Costco Wholesale Corporation — Form 10-Q Summary
Reporting period: Second quarter and first half of fiscal 2023, ended February 12, 2023; comparisons are with the periods ended February 13, 2022. Amounts are in millions except per-share data. Costco operated 848 warehouses worldwide.
Financial performance
| Metric | 12 weeks ended Feb. 12, 2023 | Year-over-year change | 24 weeks ended Feb. 12, 2023 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $54,239 | +6% | $107,676 | +7% |
| Membership fees | $1,027 | +6% | $2,027 | +6% |
| Total revenue | $55,266 | +6% | $109,703 | +7% |
| Operating income | $1,903 | +5% | $3,654 | +4% |
| Net income attributable to Costco | $1,466 | +13% | $2,830 | +8% |
| Diluted EPS | $3.30 | from $2.92 | $6.37 | from $5.90 |
| Gross margin percentage | 10.72% | +8 bps | 10.67% | -18 bps |
| SG&A as % of net sales | 9.11% | +13 bps | 9.15% | -11 bps |
Quarterly comparable sales rose 5% (7% excluding foreign-exchange and gasoline-price effects); e-commerce comparable sales fell 10%. For the first half, comparable sales rose 6% (7% excluding those effects), while e-commerce fell 7%. Membership renewal rates were 92.6% in the U.S. and Canada and 90.5% worldwide. Paid members totaled 68.1 million.
Cash flow and liquidity: First-half operating cash flow was $5,802, up from $3,659, reflecting in part a favorable inventory cash-flow swing. Capital expenditures were $1,947; investing cash outflow was $1,865 and financing cash outflow was $1,215. Cash and cash equivalents were $12,970, with short-term investments of $735. Current assets were $34,330 versus current liabilities of $32,516.
Debt: Long-term debt, including current portion, was $6,612 at February 12, 2023; short-term borrowings were $45. Cash and short-term investments totaled $13,705. The company reported $1,269 of borrowing capacity under bank credit facilities.
Changes, drivers, and unusual items
- Sales growth reflected comparable-sales gains and 20 net new warehouses opened since the prior-year quarter. Foods and sundries and fresh foods grew; non-foods declined. Gasoline volume increased about 9% in the quarter.
- Quarterly gross-margin percentage improved primarily because the prior-year quarter had a larger LIFO charge; core merchandise margins declined, particularly in fresh foods and non-foods. First-half gross margin was pressured by lower core-category margins, increased 2% rewards, and a $93 charge tied primarily to terminating and impairing leased charter-shipping assets.
- Quarterly SG&A as a share of sales increased, partly due to central operating costs and a tax-audit-related charge. First-half SG&A ratio improved versus the prior year, partly because the prior-year period included an IT-asset write-off.
- First-half interest income rose with higher global interest rates. The first-half effective tax rate was 24.6%, including $57 of net discrete tax benefits; excluding those benefits, management stated the rate was 26.1%.
- Foreign-exchange movements reduced sales by approximately $937 in the quarter and $2,471 in the first half. Management noted ongoing merchandise-cost inflation and pricing choices that can weigh on margins.
Outlook, risks, and contingencies
Costco did not provide a specific sales or earnings forecast in the supplied filing text. Management planned fiscal 2023 capital expenditures of approximately $3,800–$4,200, funded from operating cash flow and existing liquidity, and expected to open 15 additional new warehouses, including one relocation, in the remainder of the fiscal year. Management stated that available cash, investments, operating cash flows, and credit capacity should meet liquidity and capital needs for the foreseeable future.
Risks identified include economic conditions, inflation or deflation, foreign-exchange and interest-rate movements, competition, consumer spending, wages and benefits, utilities and commodity costs, tariffs and geopolitical conditions, cybersecurity and privacy, real estate and capital needs, and litigation. The company reported no material changes to previously disclosed risk factors or market risks and concluded disclosure controls were effective.
Costco is defending various employment, opioid-related, and shareholder claims, among others. It said pending matters are not expected to have a material adverse effect on financial position, results, or cash flows, but an unfavorable outcome could cause a material charge in an individual quarter or year. Accruals for described matters were immaterial; some potential losses could not be reasonably estimated.
The board authorized a new $4,000 share-repurchase program through January 2027; $3,955 remained available at quarter-end. A quarterly dividend of $0.90 per share was declared and paid after quarter-end. The filing also disclosed approximately $145 in second-quarter gross revenue (estimated profit under $10) from two cardholders associated with Iran’s embassy at a Mexico subsidiary; the membership was canceled and Costco said it did not intend to continue the activity.
Important facts for investors to verify
- Whether comparable-sales momentum and membership growth persist, particularly given the decline in e-commerce comparable sales.
- Whether core merchandise margins recover after inflation, higher rewards, and pricing investments; and how the charter-shipping charge affects subsequent comparisons.
- Whether planned fiscal 2023 capital spending and warehouse openings proceed as expected.
- Cash-flow sustainability, including the effects of inventory, supplier-payment timing, capital spending, dividends, and repurchases.
- Developments in litigation and other contingencies, since the filing says some possible losses cannot be estimated and adverse outcomes could materially affect an individual period.