Costco Wholesale Corporation — FY2021 Form 10-K
Reporting period: 52 weeks ended August 29, 2021. Although the request references “2021 Q4,” this filing reports the full fiscal year, not standalone fourth-quarter results.
Business context
Costco operates membership warehouses and e-commerce sites, emphasizing high sales volumes, rapid inventory turnover and low prices. It ended the year with 815 warehouses, up from 795, and 111.6 million total cardholders. U.S. and Canadian operations accounted for 86% of net sales and 81% of operating income.
Financial performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $192.052 billion | $163.220 billion |
| Total revenue, including membership fees | $195.929 billion | $166.761 billion |
| Membership fee revenue | $3.877 billion | $3.541 billion |
| Operating income | $6.708 billion | $5.435 billion |
| Net income attributable to Costco | $5.007 billion | $4.002 billion |
| Diluted earnings per share | $11.27 | $9.02 |
| Operating cash flow | $8.958 billion | $8.861 billion |
| Capital expenditures | $3.588 billion | $2.810 billion |
- Net sales grew 18%; comparable sales rose 16%, or 13% excluding foreign exchange and gasoline-price effects. E-commerce comparable sales increased 44%.
- Gross margin was $21.368 billion, or 11.13% of net sales, versus 11.20% in FY2020. Excluding gasoline-price inflation, management said the rate increased to 11.22%.
- SG&A was $18.461 billion; as a share of net sales it fell to 9.61% from 10.01%, mainly from sales leverage and lower incremental COVID-related wages.
- Cash provided by operations was $8.958 billion; investing activities used $3.535 billion and financing activities used $6.488 billion. Financing outflows included dividends.
- Cash and cash equivalents were $11.258 billion and short-term investments were $0.917 billion at year-end, totaling $12.175 billion. Current assets were $29.505 billion and current liabilities $29.441 billion.
- Balance-sheet debt was $7.491 billion, including the current portion; long-term operating lease liabilities were $2.642 billion. The company reported $1.050 billion of bank-credit borrowing capacity, with year-end short-term borrowings described as immaterial in MD&A.
- Cash dividends declared totaled $12.98 per share, including a $10.00 special dividend. The quarterly dividend was raised from $0.70 to $0.79 per share in April 2021.
Changes, outlook and notable items
- Net income rose 25%, while membership fees increased 9%. Membership renewal rates were 91% in the U.S. and Canada and 89% worldwide.
- Costco opened 22 warehouses, including two relocations, compared with 16 openings including three relocations in FY2020.
- Management planned FY2022 capital expenditures of approximately $3.8–$4.2 billion and up to 35 new warehouse openings, including five relocations. These were plans, subject to change; COVID-related real-estate and construction delays had occurred.
- COVID-related incremental wages were $515 million in FY2021. The company said temporary incremental wage and benefit costs ended February 28, 2021, and that permanent wage increases effective March 1 carried an estimated annualized pretax cost of about $400 million.
- Inflation, higher merchandise costs, supply-chain constraints and labor availability remained pressures. Costco cited a $84 million fourth-quarter write-off of IT assets no longer expected to be used in its systems modernization.
- The effective tax rate was 24.0%, including $163 million of discrete net tax benefits; excluding those benefits, management reported a 26.4% rate.
- Management said cash, investments, operating cash flow and available credit were expected to meet liquidity and capital needs for the foreseeable future. It did not provide earnings or sales guidance in the supplied filing text.
- Key risks include dependence on U.S. and Canadian results, intense retail competition, pandemic-related disruption, supply constraints and inflation, cybersecurity and IT execution, labor costs, foreign exchange, and legal and regulatory matters. The company said pending claims were not expected to materially affect its financial position, results or cash flows, while noting an adverse outcome could materially affect an individual quarter or year.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether comparable-sales growth and elevated e-commerce growth can be sustained as pandemic-related comparisons normalize.
- How inflation, supply availability, gasoline prices and foreign exchange affect sales growth and gross margin.
- Whether planned FY2022 capital spending and warehouse openings proceed as stated, and their effects on cash flow and returns.
- The persistence of higher labor costs, including the estimated annualized cost of permanent wage increases.
- Exposure from self-insurance estimates, ongoing litigation and tax examinations; the filing reports $1.257 billion of aggregate insurance liabilities and says some legal loss ranges cannot be reasonably estimated.