Costco Wholesale Corporation — Form 10-Q Summary
Reporting period: Second quarter and first half of fiscal 2015, for the 12 and 24 weeks ended February 15, 2015, compared with the periods ended February 16, 2014. Amounts are in millions of dollars, except per-share data and where noted. Costco operated 671 warehouses worldwide.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | First half FY2015 | First half FY2014 |
|---|---|---|---|---|
| Net sales | $26,872 | $25,756 | $53,156 | $50,224 |
| Membership fees | $582 | $550 | $1,164 | $1,099 |
| Total revenue | $27,454 | $26,306 | $54,320 | $51,323 |
| Operating income | $877 | $724 | $1,647 | $1,392 |
| Net income attributable to Costco | $598 | $463 | $1,094 | $888 |
| Diluted EPS | $1.35 | $1.05 | $2.47 | $2.01 |
| Operating cash flow | — | $2,028 | $1,652 |
- Q2 net sales rose 4%; comparable sales increased 2% overall and 8% excluding gasoline-price and foreign-currency effects. First-half net sales rose 6%; comparable sales rose 3% overall and 7% excluding those effects.
- Q2 gross margin was $2,975, or 11.07% of net sales, versus $2,713, or 10.53%, a 54-basis-point increase. First-half gross margin was $5,874, or 11.05%, versus $5,357, or 10.67%, up 38 basis points. Excluding gasoline-price deflation’s effect on sales, reported adjusted gross-margin gains were 20 basis points for Q2 and 16 for the first half.
- SG&A was 9.94% of net sales in Q2 versus 9.83%; for the first half it was 10.10% versus 10.02%. Management said the ratios improved when adjusted for gasoline-price deflation, reflecting warehouse-cost leverage, partly offset by systems investment and higher stock compensation.
- Q2 diluted EPS included a $0.13-per-share tax benefit related to the special dividend paid to employee 401(k) participants, partly offset by a $0.03-per-share tax charge for an ongoing tax matter. Currency changes reduced Q2 diluted EPS by $0.05. The filing attributes a significant portion of the reported earnings increase to the tax benefit.
Cash, liquidity and debt
- At February 15, 2015, cash and cash equivalents were $5,866 and short-term investments were $1,587, totaling $7,453. Management said cash and operating cash flows should meet foreseeable capital requirements. $1,884 of cash and short-term investments held by certain non-U.S. subsidiaries was considered indefinitely reinvested.
- First-half operating cash flow was $2,028; investing cash outflow was $1,180, including $1,167 of property and equipment additions; financing cash outflow was $373. Foreign-exchange movements reduced cash by $347.
- Total debt carrying value was $5,030 at quarter-end, including $1,200 current and $3,830 long-term. On February 17, after quarter-end, Costco issued $1,000 of notes: $500 at 1.75% due 2020 and $500 at 2.25% due 2022. The proceeds funded part of the $2,358 special and quarterly dividend payment made February 27.
- Capital spending was approximately $1,167 in the first half. Management expected fiscal 2015 spending of approximately $2,500–$2,700 and planned up to 22 additional warehouse openings, including two relocations, during the remainder of the year.
Material changes, outlook and risks
- Sales growth was affected by gasoline-price declines and weaker foreign currencies: in Q2, these reduced net sales by approximately $851 and $662, respectively. Lower fuel prices also affected sales mix and reported margins. Management emphasized comparable-sales growth, competitive pricing, membership growth and cost control as key profit drivers.
- Membership fees rose 6% in both Q2 and the first half. Paid cardholders increased to 43.2 million from 40.3 million; renewal rates were 91% in the U.S. and Canada and 88% worldwide.
- The board declared a $5.00-per-share special dividend plus the $0.355 quarterly dividend. The combined payment was approximately $2,358. Costco also repurchased $110 of shares in the first half.
- Management identified economic conditions, competition, currency and fuel-price changes, consumer spending, security and privacy breaches, real estate conditions, vendor actions, and labor, health-care, energy and commodity costs as risks. No material changes to previously reported risk factors were identified.
- Legal matters include motor-fuel temperature-sales litigation and investigations or inquiries involving hazardous merchandise returns, unclaimed property, and controlled-substance prescription practices. No accrual was recorded for the described matters; management said potential losses could not be reasonably estimated and an unfavorable result could materially affect an individual quarter.
- No specific earnings or sales guidance was provided. The filing noted adoption of a new revenue-recognition standard was planned for fiscal 2018; its impact was still under evaluation.
Important facts for investors to verify
- How much earnings growth persists after excluding the $57 tax benefit associated with the special dividend and other discrete tax items.
- Comparable-sales trends and margins excluding gasoline-price and currency effects, especially in international operations.
- The cash and debt position after the special dividend, including the impact of the post-quarter $1,000 note issuance.
- Whether the planned fiscal 2015 capital spending and warehouse openings proceed as expected.
- Developments in the disclosed legal and regulatory matters and any resulting financial exposure.