Business Context and Reporting Period
Company: Costco Wholesale Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 10, 2009 (12-week quarter and 36-week year-to-date)
Operations: Membership warehouse retailer operating 523 locations globally as of May 10, 2009, including the U.S., Canada, U.K., Japan, Korea, Taiwan, and a joint venture in Mexico.
Key Financial Metrics
| Metric ($ millions) | 12 Weeks Ended May 10, 2009 | 12 Weeks Ended May 11, 2008 | 36 Weeks Ended May 10, 2009 | 36 Weeks Ended May 11, 2008 |
|---|---|---|---|---|
| Total Revenue | $15,806 | $16,614 | $49,044 | $49,383 |
| Net Sales | $15,477 | $16,263 | $48,001 | $48,351 |
| Net Income | $210 | $295 | $712 | $885 |
| Diluted EPS | $0.48 | $0.67 | $1.62 | $1.99 |
| Operating Cash Flow (36 weeks) | $1,508 (2009) vs $1,763 (2008) | |||
| Cash & Equivalents (Balance Sheet) | $3,083 (May 10, 2009) vs $2,619 (Aug 31, 2008) | |||
| Total Debt (Current + Long-term) | $2,237 (May 10, 2009) vs $2,346 (Aug 31, 2008) | |||
| Gross Margin % | 10.99% | 10.54% | 10.79% | 10.64% |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 4.8% in the quarter and 0.7% year-to-date. Comparable sales dropped 7% in the quarter and 3% year-to-date.
- Profitability Impact: Net income fell 28.4% in the quarter and 19.6% year-to-date. Diluted EPS decreased from $0.67 to $0.48 in the quarter.
- Key Drivers of Decline:
- Gasoline Prices: A 39% drop in average gasoline prices reduced sales by approximately $650 million in the quarter.
- Foreign Exchange: Weakening currencies in Canada, the U.K., and Korea negatively impacted sales by approximately $713 million in the quarter.
- Economic Conditions: General economic downturn reduced spending in hardlines and softlines.
- Expense Increases: SG&A expenses as a percentage of net sales increased 96 basis points in the quarter, driven by lower sales volumes, increased employee benefit costs, and a $7 million litigation settlement charge.
- Investment Losses: The company recognized $5 million in other-than-temporary impairment losses on investments in the quarter (totaling $12 million year-to-date) related to restricted money market funds.
Guidance, Outlook, and Risks
- Capital Expenditures: Management intends to spend approximately $1,200 million to $1,400 million in fiscal 2009 on real estate, construction, and equipment. Approximately $897 million has been spent through the third quarter.
- Expansion Plans: Plans to open six additional warehouses in the remainder of fiscal 2009, including the first location in Australia. Two "Costco Home" locations are scheduled to close.
- Dividends: The Board increased the quarterly dividend to $0.18 per share (up from $0.16), representing a 12.5% increase on an annualized basis.
- Stock Repurchases: Repurchase activity slowed significantly; only 50,000 shares were bought in the quarter compared to 3.75 million in the prior year quarter. Approximately $2,002 million remains available under approved plans.
- Legal Contingencies:
- Membership Renewal Settlement: A proposed settlement regarding membership renewal policies resulted in a $27 million charge to deferred fees and a $7 million reserve for costs.
- Gasoline Temperature Litigation: Agreed to a settlement requiring the installation of temperature-correcting dispensers in 13 states over five years.
- Stock Option Investigation: The U.S. Attorney's Office closed its investigation into historical stock option granting practices in February 2009.
Investor Verification Checklist
- Comparable Sales Trend: Verify if the 7% decline in comparable sales stabilizes in the next quarter given the economic environment.
- Investment Portfolio Recovery: Monitor the liquidation status and final recovery value of the Columbia, BlackRock, and Merrill Lynch money fund investments.
- Gasoline Volume vs. Price: Assess whether lower gasoline prices will drive higher volume sales to offset the revenue loss from price deflation.
- Membership Renewal Rate: Confirm the 87% renewal rate remains stable despite the policy change and litigation settlement.
- SG&A Efficiency: Track if SG&A as a percentage of sales improves as sales volumes recover or if fixed cost pressures persist.