Business Context and Reporting Period
Company: Costco Wholesale Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: August 30, 2009 (52 weeks)
Business Model: Membership warehouse retailer offering low prices on a limited selection of nationally branded and private-label products. The company operates 527 warehouses globally (406 in the U.S., 77 in Canada, and 44 in other international locations) and maintains a membership base of approximately 56 million cardholders with an 87% renewal rate.
Key Financial Metrics
| Metric (in millions, except per share) | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Net Sales | $69,889 | $70,977 |
| Total Revenue (Sales + Membership Fees) | $71,422 | $72,483 |
| Membership Fees | $1,533 | $1,506 |
| Gross Margin | $7,554 | $7,474 |
| Gross Margin % | 10.81% | 10.53% |
| Operating Income | $1,777 | $1,969 |
| Net Income | $1,086 | $1,283 |
| Diluted EPS | $2.47 | $2.89 |
| Operating Cash Flow | $2,092 | $2,206 |
| Total Assets | $21,979 | $20,682 |
| Long-Term Debt (excl. current) | $2,206 | $2,206 |
| Cash & Short-Term Investments | $3,727 | $3,275 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 1.5% to $69.9 billion. This was driven by a 4% decline in comparable warehouse sales, partially offset by sales from 15 net new warehouse openings.
- Comparable Sales Drivers: The decline in comparable sales was significantly impacted by a 30% drop in gasoline prices (reducing sales by ~$2.2 billion) and weakening foreign currencies (reducing sales by ~$2.4 billion).
- Profitability: Net income decreased 15% to $1.086 billion. Operating income fell 9.8% to $1.777 billion.
- Margin Expansion: Despite lower sales, gross margin percentage increased 28 basis points to 10.81%, aided by a $32 million LIFO benefit due to deflationary trends in merchandise costs.
- Expense Pressure: Selling, General, and Administrative (SG&A) expenses as a percentage of net sales increased 58 basis points to 10.38%, primarily due to lower sales volumes and higher employee healthcare costs.
Guidance, Outlook, and Risks
- Expansion Plans: The company intends to spend approximately $1.3 billion in fiscal 2010 on real estate, construction, and equipment. It plans to open 16 to 18 new warehouses in 2010.
- Dividends: The Board increased the quarterly cash dividend from $0.16 to $0.18 per share in April 2009.
- Stock Repurchases: The company repurchased 895,000 shares in 2009 for $57 million. Approximately $2.0 billion remains available under current repurchase authorizations.
- Key Risks:
- Economic Conditions: Adverse economic conditions and reduced consumer confidence continue to impact spending, particularly in hardlines and softlines.
- Competition: Intense competition from other warehouse clubs, discount retailers, and e-commerce businesses.
- Legal Proceedings: Significant pending litigation includes class actions regarding membership renewal policies (proposed settlement recorded), gasoline temperature sales practices, and employment-related claims in California.
- Foreign Exchange: Continued weakness in the Canadian, UK, and Korean currencies negatively impacts reported results.
Investor Verification Checklist
- Comparable Sales Trend: Verify if the 4% decline in comparable sales stabilizes in upcoming quarters, distinguishing between the one-time impact of gasoline price deflation and underlying consumer demand.
- Membership Renewal Rates: Monitor the 87% renewal rate to ensure it remains resilient despite economic headwinds and recent policy changes regarding late renewals.
- SG&A Leverage: Assess the company's ability to control SG&A expenses as a percentage of sales, given the pressure from healthcare costs and lower sales volumes.
- Legal Settlements: Track the final approval and financial impact of the membership renewal policy settlement and the gasoline temperature sales practices settlement.
- International Performance: Evaluate the impact of foreign currency fluctuations on international segment results, noting that 93% of sales are derived from U.S. and Canada operations.