Costco Wholesale Corporation — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2024, the 12 weeks ended May 12, 2024; year-to-date results cover the 36 weeks ended May 12, 2024. Comparisons are with the corresponding periods ended May 7, 2023. Unless stated otherwise, financial amounts are in millions.
Business context and results
Costco operates membership warehouses and e-commerce sites, emphasizing high sales volume, rapid inventory turnover, and low prices. It operated 876 warehouses worldwide at quarter-end. Management describes comparable sales growth as a key profitability driver and notes the business operates at relatively low margins.
- Third quarter: Net sales rose 9% to $57,392; membership-fee revenue rose 8% to $1,123; total revenue was $58,515. Net income increased to $1,681 from $1,302. Diluted EPS was $3.78 versus $2.93.
- First 36 weeks: Net sales rose 7% to $171,440; membership-fee revenue rose 8% to $3,316; total revenue was $174,756. Net income increased to $5,013 from $4,132. Diluted EPS was $11.27 versus $9.30.
- Comparable sales: Increased 7% in the quarter and 5% year to date. Excluding foreign exchange and gasoline-price effects, they increased 7% and 5%, respectively. Quarterly growth reflected increased shopping frequency and a slightly higher average ticket.
- Membership: Paid members reached 74.5 million and cardholders 133.9 million. Renewal rates were 93.0% in the U.S. and Canada and 90.5% worldwide.
Margins, cash flow, and financial position
- Gross margin: 10.84% of net sales in the quarter, up 52 basis points year over year; year-to-date margin was 10.89%, up 34 basis points. Much of the quarterly improvement reflected the absence of a $298 million prior-year charge related primarily to discontinued charter shipping activities. Management also cited core merchandise, LIFO, gasoline, and rewards effects.
- SG&A: 8.96% of net sales in the quarter, down 15 basis points, largely reflecting improved productivity. Year to date, SG&A was 9.18% of sales, up 4 basis points, with wage increases contributing to pressure.
- Operating income: $2,197 for the quarter versus $1,679; $6,243 year to date versus $5,333. Interest expense was $41 for the quarter and $120 year to date. Year-to-date interest income and other, net increased to $504 from $295, partly due to higher rates and average balances before the special dividend.
- Cash flow, year to date: Operating activities provided $8,381, compared with $7,343. Investing activities used $2,706, including $3,133 of capital expenditures. Financing activities used $8,948, primarily reflecting dividends, debt and short-term borrowing activity, share repurchases, and stock-award tax withholdings. Cash and cash equivalents decreased to $10,404 from $13,700 at fiscal year-end.
- Liquidity and debt: Cash and short-term investments totaled $11,499 at May 12, 2024, down from $15,234 at September 3, 2023. Current assets were $33,288 and current liabilities $35,361. Reported current and long-term debt totaled $6,911. On May 18, after quarter-end, Costco repaid the $1,000 principal balance of its 2.750% Senior Notes, using cash and short-term investments. Management believes cash, investments, operating cash flow, and credit capacity will meet foreseeable capital and liquidity needs.
- Capital returns: Costco paid a $15-per-share special dividend in January 2024, totaling approximately $6,655, and paid a quarterly dividend of $1.16 per share in May. It repurchased $484 of shares year to date; $3,079 remained available under its $4,000 authorization.
Changes, outlook, and risks
- Quarterly net-sales growth reflected comparable-sales gains and 24 net new warehouses opened since the end of the prior-year third quarter. E-commerce comparable sales rose 21%, compared with a 10% decline a year earlier.
- For fiscal 2024, management expects capital expenditures of approximately $4,300–$4,500; $3,133 had been spent through 36 weeks. Costco had opened 16 warehouses, including one relocation, and planned 14 additional openings for the remainder of the fiscal year. These are plans, not guaranteed outcomes. The filing provides no specific earnings or revenue guidance.
- Management cited exposure to economic conditions, inflation or deflation, competition, consumer spending, wages and benefits, energy and commodity costs, tariffs, foreign exchange, privacy and cybersecurity, regulation, and real-estate and capital-spending conditions. It notes that modest cost or margin changes can materially affect earnings.
- Legal matters include employment and wage claims, opioid-related litigation, product-injury cases involving Real Water, privacy claims concerning website trackers, government investigations, and an EPA notice concerning certain products. Costco says pending matters are not expected to have a material adverse effect on its overall financial position, results, or cash flows; an unfavorable outcome could nevertheless materially affect an individual quarter or year. Possible losses for certain matters cannot be reasonably estimated.
- The company reported no material change in risk factors from its fiscal 2023 Form 10-K and no material change in market-risk disclosures. Management concluded disclosure controls were effective as of May 12, 2024.
Important facts for investors to verify
- Whether comparable-sales, membership, and renewal-rate momentum continues, including the contribution of new warehouses and e-commerce.
- Whether margin gains persist after the absence of the prior-year charter-shipping charge and amid changes in gasoline, rewards, merchandise mix, and costs.
- Execution of the planned fiscal 2024 capital spending and warehouse openings, and resulting cash and liquidity needs.
- Effects of the January special dividend, subsequent repayment of the May 2024 notes, and ongoing dividends and repurchases on cash balances and interest income.
- Developments in the disclosed litigation and regulatory matters, particularly where the company says potential losses cannot currently be estimated.