Costco 2006 Annual Report Download - page 25

sign-ups at the 16 new warehouses opened in fiscal 2005, increased penetration of our Executive
Membership program and a high overall member renewal rate of 86%.
Gross Margin
Fiscal 2006 Fiscal 2005 Fiscal 2004
Gross margin ........................ $6,217,683 $5,532,109 $5,056,611
Gross margin increase ................. 12.4% 9.4% 13.4%
Gross margin as a percent of net sales . . . 10.55% 10.66% 10.73%
2006 vs. 2005
Gross margin was $6.22 billion in fiscal 2006 or 10.55% of net sales, compared to $5.53 billion or
10.66% of net sales in fiscal 2006. This eleven basis point decrease reflected increased penetration of
the Executive Membership two-percent reward program and increased spending by executive
members, which decreased gross margin by ten basis points. Additionally, a decrease of four basis
points in gross margin in our merchandise departments and warehouse ancillary businesses was
primarily due to changes in the sales mix, with higher sales penetration of lower margin departments
and slightly lower overall gross margins in our hardlines and softlines categories. These decreases
were partially offset by a three basis point improvement due to the absence of a charge to inventories
following the last-in, first-out (LIFO) method.
2005 vs. 2004
Gross margin increased 9.4% to $5.53 billion, or 10.66% of net sales, in fiscal 2005 from $5.06 billion, or
10.73% of net sales in fiscal 2004. This seven basis point decrease in gross margin as a percentage of
net sales reflected a decrease of three basis points in gross margin in our merchandise departments. The
three basis point decrease in merchandising is largely due to changes in the sales mix, with higher
penetration of lower margin departments. This effect was offset by gross margin gains in most of our
merchandise departments, as well as our international operations. Gross margin as a percentage of net
sales was positively impacted by five basis points due to the implementation of EITF 03-10, whereby net
sales and merchandise costs were reduced equally. The gross margin percentage was reduced by ten
basis points due to the increased penetration of the Executive Member two-percent reward program,
increased spending by Executive members and the resulting increases in the related costs.
The gross margin figures reflect accounting for most U.S. merchandise inventories on the LIFO
method. Fiscal 2005 included a $13.0 million LIFO charge (increase in merchandise costs), while fiscal
2004 included a $6.0 million LIFO charge. The impact of the LIFO adjustment on a year-over-year
basis negatively impacted gross margin, as a percentage of sales, by one additional basis point.
Selling, General and Administrative Expenses
Fiscal 2006 Fiscal 2005 Fiscal 2004
Selling, general and administrative expense . . $5,732,141 $5,061,339 $4,600,792
Selling, general and administrative expense as
a percent of net sales ................... 9.72% 9.76% 9.76%
2006 vs. 2005
Selling, general and administrative (SG&A) expenses were $5.73 billion, or 9.72% of net sales in fiscal
2006, compared to $5.06 billion, or 9.76% of net sales in fiscal 2005. Improved warehouse and central
operating costs positively impacted SG&A by approximately nine basis points, primarily due to
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