Costco 2010 Annual Report Download - page 28

growth is the health of the economies in which we do business, especially the United States. Adverse
economic conditions negatively impacted spending by our customers during 2009 and 2010, and that
negative impact may continue. Sales growth and our gross margin are also impacted by our
competition, which is vigorous and widespread, including other warehouse clubs, discount,
department, drug, variety and specialty stores, and supermarkets, as well as internet retailers. While
we cannot control or reliably predict general economic health or changes in competition, we believe
that we have been successful historically in adapting our business to these changes, such as through
adjustments to our pricing and to our merchandise mix, including increasing the penetration of our
private label items. Our philosophy is not to focus in the short term on maximizing prices that our
members can be charged but to maintain what we believe is a perception among our members of our
“pricing authority”—consistently providing the most competitive values. This may cause us, for
example, to absorb increases in merchandise costs at certain times rather than immediately passing
them along to our members, negatively impacting gross margin.
We also achieve sales growth by opening new warehouses and relocating existing warehouses to
larger facilities. As our warehouse base grows and available and desirable potential sites become
more difficult to secure, square footage growth becomes a comparatively less substantial component
of growth, but the negative aspects of such growth (including lower initial operating profitability relative
to existing warehouses and cannibalization of sales at existing warehouse when openings occur in
existing markets) are ameliorated. Our rate of square footage growth is higher in foreign markets, due
to the smaller base in those markets, and we expect that to continue.
Our financial performance also depends heavily on our ability to control costs. While we believe that
we have achieved successes in this area historically, some significant costs are partially outside our
control, most particularly health care expenses. With respect to expenses relating to the compensation
of our employees, our philosophy is not to seek to minimize the wages and benefits that they earn.
Rather, we believe that achieving our longer-term objectives of reducing turnover and enhancing
employee satisfaction requires maintaining compensation levels that are better than the industry
average for much of our workforce. This may cause us, for example, to absorb costs that other
employers might seek to pass through to their workforces. Because our business is operated on very
low margins, modest changes in various items in the income statement, particularly gross margin and
selling, general and administrative expenses, can have substantial impacts on net income.
Results of Operations
Net Sales
2010 2009 2008
Net sales .................................... $76,255 $69,889 $70,977
Net sales increase (decrease) .................. 9.1% (1.5%) 12.5%
Increase (decrease) in comparable sales ......... 7% (4%) 8%
Warehouse openings, net ...................... 13 15 24
2010 vs. 2009
Net Sales
Net sales increased 9.1% during 2010 compared to 2009. The $6,366 increase was comprised of a
$4,871 increase in comparable sales and the remainder primarily from sales at new warehouses
opened during 2010 and 2009.
Foreign currencies, particularly in Canada, Korea, and Japan, strengthened against the U.S. dollar,
which positively impacted net sales during 2010 by approximately $1,570 (225 basis points). Net sales
were also positively impacted by gasoline price inflation during 2010 by approximately $895 (128 basis
points), which resulted from a 17% increase in the average sales price per gallon.
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