Costco Wholesale Corporation — Form 10-Q Summary
Reporting period: First quarter fiscal 2015, the 12 weeks ended November 23, 2014; comparable period ended November 24, 2013. Amounts are in millions except per-share data, percentages, and warehouse counts. Costco operated 671 warehouses and online businesses in the U.S., Canada, U.K., and Mexico.
Financial results and liquidity
- Revenue: Net sales were $26,284, up 7%; membership fees were $582, up 6%; total revenue was $26,866, up 7% from $25,017.
- Profit: Operating income was $770, versus $668. Net income attributable to Costco was $496, up 17% from $425. Diluted EPS was $1.12, versus $0.96.
- Margins: Gross margin was $2,899, or 11.03% of net sales, versus $2,644, or 10.81%. SG&A was 10.26% of net sales, up four basis points. Core merchandise gross margin declined two basis points as a percentage of its category sales.
- Cash flow: Operating cash flow was $1,128, compared with $939; investing cash use was $653, versus $826; financing cash use was $108, versus $71. Cash increased $231 to $5,969; the exchange-rate effect on cash was negative $136.
- Liquidity and debt: Cash, cash equivalents, and short-term investments totaled $7,619. Long-term debt, excluding current portion, was $5,034, down from $5,093 at fiscal year-end; short-term borrowings were $34. Management said cash and operating cash flow should meet capital needs for the foreseeable future.
- Shareholder returns: The quarterly dividend was raised to $0.355 per share from $0.31. Costco repurchased 139,000 shares for approximately $18.
Changes versus the prior comparable quarter
- Comparable sales rose 5% versus 3% a year earlier; excluding gasoline-price and currency effects, comparable sales increased 7% versus 5%.
- Foreign-currency changes reduced net sales by approximately $412 and gross margin by $47; management estimated a $0.04 adverse effect on diluted EPS. Lower gasoline prices reduced net sales by approximately $203, while gasoline-price deflation also lifted reported gross margin as a percentage of sales by lowering gasoline’s sales share.
- Membership fees benefited from new sign-ups and greater Executive Membership penetration. Paid cardholders increased to 42.5 million from 39.8 million; renewal rates were 91% in the U.S. and Canada and 87% worldwide.
- Operating income and net income increased despite higher SG&A dollars. Excluding the effect of gasoline-price deflation on sales, SG&A as a percentage of adjusted net sales improved four basis points, aided by lower warehouse operating costs; higher stock-based compensation partly offset the improvement.
- Foreign-currency translation and other adjustments were a loss of $322, versus income of $84, reducing comprehensive income attributable to Costco to $184 from $506.
Outlook, risks, and unusual items
- Costco planned to open up to 25 additional warehouses during the remainder of fiscal 2015, including two relocations. Fiscal 2015 capital spending was expected to be approximately $2,500–$2,600; no specific earnings or revenue guidance was provided.
- Management emphasized comparable-sales growth, member loyalty and renewal, pricing competitiveness, and cost control. It noted that competition, economic conditions, currency movements, gasoline prices, employee and utility costs, and the low-margin operating model can affect results.
- Gross margin benefited by seven basis points from a non-recurring legal settlement. Interest income and other, net increased to $35 from $18, including a $23 unrealized gain on unsettled foreign-exchange contracts; management attributed the increase primarily to favorable mark-to-market effects.
- Legal matters include motor-fuel temperature-sales litigation, an inquiry regarding returned hazardous merchandise, state unclaimed-property examinations, and government inquiries concerning controlled-substance prescriptions. No accrual was recorded for the matters described; possible losses could not be reasonably estimated. Costco said an unfavorable outcome could materially affect an individual quarter, though it did not expect pending matters to materially affect its financial position.
- Disclosure controls were concluded to be effective, and the filing reported no material change in risk factors from the fiscal 2014 Form 10-K.
Important facts for investors to verify
- Whether comparable-sales momentum and membership growth persist, particularly after separating currency and gasoline effects.
- How much reported margin improvement reflects gasoline mix and the non-recurring legal settlement, versus underlying merchandise performance.
- Delivery of the planned warehouse openings and capital spending, and the resulting impact on cash flow and returns.
- Developments in the disclosed legal and regulatory matters, for which potential losses were not estimable.
- Exposure to foreign exchange movements, including the impact on sales, earnings, cash, and comprehensive income.