Costco Wholesale Corporation — Q1 FY2022 Form 10-Q
Reporting period: 12 weeks ended November 21, 2021; comparisons are with the 12 weeks ended November 22, 2020. Amounts are in millions of dollars except per-share data, percentages, and membership counts.
Business context and results
Costco operates membership warehouses and e-commerce businesses, emphasizing high sales volume and rapid inventory turnover at relatively low gross margins. It operated 823 warehouses at quarter-end.
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $49,417 | $42,347 | +17% |
| Membership fees | $946 | $861 | +10% |
| Total revenue | $50,363 | $43,208 | +17% |
| Operating income | $1,693 | $1,430 | +18% |
| Net income attributable to Costco | $1,324 | $1,166 | +14% |
| Diluted EPS | $2.98 | $2.62 | +14% |
Margins, sales, and operating drivers
- Comparable sales increased 15% company-wide; excluding foreign-exchange and gasoline-price effects, they rose 10%, versus 17% in the prior-year quarter. E-commerce comparable sales increased 14%.
- Higher gasoline prices added approximately $1,843, or 435 basis points, to reported sales growth; higher gasoline volume added approximately $809, or 191 basis points. Foreign exchange added approximately $380, or 90 basis points.
- Gross margin was $5,465; gross margin rate fell to 11.06% from 11.55%. Excluding gasoline-price inflation’s effect on sales, the rate was 11.49%, down six basis points. Core merchandise margin pressure, including from food categories, was partly offset by ancillary businesses.
- SG&A was $4,718, or 9.55% of net sales, down from 10.20%. Management cited sales leverage and the end of incremental COVID-related wages; the quarter also included a $118 IT-asset write-off.
- Operating income margin was approximately 3.36% of revenue, compared with 3.31% in the prior-year quarter. The reported effective tax rate was 20.7%, versus 16.8%; excluding discrete tax benefits, management reported rates of 26.4% and 26.3%, respectively.
Cash flow, liquidity, and debt
- Operating cash flow was $3,258, up from $2,647. Inventory growth used $2,760 of cash, partly offset by a $3,389 increase in accounts payable.
- Investing cash outflow was $912, including $1,055 of capital expenditures. Financing cash outflow was $839. Cash and cash equivalents ended the quarter at $12,751; short-term investments were $725.
- Current assets were $33,850 and current liabilities were $33,342. Debt on the balance sheet comprised $799 current and $6,667 long-term. Management said cash, investments, operating cash flow, and credit capacity should meet foreseeable liquidity and capital needs.
- On December 1, 2021, after quarter-end, Costco repaid its 2.300% Senior Notes due May 2022 at the contractual redemption price plus accrued interest.
Changes, outlook, and risks
- Membership renewal rates were 92% in the U.S. and Canada and 89% worldwide; paid members totaled 62.5 million, up from 59.1 million. The quarterly dividend was $0.79 per share, versus $0.70 a year earlier.
- Management planned approximately $4,000 of FY2022 capital expenditures and 20–23 additional warehouse openings, including up to four relocations, after opening nine in the quarter. These are plans, not guaranteed outcomes.
- Management noted merchandise inflation above recent years and continuing COVID-related and other supply-chain and logistics constraints, expected to affect some categories for the foreseeable future. Other stated uncertainties include competition, labor and benefit costs, fuel and commodity prices, tariffs, foreign exchange, and pandemic-related disruption.
- The filing added a risk concerning potential vaccine or testing mandates: legal challenges could affect whether and when the federal OSHA requirement takes effect; mandates could raise costs and create employee-retention and operational challenges.
- Costco said pending legal matters were not expected to have a material adverse effect on its financial position, results, or cash flows, but an unfavorable outcome could produce a material charge in an individual quarter or year. Accruals for the described matters were immaterial; some possible losses could not be reasonably estimated.
Important facts for investors to verify
- Whether comparable-sales growth persists after separating gasoline and foreign-exchange effects, and whether the slowdown in that adjusted growth continues.
- Whether Costco can manage merchandise inflation and supply constraints without further pressure on gross margin or member value.
- How recurring earnings compare with reported earnings, given discrete tax benefits of $97 in Q1 FY2022, including $91 from stock compensation.
- Progress against planned capital spending and warehouse openings, and the effect of inventory and accounts-payable movements on operating cash flow.
- Developments in COVID-related mandates, supply-chain risks, and significant litigation contingencies.