COSTCO DETAILS GROWTH PLANS 2004-02-09 (2)

Mina Williams

BELLEVUE, Wash. (FNS) -- Costco Wholesale Corp., Issaquah, Wash., plans to grow sales through unit expansion, e-commerce and keeping its prices low, Jim Sinegal, president and chief executive officer, told shareholders at its annual meeting here last month.

This strategy will help maintain Costco's position as the sixth largest retailer in the United States and the ninth in the world. The warehouse-membership chain currently operates 430 warehouses worldwide.

It plans to open an additional 25 units during the current fiscal year in new domestic and international markets. "We are looking to double the size of the company in the countries where we do business," Sinegal said.

The company expects to continue growing its store base in the United States by adding 20 to 25 units over the next three to five years.

During the fiscal year ending Aug. 31, 2003, revenues were $42.5 billion. The average Costco warehouse store produced $105 million in yearly sales. Net income at the company was $721 million.

"Sales are strong, shrink is under control and we plan to stay on our game plan to grow the business," Sinegal said.

One of Costco's assets is the number of cardholders it has signed. These cardholders represent 23 million households and 41 million total individuals. Costco's card membership renewal rate is 86%. Cardholders represent $919 million in cash in annual fees, Sinegal said.

Sinegal also said e-commerce holds potential for further growth. The Costco.com site has achieved profitability on an allocated basis within three years, he noted.

Going forward, Costco expects to be challenged by rising expenses such as new market expansion, the increasing cost of health care and workers' compensation and the addition of bank fees as the units accept more non-cash transactions.

Additionally, the company's front-end, one-to-one initiative that adds staff to alleviate crowding at checkout lines has added $40 million to the cost of operation.

Sinegal also mentioned the expenses associated with the company's accelerated receiving system. This system streamlines receiving practices, uses a new security system, and eliminates duplicate efforts at the depot and at the store units.

"Our objective is to bring high quality, name brands and select private label consistently to market at the lowest possible price," Sinegal said, pointing to new direct relationships developed with such suppliers as OshKosh, Kitchen Aid, J.A. Henckels, Lane, DeWalt and Levi. Additionally, co-branding opportunities have been struck with Whirlpool, Starbucks, Foster Farms, Tyson, Quaker Oats and Jelly Belly.

Executives anticipate deepening Costco's private-label offerings over a five-year period from 330 items currently carried in-store to 500 items. The goal is to move sales of the Kirkland brand from 15% to 20%.

During the meeting, shareholders passed a resolution asking the board of directors to consider annual elections of members. The board will review the resolution but it does not have to approve it.

However, shareholders rejected a controversial resolution asking Costco to adopt a social policy for the selection and acquisition of store sites. The resolution was prompted by the land-procurement controversy in Cuernavaca, Mexico, where Costco built a store on a historic hotel site that housed valuable art murals and other artifacts.

"Last year we were attacked on our building in Cuernavaca, Mexico," Sinegal said. "We were unaware of the murals [on the site] and their value. When we purchased the property no value was indicated."

Sinegal described how the murals had deteriorated over several decades from weather and vandalism, and showed shareholders a video outlining the restoration process and describing the building of a cultural center to house the murals along with a collection of Mexican art.