Costco Wholesale Annual Report 2009 |
| February 10 2010 | |
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Costco’s unique approach to merchandising, operations, and employee engagement has proven successful again and again, ever since we opened our first warehouse in downtown Seattle. Fiscal 2009 provided an opportunity to test our mettle in an unusually challenging economy. We’re sure many of you would agree that the current global recession is the worst financial crisis since the Great Depression of the 1930s. While our sales and profits were less than in fiscal 2008, Costco remained solidly profitable in fiscal 2009. During the past fiscal year we opened twenty new warehouses; we increased our membership cardholder base by 2.3 million members, with membership renewals remaining strong at over 87%; and our employees continued to have job security along with one of the best wage and benefits packages in the retail industry. Fiscal 2009 was the first time in our history when sales did not achieve record highs. Sales were $69.9 billion, a 1.5% decrease from 2008’s results, and for the first time we reported a year of negative comparable sales in warehouses open more than a year: – 4% in 2009. Net earnings again exceeded $1 billion, but were down from the previous fiscal year by 15%. We have always maintained that truly great companies should build market share in tough times. During the fiscal year, Costco rose from the fifth-largest U.S. retailer in 2008 to the third-largest in 2009; and we remained the ninth-largest retailer in the world. We also moved from the 29th spot in the Fortune 500 to number 24. In addition, in 2009 we were named the 22nd most admired company in the world by Fortune magazine, and we remained at the top of the University of Michigan’s American Consumer Satisfaction Index, a reflection of how well we keep our promise to Costco shoppers. Our potential for expansion remains as strong as ever. The demand for quality goods and services in Costco’s treasure-hunt atmosphere continues to grow, both in the U.S. and around the world, even in times of economic stress. From Texas to Taiwan, people are clamoring for a Costco warehouse in their community. The success of our operations is world-wide; in fact, of our top 20 warehouses for sales in fiscal 2009, half of them were outside the United States. In fiscal 2009, capital expenditures totaled nearly $1.3 billion, including the construction and opening of new warehouses and depots, as well as the remodeling and upgrading of many of our existing warehouses. We opened twenty new warehouses in fiscal 2009, including three Business Centers (Commerce and Hawthorne, California and Las Vegas, Nevada), as well as a warehouse we relocated in Bloomfield, Michigan. Almost all of our new U.S. locations were opened in existing markets, and included: Rockwall (Dallas) and Houston (Galleria), Texas; Kapolei, Hawaii; Lakewood, California; St. Charles, Illinois; Brandywine, Maryland; Covington, Washington and Pocatello, Idaho. Internationally we opened eight new warehouses, which included two new units in Canada – in Peterborough, Ontario, 78 miles from Toronto, and Dartmouth, Nova Scotia, part of the Halifax urban core. In England, we opened a warehouse in the city of Croyden, which is part of greater London. In Mexico, a second unit was opened in the city of Guadalajara; and we opened three new Asia warehouses in an exciting three-day blitz last July – in Hsinchu, Taiwan, southwest of Taipei; Shin Misato, in greater Tokyo, Japan; and Busan, Korea’s second-largest city. These three countries – Japan, Korea and Taiwan – provide us with great expansion opportunities. When we opened the new warehouses in each country in early July 2009, each warehouse had record-breaking opening day sales for its country – all well over $700,000 per warehouse. Membership sign-ups through opening day were tremendous at each warehouse – more than 47,000 in Japan –highlighting the potential of the Asia markets for Costco. Our most thrilling new opening was in Australia last August, where people drove as long as five hours to shop, and lined up to be first through the door. Our Docklands warehouse is in a revitalized area of Melbourne, the country’s second-largest city. The Australian market is particularly well-suited to Costco’s business model. The population is young and affluent; other retailers’ goods are expensive; and the variety of merchandise imported from the U.S. is limited. Australians love the Costco concept and gave us our best-ever opening day sales for a new country – more than $841,000 U.S. We plan to open a second warehouse in Sydney, in the fall of 2010, and look forward to ongoing expansion. We also expanded our number of Business Centers this year to seven, opening two in the Los Angeles area – in Hawthorne and City of Commerce – and one in Las Vegas. Costco has always valued its business members; and our Business Centers give us an opportunity to give them both walk-in and delivery options in some of our major markets. Despite the lower number of openings this year (twenty) compared to prior years – a reflection of economic conditions and the difficulty of completing real estate deals – these new warehouses averaged $100 million of sales per year on an annualized basis – the highest average for openings in our Company’s history. Don’t judge the low number of openings as a hesitancy on our part, but rather a reflection of turbulence in the market. We have a significant backlog of projects in the pipeline and are striving to build our annual rate of new Costco openings to between 30-40 per year if conditions permit. In addition to warehouse openings, we opened three new depots in fiscal 2009 – in Airdrie, Alberta in the Calgary market; Tepeji, Mexico in greater Mexico City; and Ichikawa, Japan in the Tokyo metro area. Our depot system, which now includes 37 state-of-the-art cross-dock facilities, is one of the most efficient forms of merchandise distribution in the world. As we geared up for the 2009 holiday season, we opened eight more U.S. warehouses: in Paradise Valley, Arizona; Colorado Springs, Colorado; Manhattan, New York; Manchester, Missouri; Strongsville, Ohio; Hayward, California; reopened Redwood City, California; and relocated Warrenton, Oregon. All of these were infills in existing markets. We currently operate 566 warehouses across the globe: 413 in the U.S. and Puerto Rico, 77 in Canada, 32 in Mexico, 21 in the United Kingdom, nine in Japan, seven in Korea, six in Taiwan and one in Australia. Our goal is still to double our number of units over the next ten years, and we believe this is possible despite the current economic climate. Our merchandising strategy is a key component to our success, and it is basically the same today as it was at our inception: to bring quality goods and services to our members at the lowest possible prices. Our goal is always to enhance value – that particular combination of quality and price – that makes us unique in retail; and we attempt to do this with each and every item we carry. At Costco we are dedicated to working both sides of the value equation: increase quality, and whenever possible reduce the price to our members. We accomplish this through successful partnerships with many of the world's leading corporations, and continually focus on developing new relationships with suppliers of high quality merchandise. The current economic climate has helped us establish beginning relationships with some exciting new suppliers that you will find introduced this winter and spring. We also provide value to Costco members by developing our private label Kirkland Signature products, where we have been able to maintain or enhance quality, build special product sizes and pallet configurations, while offering lower prices and becoming even more competitive in the marketplace. Our ancillary businesses, which include pharmacy, optical, hearing-aid, one-hour photo, food courts and gas stations, continue to offer value to our members. Our dollar-fifty hot dog and soda is legendary, and our pharmacies continue to be acclaimed for low prescription prices and a memberfriendly approach, resulting in strong pharmacy sales increases in both prescription and over-the-counter drugs in fiscal 2009. We also opened new central prescription fill centers in Northern and Southern California this past year, and now service more than 175 of our warehouses, reducing the cost of a prescription renewal by almost half. Competition in this area remains keen and requires us to execute creatively and efficiently. Sales were up in every ancillary department except one-hour photo (due to increased usage of digital cameras) and gasoline (due to significant decreases in gas prices). But while gas sales dollars were down, gallons sold were up, as were profits. Despite a very turbulent market, we sold more than $5 billion worth of gasoline in fiscal 2009. Adding additional value to our gas stations are our environmentally friendly, state-of-the-art car washes. We operated two in fiscal 2009 . in Seattle, Washington and Poway, California, and this fall we opened six more . one in Scottsdale, Arizona and five in California . in Lancaster, Glendale, Victorville, Oxnard, and South San Francisco. We have plans to add more car washes in the upcoming year. While we face many challenges, there are a lot of things going right at Costco. We had the best inventory shrink results in our Company's history in fiscal 2009 . below .15% of sales. The change in our member returns policy for certain electronics in mid-year 2007 (concurrent with introducing our concierge program and extended warranty) continues to help bottom line results, with reduced returns and lower cost of disposed products. A similar policy change in Canada in mid-2008 improved their operations, as well. Importantly, we believe we have maintained member satisfaction through this transition. Another challenge we are dealing with is an increase in selling, general and administrative (SG&A) expenses as a percent of sales. These expenses went up again in 2009, primarily due to rising costs (particularly in health care benefits) and our lower sales base. We are not satisfied with this performance and will continue to emphasize cost controls and expense reduction in all areas of our business. We spent a relatively small amount (less than $100 million) to buy back Costco stock in fiscal 2009, compared with the nearly $900 million expended in fiscal 2008 and the $1.9 billion we spent to buy back stock in fiscal 2007. Since we began our buy-back program in June 2005, we have repurchased nearly 17% of our outstanding shares. We increased our quarterly cash dividends by 121.2% in fiscal 2009 . from $.16 to $.18, paying out about $300 million annually in dividends. As Costco's founders, we have always maintained that we are in business for the long haul, and we believe that our strong emphasis on fiscal responsibility, coupled with operating efficiencies and creative merchandising, are the fundamentals of Costco’s success. Our unique business model and dedication to the ethical treatment of all of our stakeholders – from shareholders to members to suppliers to employees – is an extension of our operating philosophy. That focus carries over into the communities where we operate and to the world at large. Costco and its employees are very involved in volunteerism and philanthropy at the local level. We also are working to expand our relationships with free trade suppliers and those who practice sustainable growth. Since our inception we have always made conservation and sustainability an emphasis at Costco. Helped by our Corporate Sustainability and Energy Group, we seek to innovate in our pursuit of earthfriendly practices and technology, and we are proud of what we have accomplished – such as skylights in all our warehouses, solar panels on 37 buildings, and an extensive recycling program. Whenever possible, we are developing recyclable packaging and redesigning packaging so that more items fit on a pallet in order to reduce the number of delivery trucks on our roads. Nevertheless, we realize there is still more to be done as we seek to reduce our carbon footprint while meeting our business needs. To learn more about our efforts, please log on to Costco.com and review our Corporate Sustainability Report, published in January 2009. We know we face challenges. Today’s financial environment means that we must work harder than ever before to make a dollar. We must concentrate on cost containment at every level, as well as continually focus our energy on driving sales. Attention to detail is critical in every aspect and segment of our business, ensuring that we deliver on every promise we make to our members and other stakeholders. We believe we have the best and most cohesive management team in the business to help us achieve our goals – men and women who have been with us since the beginning, many of whom have worked together in retail for more than forty years – as well as the best employees in the industry. We are all committed to excellence every day. We expect the economy will continue to be turbulent throughout 2010. While Costco, like all businesses, will be confronted with difficulties in the coming year, we are confident that the Company will grow despite the lackluster retail climate. We will continue our focus on growing long-term shareholder value by adhering to the policies and practices that made Costco great. We are confident in our entrepreneurial and innovative spirit at every level of our Company. Our management team and our 147,000 fellow employees worldwide join us in thanking you for your trust and support and for the important role you play in Costco’s success. We look forward to seeing many of you at our upcoming Annual Meeting of Shareholders on January 28, 2010, in Bellevue, Washington. As always, we extend our best wishes for a joyous holiday season and a prosperous and successful New Year. Warm Regards, Download Costco Wholesale Annual Report 2009 PDF format, 1.0MB, 96Pages. THE COMPANY In January 1997, after the spin-off of most of its non-warehouse assets to Price Enterprises, Inc., the Company changed its name to Costco Companies, Inc. On August 30, 1999, the Company reincorporated from Delaware to Washington and changed its name to Costco Wholesale Corporation, which trades on the NASDAQ under the symbol “COST.” As of December 2009, the Company operated a chain of 566 warehouses in 40 states and Puerto Rico (413 locations), nine Canadian provinces (77 locations), the United Kingdom (21 locations), Korea (seven locations), Taiwan (six locations, through a 55%-owned subsidiary), Japan (nine locations) and Australia (one location), as well as 32 warehouses in Mexico through a 50%-owned joint venture. CONTENTS Bookmark
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| Last Updated ( February 10 2010 ) |
Dear Costco Shareholders,
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