Costco Wholesale Corporation — Q1 FY2024 Form 10-Q
Reporting period: 12 weeks ended November 26, 2023; comparison is the 12 weeks ended November 20, 2022. Costco operated 870 warehouses worldwide at quarter-end.
Financial performance
| Metric | Q1 FY2024 | Prior period | Change |
|---|---|---|---|
| Net sales | $56.717 billion | $53.437 billion | +6% |
| Membership-fee revenue | $1.082 billion | $1.000 billion | +8% |
| Total revenue | $57.799 billion | $54.437 billion | +6% |
| Operating income | $1.984 billion | $1.751 billion | +13% |
| Net income | $1.589 billion | $1.364 billion | +16% |
| Diluted EPS | $3.58 | $3.07 | +17% |
| Operating cash flow | $4.651 billion | $2.610 billion | +$2.041 billion |
Gross margin was $6.260 billion, or 11.04% of net sales, up 43 basis points. Excluding gasoline-price deflation’s effect on sales, gross margin percentage rose 36 basis points. SG&A was $5.358 billion; SG&A as a percentage of sales increased 25 basis points to 9.45%, reflecting higher operating costs, including wage increases. Operating margin was approximately 3.4% of revenue versus 3.2% a year earlier.
Net sales growth reflected 4% comparable-sales growth and sales from 25 net new warehouses opened since the prior-year quarter. Comparable sales growth was supported by increased shopping frequency, partly offset by a slight decrease in average ticket. Lower gasoline prices reduced sales by about $341 million (64 basis points); foreign-exchange movements added approximately $195 million (36 basis points). Membership growth also reflected new sign-ups, Executive upgrades, and higher renewal rates. Renewal rates were 92.8% in the U.S. and Canada and 90.5% worldwide.
Cash, liquidity and debt
Cash and cash equivalents were $17.011 billion and short-term investments were $853 million at November 26, 2023, totaling $17.864 billion. Current assets were $40.080 billion and current liabilities $36.768 billion. Debt comprised $1.080 billion current and $5.866 billion long-term, excluding the current portion. Costco issued approximately $500 million of fixed-rate senior notes through its Japan subsidiary during the quarter.
Operating cash flow increased to $4.651 billion, with working-capital movements including a $2.854 billion increase in accounts payable and a $1.384 billion inventory outflow. Investing cash outflow was $366 million, including $1.040 billion of capital expenditures. Financing cash outflow was $974 million, including $905 million of dividend payments, $162 million of share repurchases, and $292 million of tax withholdings on stock awards. Management said cash, investments, operating cash flow, and available credit capacity should cover foreseeable liquidity and capital needs.
Outlook, changes and notable items
- Costco planned approximately $4.4–$4.6 billion of FY2024 capital expenditures and 23 additional warehouse openings, including one relocation, for the remainder of the fiscal year. These are plans, not earnings guidance; no specific earnings or sales forecast was provided.
- Gross-margin improvement included the absence of a $93 million prior-year charge, primarily tied to discontinued charter shipping activities. The current quarter also benefited from a LIFO credit; higher 2% member rewards partly offset margin gains.
- The effective tax rate was 24.5%, versus 23.0%. Both periods included discrete tax benefits, mainly from stock compensation; excluding these benefits, the rates were 26.4% and 26.1%, respectively.
- The quarterly dividend was $1.02 per share, up from $0.90. After quarter-end, the board declared a $15.00-per-share special dividend, approximately $6.7 billion in aggregate, payable January 12, 2024.
- Key stated risks include economic and consumer-spending conditions, competition, inflation/deflation, exchange rates, gasoline and commodity costs, employee costs, tariffs, privacy or security breaches, real estate and capital spending, regulation, and geopolitical conditions.
- Legal matters include employment-related class actions, opioid litigation and investigations, website-tracker privacy claims, and a supply-agreement arbitration in which the claimant asserted damages exceeding $70 million. The company said it did not expect pending matters, 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 growth and membership renewals continue, and how much growth comes from traffic, ticket size, new warehouses, currency, or gasoline prices.
- Whether higher SG&A costs, including wages, can be offset by sales growth and operating efficiencies, and whether reported margin gains are repeatable without the prior-year shipping charge.
- The sustainability and drivers of operating cash flow, particularly the large quarter-to-quarter contribution from accounts payable and inventory movements.
- Funding and balance-sheet effects of the $6.7 billion special dividend alongside planned capital expenditures and warehouse expansion.
- Developments and potential exposure in disclosed legal matters; the filing does not provide a clear aggregate reasonably estimable loss range.