Costco Wholesale Corporation — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2018, the 12 weeks ended May 13, 2018; year-to-date figures cover 36 weeks. Comparisons are with the periods ended May 7, 2017. Costco operated 749 warehouses and e-commerce websites in six countries.
Financial performance
- Third-quarter revenue: $32.361 billion, up 12%; net sales were $31.624 billion, up 12%, and membership fees were $737 million, up 14%.
- Third-quarter earnings: Operating income was $1.067 billion, up from $968 million. Net income attributable to Costco was $750 million, up 7%; diluted EPS was $1.70 versus $1.59.
- Year-to-date: Revenue was $97.165 billion, up 12%; net income attributable to Costco was $2.091 billion versus $1.760 billion; diluted EPS was $4.74 versus $3.99.
- Margins: Third-quarter gross margin was 11.05%, down 46 basis points; SG&A was 9.98% of net sales, down 32 basis points. For the first 36 weeks, gross margin was 11.09%, down 26 basis points, while SG&A was 10.12% of net sales, down 29 basis points.
- Cash flow, first 36 weeks: Operating cash flow was $4.220 billion, versus $4.892 billion; investing outflow was $1.852 billion and financing outflow was $1.014 billion. Capital expenditures were $1.913 billion.
- Liquidity and debt: Cash and cash equivalents were $5.877 billion and short-term investments $1.167 billion at May 13. Long-term debt, including its current portion, was $6.611 billion. The company reported $866 million of borrowing capacity and no short-term facility borrowings.
Material changes and drivers
- Comparable sales rose 10% in the quarter and year to date. Excluding foreign-exchange and gasoline-price effects, comparable sales rose 7% in both periods. Growth reflected higher shopping frequency and average ticket; new warehouses also contributed.
- Quarterly reported sales benefited by approximately $504 million from higher gasoline prices and $412 million from currency movements. These effects also influence reported growth and margin percentages.
- Management attributed lower quarterly gross margin primarily to gasoline’s sales mix impact, a shift toward lower-margin ancillary businesses, lower margins in certain core categories, pharmacy margins, and centralized return-center costs. SG&A leverage from sales growth partly offset these pressures.
- Membership-fee growth reflected fee increases and sign-ups. Paid members reached 50.9 million; renewal rates were 90% in the U.S. and Canada and 87% worldwide.
- Year-to-date operating cash flow declined partly because the prior-year period benefited from approximately $1.7 billion of accelerated vendor payments made in the final week of fiscal 2016.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Costco expected to open 15 additional warehouses, including two relocations, during the remainder of fiscal 2018, and planned fiscal-year capital spending of approximately $2.5–$2.7 billion.
- Effective June 2018, the company planned wage increases for most U.S. hourly employees, with estimated annualized pretax cost of $110–$120 million.
- The 2017 Tax Act produced a reported net tax benefit of $131 million for the first 36 weeks, including a $160 million provisional deferred-tax remeasurement benefit and a $142 million estimated deemed-repatriation tax expense, partly offset by other items. Management said estimates could be adjusted through the first quarter of fiscal 2019. The 2018 year-to-date effective tax rate was 29.0%.
- Legal matters include wage-and-hour litigation, an Ontario drug-benefit inquiry, opioid-related litigation, and Connecticut hazardous-waste notices. The company said it did not expect pending matters, individually or in aggregate, to materially affect financial position, results, or cash flows, but an unfavorable outcome could materially affect an individual quarter.
- Management cited exposure to economic conditions, competition, consumer spending, foreign exchange, cybersecurity/privacy, real estate, labor and health-care costs, energy and commodity prices, regulation, and geopolitical conditions. No material change to previously disclosed risk factors was reported.
- Upcoming accounting changes: revenue recognition adoption was planned for fiscal 2019, with no material financial-statement impact expected; lease accounting adoption was planned for fiscal 2020 and expected to materially increase reported assets and liabilities.
Key facts for investors to verify
- Whether comparable-sales momentum persists after separating gasoline-price and currency effects, and whether new openings continue to cannibalize established warehouses.
- Whether gross-margin pressure eases and sales leverage continues to offset labor, return-center, and other operating costs.
- Membership growth and renewal rates, including the durability of fee-increase benefits.
- Cash generation relative to capital spending, dividends, repurchases, and debt obligations; assess the timing effects in prior-year operating cash flow.
- Final tax-law estimates, the cost and effects of wage increases, and developments in the disclosed legal and regulatory matters.