our ancillary businesses, which include pharmacy, optical, hearing-aid, one-hour photo, food courts
and gas stations, continue to offer value to our members. Our dollar-fifty hot dog and soda is
legendary, and our pharmacies continue to be acclaimed for low prescription prices and a member-
friendly approach, resulting in strong pharmacy sales increases in both prescription and
over-the-counter drugs in fiscal 2009. We also opened new central prescription fill centers in Northern
and Southern California this past year, and now service more than 175 of our warehouses, reducing
the cost of a prescription renewal by almost half. Competition in this area remains keen and requires
us to execute creatively and efficiently.
Sales were up in every ancillary department except one-hour photo (due to increased usage of digital
cameras) and gasoline (due to significant decreases in gas prices). But while gas sales dollars were
down, gallons sold were up, as were profits. Despite a very turbulent market, we sold more than $5
billion worth of gasoline in fiscal 2009. Adding additional value to our gas stations are our
environmentally friendly, state-of-the-art car washes. We operated two in fiscal 2009 – in Seattle,
Washington and Poway, California, and this fall we opened six more – one in Scottsdale, Arizona and
five in California – in Lancaster, Glendale, Victorville, Oxnard, and South San Francisco. We have
plans to add more car washes in the upcoming year.
While we face many challenges, there are a lot of things going right at Costco. We had the best
inventory shrink results in our Company’s history in fiscal 2009 – below .15% of sales. The change in
our member returns policy for certain electronics in mid-year 2007 (concurrent with introducing our
concierge program and extended warranty) continues to help bottom line results, with reduced returns
and lower cost of disposed products. A similar policy change in Canada in mid-2008 improved their
operations, as well. Importantly, we believe we have maintained member satisfaction through this
transition.
Another challenge we are dealing with is an increase in selling, general and administrative (SG&A)
expenses as a percent of sales. These expenses went up again in 2009, primarily due to rising costs
(particularly in health care benefits) and our lower sales base. We are not satisfied with this
performance and will continue to emphasize cost controls and expense reduction in all areas of our
business.
We spent a relatively small amount (less than $100 million) to buy back Costco stock in fiscal 2009,
compared with the nearly $900 million expended in fiscal 2008 and the $1.9 billion we spent to buy
back stock in fiscal 2007. Since we began our buy-back program in June 2005, we have repurchased
nearly 17% of our outstanding shares. We increased our quarterly cash dividends by 12
1
⁄ 2 % in fiscal
2009 – from $.16 to $.18, paying out about $300 million annually in dividends.
As Costco’s founders, we have always maintained that we are in business for the long haul, and we
believe that our strong emphasis on fiscal responsibility, coupled with operating efficiencies and
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