Costco 1998 Annual Report Download - page 13

MERRILL CORPORATION NETWORK COMPOSITION SYSTEM BSANDFO // 1-DEC-98 23:38 DISK004:[98SEA7.98SEA2097]DM2097A.;7
IMAGES:[PAGER.PSTYLES]MRLL.BST;4 pag$fmt:mrll.fmt Free: 50D*/ 120D Foot: 0D/ 0D VJ R Seq: 2 Clr: 0
COSTCO COMPANIES A/R (Y/E 8-31-98) Proj: P1826SEA98 Job: 98SEA2097 File: DM2097A.;7
Merrill/Seattle [phone] Page Dim: 8.250N X 10.750NCopy Dim: 38. X 54.3
cumulative effect of the accounting change as of the beginning of fiscal 1999 and assuming that member-
ship fee income is recognized ratably over the one year life of the membership. This charge is not expected
to have a material effect on the Company’s financial condition, cash flows or ongoing operating results.
Gross margin (defined as net sales minus merchandise costs) increased 13% to $2,450,689, or 10.28%
of net sales, in fiscal 1998 from $2,169,633, or 10.10% of net sales, in fiscal 1997. Gross margin as a
percentage of net sales increased due to increased sales penetration of certain higher gross margin
ancillary businesses, the expanded use of the Company’s depot facilities, and improved performance of the
Company’s international operations. The gross margin figures reflect accounting for most U.S. merchan-
dise inventories on the last-in, first-out (LIFO) method. For both fiscal 1998 and 1997 there was no LIFO
charge due to the use of the LIFO method compared to the first-in, first-out (FIFO) method.
Selling, general and administrative expenses as a percent of net sales decreased to 8.69% during fiscal
1998 from 8.74% during fiscal 1997, primarily reflecting the increase in comparable warehouse sales noted
above, and a year-over-year improvement in the Company’s core warehouse operations and Central and
Regional administrative offices, which were partially offset by higher expenses associated with interna-
tional expansion and certain ancillary businesses.
Preopening expenses totaled $27,010, or 0.11% of net sales, during fiscal 1998 and $27,448, or 0.13%
of net sales, during fiscal 1997. During fiscal 1998, the Company opened 16 new warehouses (in addition,
two warehouses were acquired during fiscal 1998 as part of the formation of the Korean joint venture)
compared to 17 new warehouses during fiscal 1997.
The provision for impaired assets and warehouse closing costs was $6,000 in fiscal 1998 compared to
$75,000 in fiscal 1997. The fiscal 1997 provision included a $65,000 impairment charge relating to the
adoption of SFAS 121 and $10,000 for warehouse closing costs. The provision for warehouse closing costs
includes estimated closing costs for certain warehouses, which were or were in the process of being
replaced by new warehouses.
Interest expense totaled $47,535 in fiscal 1998 and $76,281 in fiscal 1997. The decrease in interest
expense is primarily related to the call for redemption during fiscal 1997 of three convertible subordinated
debenture issues. Both the Company’s 63⁄4% ($285,100 principal amount), and 51⁄2% ($179,300 principal
amount) debentures were called for redemption in the second quarter of fiscal 1997. Approximately
$302,000 of these two series of debentures were converted into common stock. The 53⁄4% ($300,000
principal amount) debentures were called for redemption in the fourth quarter of fiscal 1997. The
reduction in interest expense related to the three redemptions was partially offset by the one-time costs of
the redemption call premiums and write-offs of unamortized issuance costs associated with the redemp-
tions of these convertible subordinated debentures. Also, in the fourth quarter of fiscal 1997, the Company
issued $900,000 (principal amount at maturity) of Zero Coupon Convertible Subordinated Notes, priced
with a yield to maturity of 31⁄2%, resulting in gross proceeds to the Company of $449,640, approximately
$312,000 of which was used to redeem the 53⁄4% convertible subordinated debentures referred to above.
Interest income and other totaled $26,662 in fiscal 1998 compared to $15,898 in fiscal 1997. The
increase was primarily due to interest earned on higher balances of cash and cash equivalents and short-
term investments during fiscal 1998 as compared to fiscal 1997.
The effective income tax rate on earnings was 40% in both fiscal 1998 and fiscal 1997.
Comparison of Fiscal 1997 (52 weeks) and Fiscal 1996 (52 weeks):
(dollars in thousands, except earnings per share)
Net operating results for fiscal 1997 reflect net income of $312,197, or $1.47 per share (diluted), as
compared to a fiscal 1996 net income of $248,793, or $1.22 per share (diluted). The net income for fiscal
1997 includes a non-cash, pre-tax charge of $65,000 ($38,675 after-tax, or $.17 per share) reflecting a
provision for the impairment of long-lived assets as required by the Company’s adoption of the Financial
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