Costco Wholesale Corporation — Q3 FY2021 Form 10-Q
Reporting period: 12 weeks ended May 9, 2021; year-to-date figures cover 36 weeks. Amounts are in millions of dollars except per-share data, percentages, and membership counts. Costco operated 809 warehouses and e-commerce sites in eight countries. Comparisons are against periods ended May 10, 2020, when pandemic-related restrictions affected sales mix and operations.
Financial performance
- Revenue: Q3 total revenue rose 22% to $45,277; net sales rose 22% to $44,376, and membership fees rose 11% to $901. Comparable sales increased 21% (15% excluding foreign exchange and gasoline-price changes). E-commerce comparable sales rose 41%. For the first 36 weeks, revenue increased 18% to $133,254 and net sales increased 18% to $130,611.
- Profit and earnings: Q3 operating income increased to $1,663 from $1,179; net income attributable to Costco rose to $1,220 from $838. Diluted EPS was $2.75 versus $1.89. Year to date, net income was $3,337 versus $2,613 and diluted EPS was $7.51 versus $5.89.
- Margins: Q3 gross margin was $4,961, or 11.18% of net sales, down 35 basis points year over year. Excluding gasoline-price inflation, gross margin percentage was 11.43%, down 10 basis points. SG&A was 9.44% of net sales versus 10.51%, a 107-basis-point improvement. Year-to-date gross margin percentage was 11.22%, up 4 basis points; SG&A was 9.82%, down 37 basis points.
- Cash flow and investment: Year-to-date operating cash flow was $6,018 versus $4,619; investing cash outflow was $2,380 versus $2,950. Capital expenditures were $2,494. Operating cash flow less capital expenditures was approximately $3,524 (calculated). Financing used $5,769, including $5,050 of cash dividend payments and $367 of share repurchases.
- Liquidity and debt: Cash and cash equivalents were $10,226 and short-term investments $900 at May 9, 2021, totaling $11,126, compared with $13,305 at August 30, 2020. Total current assets were $27,916 and current liabilities $27,982. Long-term debt, including its current portion, had a carrying value of $7,587; the filing reports no material short-term bank borrowings. Management believes cash and operating cash flow will meet foreseeable liquidity and capital needs.
- Other metrics: Paid members totaled 60.6 million and cardholders 109.8 million. Renewal rates were 91% in the U.S. and Canada and 88% worldwide. The quarterly dividend was $0.79 per share.
Material changes and management commentary
- Sales growth reflected 21% comparable-sales growth and 22 net new warehouses opened since the prior-year quarter. Stronger sales included hardlines, softlines, gasoline, and ancillary businesses recovering from prior-year closures or restrictions. Foreign exchange added about $1,032 and gasoline-price increases about $984 to quarterly net sales; higher gasoline volume added about $820.
- Q3 gross-margin percentage was pressured by sales mix, including ancillary businesses and gasoline; core merchandise margin as a percentage of core merchandise sales increased 27 basis points. SG&A leverage and lower COVID-related incremental wages supported expense ratios. COVID-related incremental wages were $57 in Q3 and $515 year to date; the program ended February 28, 2021.
- Permanent wage increases for hourly and most salaried warehouse employees took effect March 1. Their estimated annualized pretax cost is approximately $400.
- Cash and investments declined from fiscal year-end, while inventory increased to $13,975 from $12,242. The company acquired a distribution facility for $345 during Q3.
Outlook, risks, and contingencies
- No specific earnings or sales guidance is provided. Management intended to spend $3,300–$3,500 on fiscal 2021 capital expenditures and expected to open seven additional warehouses during the remainder of the year; plans may change. COVID-19 delayed some construction.
- Management said COVID-related supply and logistics constraints had adversely affected some categories and were expected to continue for the foreseeable future. It also cited inflation, labor and other operating costs, foreign exchange, gasoline prices, competition, tariffs, and pandemic-related demand and staffing uncertainty as risks.
- Various legal matters include employment claims, opioid litigation, shareholder matters, and a 401(k) fiduciary-duty suit. The company said it did not believe pending matters would materially adversely affect its financial position, results, or cash flows, but an unfavorable outcome could cause a material charge in an individual quarter or year. Possible losses for certain tax-related examinations could not be estimated.
- Management reported disclosure controls were effective as of May 9, 2021, and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of sales growth reflects underlying demand versus pandemic-era comparisons, new warehouses, foreign exchange, gasoline prices, and inflation.
- Whether gross-margin trends and expense leverage persist as sales mix normalizes and permanent wage increases flow through a full period.
- The ongoing effects of supply-chain and logistics constraints, and execution of the stated capital-spending and warehouse-opening plans.
- Cash and investment levels, inventory growth, dividend commitments, and debt maturities, including the $800 senior notes due May 2022.
- Developments in disclosed legal and tax contingencies; the filing does not provide a clear estimate of possible losses for several matters.