Costco Wholesale Corporation — Form 10-Q Summary
Reporting period: Second quarter and first half of fiscal 2022, ended February 13, 2022. The comparable periods ended February 14, 2021. Unless noted otherwise, dollar amounts are in millions. Costco operates membership warehouses and e-commerce businesses; it had 828 warehouses worldwide at quarter-end.
Financial performance
| Metric | 12 weeks ended Feb. 13, 2022 | Prior-year quarter | 24 weeks ended Feb. 13, 2022 | Prior-year first half |
|---|---|---|---|---|
| Net sales | $50,937 | $43,888 | $100,354 | $86,235 |
| Total revenue | $51,904 | $44,769 | $102,267 | $87,977 |
| Membership fee revenue | $967 | $881 | $1,913 | $1,742 |
| Operating income | $1,812 | $1,340 | $3,505 | $2,770 |
| Net income attributable to Costco | $1,299 | $951 | $2,623 | $2,117 |
| Diluted EPS | $2.92 | $2.14 | $5.90 | $4.76 |
- Quarterly net sales and total revenue each rose about 16%; net income rose about 37%. First-half net sales and total revenue each increased about 16%, while net income rose about 24%.
- Quarterly gross margin was $5,420, or 10.64% of net sales, versus 10.96% a year earlier. First-half gross margin was $10,885, or 10.85%, versus 11.25%. Quarterly core merchandise gross margin rate declined 28 basis points; total gross margin rate declined 32 basis points.
- SG&A was $4,575 for the quarter and $9,293 for the first half. As a percentage of net sales, it fell to 8.98% from 9.92% for the quarter and to 9.26% from 10.06% for the first half, reflecting sales leverage and the end of incremental COVID-related wages.
- Operating cash flow was $3,659 for the first half, versus $2,685; capital expenditures were $1,778. Investing cash use was $1,393 and financing cash use was $1,667. Cash and cash equivalents ended the period at $11,819, up from $11,258 at fiscal year-end.
- At February 13, cash and short-term investments totaled $12,296; current assets were $32,565 and current liabilities $31,545. Long-term debt, net of discounts and issuance costs, was $6,658, with no current portion. Costco repaid $800 of senior notes in December 2021.
Material changes and drivers
- Comparable sales increased 14% in the quarter and 15% in the first half. Excluding foreign-exchange and gasoline-price effects, comparable sales rose 11% in both periods. E-commerce comparable sales increased 13% in both periods.
- Quarterly sales growth included a $1,713 benefit from higher gasoline prices and an $814 benefit from higher gasoline volume; foreign-exchange changes reduced sales by approximately $281. The company also cited sales at 25 net new warehouses opened since the prior-year quarter.
- Membership fee revenue rose 10% in both periods. Paid members totaled 63.4 million and cardholders 114.8 million. Renewal rates were 92% in the U.S. and Canada and 90% worldwide.
- Higher merchandise costs and inflation pressured core merchandise margins; Costco cited a quarterly LIFO charge of $14 basis points. Gasoline and ancillary businesses partly offset the pressure. Inventory increased $2,270 from fiscal year-end.
- First-half operating cash flow increased, while investing outflows rose primarily with capital spending. First-half financing cash use was lower than the prior year, which included a special dividend.
Outlook, risks and unusual items
- Management intended to spend approximately $4,000 on capital expenditures in fiscal 2022. It opened 14 warehouses in the first half and planned 15 to 18 additional openings, including up to three relocations, in the remainder of the year. Management said existing liquidity, operating cash flows and credit capacity should be sufficient for foreseeable needs.
- Management reported that wages and benefits would increase in mid-March. The estimated incremental annualized pre-tax cost, after normal annual increases, was approximately $275; an additional $85 was expected in the third quarter for a one-time accrued-benefit true-up.
- COVID-19 continued to affect operations to a lesser extent, while COVID-related and other supply-chain and logistics constraints were expected to continue affecting some categories. Other stated risks include inflation, currency movements, commodity and employee costs, competition, tariffs, geopolitical conditions and consumer spending.
- A $118 write-off of certain IT assets was recorded in the first quarter. First-half effective tax rate was 23.8%, including $91 of net discrete tax benefits; excluding those benefits, management reported a 26.4% rate.
- Costco disclosed employment-related and opioid-related litigation. It did not expect pending matters, individually or in aggregate, to materially affect financial position, results or cash flows, but said an unfavorable outcome could produce a material charge in an individual quarter or year.
- The quarterly dividend was increased to $0.79 per share and paid February 18, 2022. The board’s $4,000 share-repurchase authorization had $3,132 remaining at quarter-end.
Important facts for investors to verify
- Whether sales and comparable-sales growth persist after separating gasoline-price inflation, gasoline volume, general inflation and new-warehouse contributions.
- Whether merchandise cost inflation, LIFO charges and pricing choices continue to pressure core merchandise margins.
- How planned wage and benefit increases, including the stated $275 annualized cost and $85 third-quarter true-up, affect expenses and margins.
- Whether inventory growth and ongoing supply-chain constraints affect cash conversion, product availability or operating cash flow.
- Progress against fiscal 2022 capital-spending and warehouse-opening plans, and any developments in litigation that could change the company’s assessment of potential losses.