Costco Wholesale Corporation — Q3 FY2022 Form 10-Q
Reporting period: 12 weeks ended May 8, 2022; year-to-date figures cover the 36 weeks ended May 8, 2022. Comparisons are with the corresponding 2021 periods unless stated otherwise. Amounts are in millions except per-share data, membership counts, and percentages.
Business context and financial performance
Costco operates membership warehouses and e-commerce businesses. At May 8, 2022, it operated 829 warehouses worldwide. Its low-price, high-volume model depends on sales growth, membership fees, rapid inventory turnover, and tight cost control.
| Metric | Q3 FY2022 | Q3 FY2021 | 36 weeks FY2022 | 36 weeks FY2021 |
|---|---|---|---|---|
| Net sales | $51,612 | $44,376 | $151,966 | $130,611 |
| Membership fees | $984 | $901 | $2,897 | $2,643 |
| Total revenue | $52,596 | $45,277 | $154,863 | $133,254 |
| Operating income | $1,791 | $1,663 | $5,296 | $4,433 |
| Net income attributable to Costco | $1,353 | $1,220 | $3,976 | $3,337 |
| Diluted EPS | $3.04 | $2.75 | $8.94 | $7.51 |
| Gross margin percentage | 10.19% | 11.18% | 10.62% | 11.22% |
| SG&A as percentage of net sales | 8.62% | 9.46% | 9.04% | 9.85% |
Material changes and operating drivers
- Q3 net sales rose 16%; comparable sales increased 15% overall, or 11% excluding gasoline-price and foreign-currency effects. Sales growth reflected higher comparable sales and 20 net new warehouses opened since the prior-year quarter.
- Gasoline-price inflation added approximately $2,270 to Q3 net sales; gasoline volume growth added approximately $1,082. Foreign-currency movements reduced sales by approximately $476.
- Membership-fee revenue increased 9%. Paid members reached 64.4 million, up from 60.6 million; renewal rates were 92% in the U.S. and Canada and 90% worldwide.
- Q3 gross margin percentage declined 99 basis points. Management cited pressure in core merchandise categories, especially fresh foods and non-foods, and a LIFO charge associated with higher merchandise costs. SG&A leverage lowered the expense ratio by 84 basis points.
- For the first 36 weeks, operating cash flow fell to $4,886 from $6,018. Inventory growth used $3,633 of cash, partly offset by higher accounts payable. Capital expenditures were $2,632.
Cash, debt, and liquidity
- Cash and cash equivalents were $11,193 and short-term investments were $638 at May 8, 2022. Combined, these totaled $11,831, compared with $12,175 at August 29, 2021.
- Total long-term debt carrying value, including the current portion, was $6,618; long-term debt excluding the current portion was $6,507. Costco repaid its $800 2.3% senior notes in December 2021.
- Current assets were $33,008 and current liabilities were $31,845. Management stated that cash, investments, operating cash flows, and available credit capacity should meet liquidity and capital requirements for the foreseeable future.
- Operating, investing, and financing cash flows for the first 36 weeks were $4,886, $(2,428), and $(2,343), respectively. The prior-year financing outflow was higher, primarily due to a special dividend.
Outlook, risks, and unusual items
- Management intended to spend approximately $4,000 on capital expenditures in FY2022. Costco opened 17 warehouses, including three relocations, in the first 36 weeks and planned 10 additional new warehouses for the remainder of the fiscal year.
- Management expected the Q4 FY2022 LIFO charge to be substantially higher than in Q4 FY2021. Inflation and supply-chain and logistics constraints were affecting merchandise categories and were expected to persist for the foreseeable future.
- A one-time pretax charge of $77 was recorded, primarily for granting employees one additional vacation day under an agreement effective March 14, 2022. A separate $118 write-off of certain IT assets was recorded in Q1 FY2022.
- Other cited risks include competition, foreign-exchange movements, gasoline and commodity costs, tariffs, labor costs, geopolitical conditions, and COVID-19-related disruptions. Management said risk factors were not materially changed from the FY2021 Form 10-K.
- Costco disclosed multiple employment-related and opioid-related legal matters. Accruals for specified matters were immaterial; the company said an unfavorable outcome could nevertheless materially affect an individual quarter or year, though it did not expect pending matters to materially affect its financial position, results, or cash flows.
- The board declared a quarterly dividend of $0.90 per share, paid May 13, 2022. The company repurchased 254,000 shares during Q3 at an average $547.38 per share.
Important facts for investors to verify
- Whether sales growth and membership trends remain strong after separating the effects of gasoline prices, inflation, foreign exchange, and new warehouse openings.
- Whether merchandise-cost inflation and the expected higher Q4 LIFO charge further pressure gross margins, and whether SG&A leverage can continue.
- How inventory investment and working-capital movements affect operating cash flow and liquidity.
- Execution of the FY2022 capital-spending and warehouse-opening plans, and the effect of new locations on existing-warehouse sales.
- Developments in disclosed litigation and other contingencies; the filing does not provide a reasonably estimable loss range for certain matters.