Costco Wholesale (COST)

Gross Margin

2009 vs. 2008

Gross margin, as a percent of net sales, increased 28 basis points compared to 2008. This increase was primarily related to a net 18 basis point increase in our core merchandise departments, primarily in food and sundries, partially offset by a decrease in softlines, and a net seven basis point increase from our warehouse ancillary businesses, primarily our gasoline and pharmacy departments. The majority of this gross margin improvement was due to our lower margin gas business having lower sales penetration, due to the decline in the average selling price per gallon. Increased sales penetration of the Executive Membership two-percent reward program negatively affected gross margin by six basis

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Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in millions, except per share and warehouse number data) (Continued)

points. In addition, gross margin was favorably impacted by nine basis points due to reversing the $32 LIFO reserve established in the prior year as we experienced net deflation, year-over-year, in the cost of our merchandise inventories.

Foreign currencies, particularly in Canada, the United Kingdom and Korea, weakened against the U.S. dollar, which negatively impacted gross margin for 2009 by approximately $258.

2008 vs. 2007

Gross margin, as a percent of net sales, increased one basis point compared to 2007. Excluding the unusual items affecting net sales and gross margin in 2007, adjusted gross margin as a percent of adjusted net sales decreased five basis points in 2008 as compared to 2007. This decrease was largely due to a net 12 basis point decrease in our warehouse ancillary businesses, particularly in one-hour photo, tire shop and food services, partially offset by an increase in our gasoline business; a $32, or five basis point LIFO charge, resulting from price increases in certain food items and gasoline; and a three basis point decrease resulting from the increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members. These decreases were partially offset by a net 15 basis point increase from our merchandise departments, particularly fresh foods, food and sundries, Costco Online and our international operations, partially offset by a decrease in softlines.

Gross Margin

Gross margin, as a percent of net sales, increased 45 basis points compared to the third quarter of 2008. This increase was primarily related to a net 42 basis point increase in our core merchandise departments, primarily in food and sundries and hardlines, offset by decreases in softlines and fresh foods, and a net eight basis point increase from our warehouse ancillary businesses. The majority of this gross margin improvement was due to our lower margin gas business having lower sales penetration, due to the decline in the average selling price per gallon. In addition, gross margin was favorably impacted by four basis points due to a LIFO adjustment. Increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members negatively affected gross margin by nine basis points.

Gross margin, as a percent of net sales, increased 15 basis points compared to the first thirty-six weeks of 2008. Our warehouse ancillary businesses experienced a 12 basis point increase, primarily in

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Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) (dollars in millions, except per share data)

our gasoline business, pharmacy and food courts, offset by decreases in one-hour photo. Our core merchandise departments increased by a net six basis points, primarily in foods and sundries, and a favorable LIFO adjustment impacted gross margin by four basis points. Increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members negatively affected gross margin by seven basis points.

Foreign currencies, particularly in Canada, the United Kingdom and Korea, weakened against the U.S. dollar, which negatively impacted gross margin for the third quarter and the first thirty-six weeks of 2009 by approximately $75 and $206, respectively.

Gross Margin

Gross margin, as a percent of net sales, decreased 31 basis points compared to the second quarter of 2008. This decrease was primarily related to a decrease of 19 basis points in our warehouse ancillary businesses, primarily in our gasoline business, and a net seven basis point decrease in our core merchandise categories, particularly softlines. This seven basis point decrease in our core merchandise categories was favorably impacted due to our lower margin gas business having a lower sales penetration quarter over quarter. The core merchandise categories gross margin, as a percent of their own sales, were lower quarter over quarter by 57 basis points. This decrease is largely attributable to price reductions designed to drive sales on certain items and higher seasonal markdowns. In addition, increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members negatively affected gross margin by nine basis points. These items were offset by a favorable LIFO adjustment of four basis points.

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Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) (dollars in millions, except per share data)

Gross margin, as a percent of net sales, was flat compared to the first half of 2008. Our ancillary businesses experienced a 13 basis point increase, primarily in our gasoline business; and we recorded a favorable LIFO adjustment of three basis points. These increases were offset by a net ten basis point decrease in our core merchandise categories, particularly related to lower sales penetration of hardlines and softlines, offset by an increase in food and sundries. In addition, increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members negatively affected gross margin by six basis points.

Gross Margin

Gross margin, as a percent of net sales, increased 32 basis points compared to the first quarter of 2008. This increase was primarily related to an increase of 46 basis points in our ancillary businesses, primarily our gasoline business, and a favorable LIFO adjustment of one basis point. These increases were offset by a net 13 basis point decrease in our core merchandise categories, particularly hardlines and softlines, which was primarily related to their lower sales penetration. In addition, increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members negatively affected gross margin by 2 basis points.

Gross Margin

2008 vs. 2007

Gross margin was $7.47 billion, or 10.53% of net sales in 2008, compared to $6.64 billion, or 10.52% of net sales in 2007. Excluding the unusual items affecting net sales and gross margin in 2007, adjusted gross margin as a percent of adjusted net sales decreased five basis points in 2008 as compared to 2007. This decrease was largely due to a net 12 basis point decrease in our warehouse ancillary businesses, particularly in one-hour photo, tire shop and food services, partially offset by an increase in our gasoline business; a $32.3 million, or five basis point LIFO charge, resulting from price increases in certain food items and gasoline; and a three basis point decrease resulting from the increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members. These decreases were partially offset by a net 15 basis point increase from our merchandise departments, particularly fresh foods, food and sundries, Costco Online and our international operations, partially offset by a decrease in softlines. We’ve experienced price increases from our suppliers at an increased rate, which may continue. Those increases generally are reflected in our selling prices, but to the extent they are not or are delayed, our gross margins will be adversely affected.

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Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

2007 vs. 2006

Gross margin was $6.64 billion, or 10.52% of net sales in 2007, compared to $6.22 billion, or 10.55% of net sales in 2006. Excluding the unusual items affecting net sales and gross margin in 2007, adjusted gross margin as a percentage of adjusted net sales was 10.58%, or an increase of three basis points as compared to 2006. This increase was primarily due to a 24 basis point increase in certain merchandise departments, largely food and sundries, as well as smaller increases in certain warehouse ancillary businesses, costco.com and our international operations, offset by a decrease in our hardlines and softlines categories of approximately 15 basis points. In addition, increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members negatively affected gross margin by six basis points.

Gross Margin

Gross Margin

2008 vs. 2007

Gross margin was $7.47 billion, or 10.53% of net sales in 2008, compared to $6.64 billion, or 10.52% of net sales in 2007. Excluding the unusual items affecting net sales and gross margin in 2007, adjusted gross margin as a percent of adjusted net sales decreased five basis points in 2008 as compared to 2007. This decrease was largely due to a net 12 basis point decrease in our warehouse ancillary businesses, particularly in one-hour photo, tire shop and food services, partially offset by an increase in our gasoline business; a $32.3 million, or five basis point LIFO charge, resulting from price increases in certain food items and gasoline; and a three basis point decrease resulting from the increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members. These decreases were partially offset by a net 15 basis point increase from our merchandise departments, particularly fresh foods, food and sundries, Costco Online and our international operations, partially offset by a decrease in softlines. We’ve experienced price increases from our suppliers at an increased rate, which may continue. Those increases generally are reflected in our selling prices, but to the extent they are not or are delayed, our gross margins will be adversely affected.

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Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

2007 vs. 2006

Gross margin was $6.64 billion, or 10.52% of net sales in 2007, compared to $6.22 billion, or 10.55% of net sales in 2006. Excluding the unusual items affecting net sales and gross margin in 2007, adjusted gross margin as a percentage of adjusted net sales was 10.58%, or an increase of three basis points as compared to 2006. This increase was primarily due to a 24 basis point increase in certain merchandise departments, largely food and sundries, as well as smaller increases in certain warehouse ancillary businesses, costco.com and our international operations, offset by a decrease in our hardlines and softlines categories of approximately 15 basis points. In addition, increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members negatively affected gross margin by six basis points.

Gross Margin

Gross Margin

Gross margin was $1.71 billion, or 10.54% of net sales, in the third quarter of fiscal 2008, compared to $1.46 billion, or 10.21% of net sales, in the third quarter of fiscal 2007. Excluding the unusual items affecting net sales and gross margin, gross margin as a percentage of net sales increased 18 basis points in the third quarter of fiscal 2008, from 10.36% in the third quarter of fiscal 2007. This increase was due to a 28 basis point increase in our merchandise departments, particularly fresh foods and food and sundries, partially offset by a decrease in softlines. This increase was partially offset by a net nine basis point decrease from our warehouse ancillary businesses, primarily in one-hour photo, food services and tire shop, partially offset by an increase in our gasoline and pharmacy businesses. In addition, increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members negatively affected gross margin by one basis point. We’ve experienced price increases from our suppliers at an increased rate, which may continue. Those increases generally are reflected in our selling prices, but to the extent they are not our gross margins will be adversely affected.

Gross margin was $5.15 billion, or 10.64% of net sales, in the first thirty-six weeks of fiscal 2008, compared to $4.48 billion, or 10.42% of net sales, in the first thirty-six weeks of fiscal 2007. Excluding the unusual items affecting net sales and gross margin, gross margin as a percentage of net sales increased 13 basis points in the first thirty-six weeks of fiscal 2008, from 10.51% in the first thirty-six weeks of fiscal 2007. This 13 basis point increase reflected a 31 basis point increase in our merchandise departments, particularly food and sundries and fresh foods, partially offset by a decrease in softlines. This increase was also offset by a decrease of 15 basis points in our warehouse ancillary businesses; primarily tire shop, gas and food services. In addition, increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members negatively affected gross margin by three basis points.

Gross Margin

Gross margin was $1.78 billion, or 10.73% of net sales, in the second quarter of fiscal 2008, compared to $1.55 billion, or 10.49% of net sales, in the second quarter of fiscal 2007. Excluding the unusual items affecting net sales and gross margin, gross margin as a percentage of net sales increased 13 basis points in the second quarter of fiscal 2008, from 10.60% in the second quarter of fiscal 2007. This increase was due to a 29 basis point increase in our merchandise departments, particularly food and sundries and hardlines. This increase was offset by a net twelve basis point decrease primarily from our warehouse ancillary businesses, which reflected decreases in pharmacy, food services and tire shop, partially offset by an increase in our gasoline business. In addition, increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members negatively affected gross margin by four basis points.

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Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Gross margin was $3.43 billion, or 10.69% of net sales, in the first half of fiscal 2008, compared to $3.02 billion, or 10.53% of net sales, in the first half of fiscal 2007. Excluding the unusual items affecting net sales and gross margin, gross margin as a percentage of net sales increased 11 basis points in the first half of fiscal 2008, from 10.58% in the first half of fiscal 2007. This net 11 basis point increase reflected an increase of 34 basis points in our merchandise departments, particularly food and sundries and hardlines. This increase was offset by a decrease of 19 basis points in our warehouse ancillary businesses, primarily tire shop, gas and food services. In addition, increased penetration of the Executive Membership two-percent reward program and increased spending by Executive members negatively affected gross margin by four basis points.