Costco 2010 Annual Report Download - page 27

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 2010, 2009, and 2008 relate to
the 52-week years ended August 29, 2010, August 30, 2009, and August 31, 2008, respectively.
Certain percentages presented are calculated using actual results prior to rounding. Unless otherwise
noted, references to net income relate to net income attributable to Costco.
Key items for 2010 included:
• Net sales increased 9.1% from the prior year to $76,255, driven by a 7% increase in
comparable sales (sales in warehouses open for at least one year, including relocated
warehouses) and sales at the 13 new warehouses (14 opened and one closed due to
relocation) in 2010. Net sales were positively impacted by the year-over-year increase in the
price of gasoline and by the strengthening of certain foreign currency exchange rates;
• Membership fees increased 10.3% to $1,691; however, excluding the $27 charge recorded in
2009 related to a litigation settlement, membership fees increased 8.4%, due to new
membership sign-ups and increased penetration of the higher-fee Executive Membership
program;
• Gross margin (net sales less merchandise costs) as a percentage of net sales increased two
basis points over the prior year;
• Selling, general and administrative (SG&A) expenses as a percentage of net sales improved
10 basis points over the prior year;
• Net income increased 20% to $1,303, or $2.92 per diluted share, compared to $1,086, or
$2.47 per diluted share, in 2009;
• The Board of Directors approved an increase in the quarterly cash dividend from $0.18 to
$0.205 per share;
• We repurchased 9,943,000 shares of our common stock, at an average cost of $57.14 per
share, totaling approximately $568;
• The Board of Directors appointed W. Craig Jelinek as Costco’s President and Chief
Operating Officer and elected him a director. Jim Sinegal will continue as Chief Executive
Officer; and
• In May 2010, we announced the retirement of Dick DiCerchio, as our Senior Executive Vice
President and Chief Operating Officer, effective June 4, 2010.
We believe that the most important driver of increasing our profitability is sales growth, particularly
comparable sales growth. Comparable sales growth is achieved through increasing the frequency with
which our members shop and the amounts they spend on each visit. Sales comparisons can also be
particularly influenced by two factors that are beyond our control, including fluctuations in currency
exchange rates (with respect to the consolidation of the results of our international operations) and
changes in the cost of gasoline and associated competitive conditions (primarily impacting domestic
operations). The higher our comparable sales not associated with currency fluctuations the more we
can leverage certain of our selling, general and administrative expenses, reducing them as a
percentage of sales and enhancing profitability. Generating comparable sales growth is foremost a
question of making available to our members the right merchandise at the right prices, a skill that we
believe we have repeatedly demonstrated over the long term. Another substantial factor in sales
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