Costco Wholesale Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended September 3, 2017, a 53-week year; FY2016 was 52 weeks. The fourth quarter comprised 17 weeks, versus 16 weeks in the prior-year quarter. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Costco operates membership warehouses and related online and ancillary businesses. It ended FY2017 with 741 warehouses in 11 countries, up from 715 a year earlier. Its low-price, high-volume model relies on membership revenue, rapid inventory turnover, and tight cost control.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change / note |
|---|---|---|---|
| Net sales | $126.172 billion | $116.073 billion | Up 9%; includes an extra week |
| Membership fees | $2.853 billion | $2.646 billion | Up 8% |
| Gross margin | $14.290 billion; 11.33% | $13.172 billion; 11.35% | Margin down 2 basis points |
| SG&A | $12.950 billion; 10.26% of sales | $12.068 billion; 10.40% | Rate improved 14 basis points |
| Operating income | $4.111 billion | $3.672 billion | Up 12% |
| Net income attributable to Costco | $2.679 billion | $2.350 billion | Up 14% |
| Diluted EPS | $6.08 | $5.33 | Up 14% |
| Operating cash flow | $6.726 billion | $3.292 billion | Increase largely reflected vendor payments accelerated into FY2016 |
| Capital expenditures | $2.502 billion | $2.649 billion | Primarily warehouse expansion and remodeling |
| Cash and short-term investments | $5.779 billion | $4.729 billion | At fiscal year-end |
| Total long-term debt, including current portion | $6.659 billion | $5.161 billion | Debt issued and prior notes repaid during FY2017 |
FY2017 comparable sales increased 4% overall; excluding foreign-currency and gasoline-price effects, they also increased 4%. U.S. and Canadian renewal rates were 90%, and worldwide renewal was 87%. The 53-week year, new warehouses, higher gasoline prices, and currency movements affected reported sales comparisons.
Fourth-quarter reference: The 17-week FY2017 quarter reported net sales of $41.357 billion, membership fees of $943 million, operating income of $1.450 billion, net income attributable to Costco of $919 million, and diluted EPS of $2.08. The quarter is not directly comparable with the 16-week FY2016 quarter.
Material changes and unusual items
- FY2017 net income included an $82 million tax benefit related to the special dividend paid to employees through the 401(k) plan, and approximately $51 million of net benefits from non-recurring legal and other matters.
- The U.S. co-branded credit-card arrangement contributed materially to FY2017 margin and expense improvements; management cautioned that benefits of comparable magnitude were not expected in subsequent years.
- Costco issued $3.8 billion of senior notes and repaid $2.2 billion of debt. It paid a $7.00-per-share special dividend in May 2017; declared dividends totaled $8.90 per share for the year. The quarterly dividend increased from $0.45 to $0.50 per share.
- Membership fees in the U.S. and Canada increased effective June 1, 2017. Management estimated the increases would add approximately $175 million to FY2018 membership-fee revenue.
- Operating cash flow rose sharply, partly because approximately $1.7 billion of vendor payments were accelerated into the final week of FY2016 ahead of a modernized accounting-system implementation.
Outlook, risks, and contingencies
- Management expected to open up to 24 warehouses and relocate up to six in FY2018; planned FY2018 capital spending was approximately $2.5–$2.7 billion. These are plans, not guaranteed results.
- Management stated cash and operating cash flows should meet liquidity and capital needs for the foreseeable future. Available bank-credit capacity was $833 million, with no short-term borrowings outstanding at year-end.
- Key risks include dependence on U.S. and Canadian operations, intense retail and online competition, comparable-sales and membership-renewal performance, labor and healthcare costs, commodity and currency volatility, supply interruptions, technology and cybersecurity incidents, and execution of international growth.
- Costco is predominantly self-insured; recorded insurance liabilities were $1.059 billion. Litigation and regulatory matters included prescription-dispensing investigations, pharmacy-related inquiries, employment claims, unclaimed-property examinations, and environmental notices. Management said pending matters were not expected to have a material adverse effect on financial position, while acknowledging some could materially affect an individual quarter.
- No specific earnings or comparable-sales forecast was provided. Future results may also be affected by accounting-standard changes, including new revenue-recognition and lease guidance.
Important facts for investors to verify
- Separate underlying growth from the extra fiscal week, gasoline-price changes, foreign exchange, and new-warehouse contributions.
- Assess how much FY2017 earnings and margin benefited from the credit-card arrangement and non-recurring tax, legal, and other items.
- Review the sustainability of comparable-sales growth, renewal rates, membership-fee gains, and the expected FY2018 fee-increase contribution.
- Reconcile operating cash-flow growth with the timing of vendor payments and monitor working-capital movements.
- Review debt maturities, the financing and ongoing cost of shareholder distributions, planned capital spending, and developments in legal and regulatory matters.