Costco Wholesale Corporation — Q2 FY2024 Form 10-Q
Reporting period: 12 weeks ended February 18, 2024; year-to-date figures cover 24 weeks. Comparisons are to the corresponding periods ended February 12, 2023. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and results
Costco operates membership warehouses and e-commerce businesses, with 874 warehouses worldwide at quarter-end. Management emphasizes sales growth, low prices, inventory turnover, membership loyalty, and tight cost control as drivers of its low-margin model.
- Q2 net sales rose 6% to $57.331 billion; total revenue rose 6% to $58.442 billion. Comparable sales increased 6% (5% in the first half), and e-commerce comparable sales grew 18% in Q2.
- Membership-fee revenue increased 8% to $1.111 billion. Paid members totaled 73.4 million, up from 68.1 million; renewal rates were 92.9% in the U.S. and Canada and 90.5% worldwide.
- Q2 net income increased to $1.743 billion from $1.466 billion; diluted EPS was $3.92 versus $3.30. First-half net income was $3.332 billion versus $2.830 billion; diluted EPS was $7.49 versus $6.37.
- Operating income was $2.062 billion in Q2 versus $1.903 billion. Q2 gross margin was 10.80% of net sales, up 8 basis points; SG&A was 9.14% of net sales, up 3 basis points. First-half gross margin was 10.92%, up 25 basis points, while SG&A was 9.29%, up 14 basis points.
Cash flow, balance sheet and capital
- First-half operating cash flow was $5.382 billion, down from $5.802 billion. Capital expenditures were $2.071 billion; investing cash outflow was $1.752 billion.
- Financing cash outflow was $8.250 billion, compared with $1.215 billion in the prior-year half, primarily reflecting dividends. Cash and cash equivalents were $9.095 billion at February 18, 2024, down from $13.700 billion at fiscal year-end; cash plus short-term investments totaled $10.321 billion.
- Debt carrying value, including current maturities, was approximately $6.945 billion, versus $6.458 billion at September 3, 2023. Current debt was $1.080 billion and long-term debt excluding current maturities was $5.865 billion. Management says liquidity, operating cash flow and available credit capacity are sufficient for foreseeable requirements.
- Costco paid a special dividend of $15 per share, approximately $6.655 billion, in January, in addition to its $1.02 quarterly dividend. First-half dividend cash payments were $8.012 billion. The company repurchased $322 million of shares in the first half; $3.241 billion remained under its $4 billion authorization.
Changes, outlook and notable items
- Sales growth reflected comparable-sales gains and 26 net new warehouses opened since the end of Q2 FY2023. Lower gasoline prices reduced Q2 net sales by $231 million (43 basis points); currency movements added approximately $94 million (17 basis points).
- Management attributed Q2 gross-margin improvement to ancillary and other businesses, core merchandise and a LIFO benefit, partly offset by higher 2% rewards. Wage increases and warehouse operating costs pressured SG&A. First-half margin comparisons also benefited from the absence of a $93 million prior-year charge related to discontinued charter shipping activities.
- Management expects FY2024 capital expenditures of approximately $4.4–$4.6 billion. It opened 14 warehouses, including one relocation, in the first half and planned 16 additional openings, including one relocation, for the remainder of the fiscal year. These are plans, not guarantees. The filing provides no specific earnings or sales guidance.
- The Q2 effective tax rate was 22.1%, including a $94 million benefit related to the special dividend. The first-half effective rate was 23.3%, favorably affected by $139 million in net discrete tax benefits; excluding these benefits, management reported a 26.5% rate.
- Risks highlighted include economic and consumer-spending conditions, inflation or deflation, competition, foreign exchange, tariffs, employee and other operating costs, privacy or security breaches, and real-estate and regulatory factors. The company reported no material change to previously disclosed risk factors.
- Costco is defending a range of employment, opioid-related, privacy-tracker, and other matters, and is subject to government inquiries concerning pharmacy-related issues. It says pending matters are not expected, individually or in aggregate, to materially affect its financial position, results or cash flows, but an unfavorable outcome could materially affect an individual quarter or year.
Important facts for investors to verify
- Whether comparable-sales and membership growth, including renewal rates and Executive-member upgrades, continue.
- Whether gross-margin gains can persist while rewards, wages and operating costs affect margins.
- How cash generation and liquidity evolve after the special dividend, and whether planned capex and warehouse openings proceed as expected.
- The extent to which tax benefits and interest income contributed to reported earnings and whether those effects recur.
- Developments in disclosed litigation and investigations, and any resulting financial exposure.