Costco 2002 Annual Report Download - page 4

Dear Costco Shareholder: December 6, 2002
Despite a fiscal year that began with the tragedy of September 11th, and an overall continued economic weakness with
declining consumer confidence throughout, Costco was able to achieve record sales and earnings in fiscal 2002, the 52 weeks
ended September 1, 2002. We are proud of the immediate and selfless actions taken by literally thousands of Costco employ-
ees—both in and around New York City and Washington, D.C., as well as throughout our company—to help in any way they
could on that most tragic day and during the many weeks that followed. We are also proud of how these same employees
pulled together throughout the fiscal year, enabling Costco to achieve record results.
During fiscal 2002, sales totaled $38 billion, an 11% increase over the prior year; and net income reached $700 million,
16% higher than earnings in fiscal 2001. Fiscal 2002 also witnessed continued expansion of our operations, with 29 new
warehouse openings in both new and existing markets. For the second year in a row, total capital expenditures exceeded
$1 billion. Included in these expenditures were over $150 million related to renovations and upgrades at existing locations
and the replacement of several Costco warehouses to completely new locations. Despite overall economic turmoil, and senior
management changes at several major retail competitors, we believe Costco ended fiscal 2002 in its strongest position ever—
poised to continue its growth in sales and earnings, as well as to strengthen its position as one of the premier retail companies
in operation today. One of the major hallmarks of our business is the extraordinary sales volume of our businesses, which
generate over $103 million in sales per unit worldwide ($114 million in U.S. Costco locations). To our knowledge this is the
highest sales performance of any retailer of significant size in the world. In addition, our comparable sales increase of 6% for
the fiscal year, in units open more than one year, was among the best performances in the retail industry.
As will be described in further detail below, Costco leveraged an 11% increase in sales to achieve a 16% increase in
earnings. This was accomplished by stronger year-over-year gross margins and membership fee percentages, which together
more than offset increased expense levels. While we would expect to continue to see slight improvement in our combined
gross margin and membership fee ratios in fiscal 2003 and beyond, we must be ever mindful that our competitive position in
the retail marketplace not be eroded. Be assured that it will not! We will continue to be the low cost provider of merchandise
and services in every market where we do business.
With regard to expenses, we constantly view expense control as both our greatest challenge and our greatest opportunity
in growing earnings in the coming years. Over the past two fiscal years, our expenses as a percent of sales have grown from
8.71% in fiscal 2000 to 9.41% in the year just ended. While this 70 basis point increase in expenses over the past two years
reflects our conscious decision to dramatically ramp-up our expansion efforts (61 new openings, including 45 “new market”
openings), it also reflects rising energy, healthcare and bank merchant costs. We realize we must be industrious and creative
in our efforts to drive down our expense ratios. To this end, our planned opening schedule of approximately 30 new ware-
houses in fiscal 2003 will be geared more towards opening “existing market” units than “new market” units, where higher
first year sales levels should help to better leverage expense levels at these locations. With regard to rising healthcare costs,
education and training on employee health and safety issues continue, underlining our goal of reducing costs while maintain-
ing what we believe to be the most comprehensive healthcare benefits among major retailers. We continue to analyze our
expense structure in depth, challenging expenses at every level throughout our company and bringing these cost savings to
the bottom line…hopefully by fiscal year-end 2003.
As mentioned earlier, in fiscal 2002 we continued our expansion focus into new markets. In fact, nearly two thirds of the
29 new locations in fiscal 2002 represented “new market” openings. We added three more warehouses in Texas to the seven
we opened there the prior year. Several new units were also opened in the Midwest, strengthening our position in that region.
These included openings in Michigan, Missouri, Minnesota, Indiana, Kansas and Illinois. New market openings also in-
cluded two in Puerto Rico and two in the Pittsburgh, Pennsylvania area. Openings in existing markets included new ware-
houses in California, Oregon, Nevada, Colorado, New York, North Carolina, Maryland, Virginia, and a new Business Center
in Arizona, as well as three additional openings in England. Our relocations in fiscal 2002 of six long-established warehouses
were highly successful, with each of these larger, better-located warehouses continuing to experience strong double-digit
sales increases over their previous sales volumes. Four relocations were completed in California, as well as one each in New
Jersey and Hawaii.
We believe that despite the current economic turbulence, there continue to be good opportunities to expand our oper-
ations and increase market share in fiscal 2003, especially in existing markets where we are well-known and well-established.
Of the approximately 30 projected openings in fiscal 2003, we will have opened 19 of these prior to calendar year-end, includ-
ing our third unit in Japan, four new locations in California, and additional locations in Indiana (2), Missouri, Illinois, Ohio,
Arizona, Massachusetts, and the United Kingdom, Canada and Mexico. In addition, in early December we opened a new
warehouse concept in Kirkland, Washington that we call “Costco Home,” featuring high-end furniture and accessories in a
100,000 square foot renovated warehouse building. We believe this furniture format has great potential in its own right, but
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