Costco Wholesale Corporation — Q1 FY2023 10-Q
Reporting period: 12 weeks ended November 20, 2022; comparisons are with the 12 weeks ended November 21, 2021. Costco operates membership warehouses and e-commerce businesses. It reported 845 warehouses worldwide at quarter-end.
Financial performance
| Metric | Q1 FY2023 | Prior period | Change |
|---|---|---|---|
| Net sales | $53.437 billion | $49.417 billion | +8% |
| Membership fee revenue | $1.000 billion | $946 million | +6% |
| Total revenue | $54.437 billion | $50.363 billion | +8% |
| Operating income | $1.751 billion | $1.693 billion | +3% |
| Net income attributable to Costco | $1.364 billion | $1.324 billion | +3% |
| Diluted EPS | $3.07 | $2.98 | +3% |
| Operating cash flow | $2.610 billion | $3.258 billion | −20% |
| Capital expenditures | $1.057 billion | $1.055 billion | Approximately flat |
Gross margin was $5.668 billion, or 10.61% of net sales, down 45 basis points. SG&A was $4.917 billion, or 9.20% of net sales, down 35 basis points. Operating margin was approximately 3.2% versus 3.4% in the prior period; net margin was approximately 2.5% versus 2.6%.
At November 20, cash and cash equivalents were $10.856 billion and short-term investments were $817 million. Current assets were $34.150 billion and current liabilities $33.067 billion. Debt carrying value was approximately $6.543 billion, including current and long-term portions. Operating cash flow funded $1.057 billion of investing outflows and $863 million of financing outflows; cash increased $653 million during the quarter.
Material changes and operating drivers
- Comparable sales rose 7%; sales growth also reflected 22 net warehouse openings since the prior-year quarter. The company opened eight warehouses, including one relocation, during the quarter.
- Gasoline price inflation added approximately $1.216 billion to net sales; higher gasoline volume added about $650 million. Foreign currency movements reduced reported net sales by approximately $1.534 billion.
- Gross margin pressure reflected weaker margins in core merchandise, a $93 million charge mainly related to downsizing charter shipping activities, and higher member rewards. Ancillary and other businesses partly offset the decline.
- Membership renewal rates were 93% in the U.S. and Canada and 90% worldwide. Paid members totaled 66.9 million.
- SG&A leverage benefited from higher sales and comparison against a prior-year $118 million IT asset write-off. Net income also benefited from a $53 million stock-compensation tax benefit, versus $91 million in the prior-year quarter.
Outlook, risks and contingencies
Management did not provide specific earnings or sales guidance. It expected fiscal 2023 capital expenditures of approximately $3.8–$4.0 billion and planned 19 additional new warehouses, including two relocations, for the rest of the fiscal year. Management said cash, investments, operating cash flows and available credit capacity should meet foreseeable liquidity and capital needs.
Management cited inflation, competition, consumer spending, foreign exchange, gasoline prices, tariffs, labor and benefit costs, supply and vendor conditions, cybersecurity and privacy, geopolitical events, climate-related regulation, and real estate and capital spending as risks. The company reported pending employment, opioid-related and shareholder derivative litigation. Accruals for described legal matters were immaterial; management said outcomes were not expected to materially affect financial position, results or cash flows, while noting an unfavorable outcome could materially affect an individual quarter or year.
Unusual disclosure: Costco recorded the $93 million charter-shipping-related charge. It also disclosed approximately $1,131 of gross revenue and less than $100 of estimated profit from an Iranian Embassy business membership in Mexico; the membership was canceled in Q2 FY2023 and the company said it did not intend to continue the activity.
Important facts for investors to verify
- Whether comparable-sales and membership trends persist after separating inflation, gasoline and currency effects.
- Whether merchandise margin pressure and the charter-shipping charge affect subsequent quarters.
- Actual fiscal 2023 capital spending and warehouse openings compared with the stated plans.
- Cash-flow trends, inventory investment, and the status of debt and available credit facilities.
- Developments in disclosed litigation and any resulting material charges.