Business context and reporting period
Costco Wholesale Corporation operates membership warehouses and e-commerce sites. This unaudited Form 10-Q covers the 12-week second quarter and 24-week first half of fiscal 2021, both ended February 14, 2021; comparisons are to periods ended February 16, 2020. Costco operated 803 warehouses worldwide.
Financial performance
Amounts below are in millions, except per-share data. Growth rates are year over year.
| Metric | Q2 FY2021 | Q2 FY2020 | First half FY2021 | First half FY2020 |
|---|---|---|---|---|
| Total revenue | $44,769 (+15%) | $39,072 | $87,977 (+16%) | $76,112 |
| Net sales | $43,888 (+15%) | $38,256 | $86,235 (+16%) | $74,492 |
| Membership fees | $881 (+8%) | $816 | $1,742 (+8%) | $1,620 |
| Operating income | $1,340 (+6%) | $1,266 | $2,770 (+19%) | $2,327 |
| Net income attributable to Costco | $951 (+2%) | $931 | $2,117 (+19%) | $1,775 |
| Diluted EPS | $2.14 | $2.10 | $4.76 | $4.00 |
| Gross margin percentage | 10.96% | 10.98% | 11.25% | 11.01% |
| SG&A as % of net sales | 9.89% | 9.78% | 10.02% | 10.03% |
Q2 comparable sales rose 13% (13% excluding currency and gasoline-price changes); e-commerce comparable sales increased 76%. First-half comparable sales rose 14% (15% excluding currency and gasoline-price changes), and e-commerce comparable sales increased 80%. Q2 increases were broad-based across core merchandise, while gasoline and travel-related businesses were weaker. Foreign exchange added approximately $423 to Q2 net sales; lower gasoline prices and volumes reduced sales by approximately $367 and $341, respectively.
Q2 gross margin percentage declined two basis points. Core merchandise margins improved, but weaker ancillary and other businesses, COVID-related incremental wages, and greater Executive member rewards partly offset those gains. Q2 SG&A rose 11 basis points as a percentage of net sales, mainly due to COVID-related wages, partly offset by sales leverage. First-half gross margin percentage increased 24 basis points, while SG&A as a percentage of sales declined one basis point.
Cash, liquidity and debt
First-half operating cash flow was $2,685, versus $2,721 a year earlier. Investing activities used $1,037, including $1,466 of capital expenditures; financing activities used $5,350, principally reflecting dividends, including the special dividend, plus share repurchases and stock-award tax withholding. Cash and cash equivalents were $8,637 and short-term investments were $617 at February 14, 2021, totaling $9,254, down from $13,305 at August 30, 2020. The balance-sheet figures imply current liabilities exceeded current assets by $256 at quarter end.
Carrying value of current and long-term debt totaled approximately $7,617. Costco had $1,051 of borrowing capacity under bank credit facilities and no short-term facility borrowings outstanding. Management said cash and operating cash flows should be sufficient for foreseeable liquidity and capital requirements.
Material changes, outlook and risks
- Costco paid approximately $4,430 in December 2020 for a $10-per-share special dividend. The first-half cash dividend payments were $4,740; the substantial distribution helps explain the decline in cash and retained earnings. The quarterly dividend was $0.70 per share.
- COVID-related incremental wages were $246 in Q2 and $458 in the first half; the company reported approximately $825 of such wage and benefit costs from March 1, 2020 through February 28, 2021. Permanent wage increases effective March 1, 2021 are estimated to cost approximately $400 annually before tax.
- Management expected to spend $3,000–$3,200 on fiscal 2021 capital expenditures, open 13 additional warehouses during the remainder of the year, and reported that COVID-19 had delayed some construction. These are plans, not guaranteed outcomes; the filing provides no earnings or revenue guidance.
- Management reported strong sales and profitability in fresh foods, foods and sundries, and e-commerce, but weaker sales and profitability in some ancillary businesses, particularly gasoline and travel. COVID-related supply constraints were expected to continue affecting some categories.
- Risks include pandemic duration and effects, supply-chain and logistics constraints, consumer demand, competition, foreign exchange, gasoline and commodity prices, tariffs, employee costs, and regulation. The company disclosed various employment, opioid, shareholder, ERISA, and tax matters; it said it did not expect pending litigation to materially affect overall financial position, results, or cash flows, but an adverse outcome could materially affect an individual quarter or year.
- The Innovel acquisition accounting remained provisional: $949 of the $998 purchase price was recorded as goodwill, with final accounting expected in Q3 FY2021.
Important facts for investors to verify
- Whether comparable-sales momentum and the exceptional e-commerce growth persist, and how gasoline, travel, and other ancillary businesses recover.
- How the permanent wage increases, continuing pandemic-related costs, supply constraints, and member rewards affect margins after the temporary incremental wage program ended.
- Execution and funding of the stated capital-spending and warehouse-opening plans, alongside cash levels, dividend commitments, and debt.
- Developments in material litigation and tax contingencies, and final purchase accounting for the Innovel acquisition.