Business Context and Reporting Period
Company: Costco Wholesale Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: 12-week quarter ended February 15, 2009 (Second Quarter of Fiscal 2009) and the 24-week period ended February 15, 2009.
Operations: The company operates membership warehouses in the U.S., Canada, Japan, the U.K., and other international markets. As of February 15, 2009, Costco operated 550 warehouses globally.
Key Financial Metrics
| Metric (in millions, except per share) | 12 Weeks Ended Feb 15, 2009 | 12 Weeks Ended Feb 17, 2008 | 24 Weeks Ended Feb 15, 2009 | 24 Weeks Ended Feb 17, 2008 |
|---|---|---|---|---|
| Total Revenue | $16,843 | $16,959 | $33,238 | $32,769 |
| Net Sales | $16,488 | $16,616 | $32,524 | $32,088 |
| Membership Fees | $355 | $343 | $714 | $681 |
| Operating Income | $398 | $504 | $820 | $899 |
| Net Income | $239 | $328 | $502 | $590 |
| Diluted EPS | $0.55 | $0.74 | $1.14 | $1.33 |
| Gross Margin % | 10.42% | 10.73% | 10.69% | 10.69% |
| SG&A Expense % | 10.11% | 9.72% | 10.28% | 9.93% |
| Cash & Equivalents (Balance Sheet) | $2,705 | $2,619 | N/A (Balance Sheet Item) | |
| Total Debt (Short-term + Long-term) | $2,371 | $2,346 | N/A (Balance Sheet Item) |
Note: Total Debt calculated as Short-term borrowings ($134) + Current portion of long-term debt ($39) + Long-term debt ($2,198) for Feb 15, 2009.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 0.8% in the quarter and increased 1.4% in the first half compared to the prior year. The quarterly decline was driven by a 3% drop in comparable sales, offset by 18 new warehouse openings.
- Comparable Sales Drivers: Comparable sales were negatively impacted by a 41% quarter-over-quarter decline in gasoline prices (approx. $571 million impact) and weakening foreign currencies (approx. $704 million impact). Shopping frequency increased, partially offsetting a decline in average spend.
- Profitability: Net income decreased 27% in the quarter ($239M vs $328M) and 15% in the first half ($502M vs $590M). Gross margin percentage decreased 31 basis points in the quarter, primarily due to lower margins in ancillary businesses (gasoline) and price reductions in core merchandise.
- Expenses: SG&A expenses as a percentage of net sales increased 39 basis points in the quarter, driven by lower sales volumes and increased employee benefit costs.
- Investment Impairments: The company recognized $7 million in other-than-temporary impairment losses on short-term investments in the first half of 2009, compared to $3 million in the prior year period.
Guidance, Outlook, and Risks
- Expansion Plans: Management intends to spend approximately $1,400 million to $1,500 million in fiscal 2009 on real estate, construction, and equipment. Approximately $671 million has been spent through the second quarter. Plans include opening 13 to 14 additional new warehouses in the remainder of the fiscal year.
- Dividends: The Board declared a quarterly cash dividend of $0.16 per share, payable February 27, 2009.
- Stock Repurchases: No repurchases occurred in the second quarter of 2009. Approximately $2,004 million remains available under approved repurchase plans.
- Legal Proceedings:
- Stock Options: The U.S. Attorney's Office closed its investigation into historical stock option granting practices on February 12, 2009. The company self-reported violations in 2006 and recorded an accounting charge.
- Class Actions: Multiple class actions are pending regarding overtime compensation, meal/rest breaks, and membership renewal practices in California. A settlement of up to $16 million was preliminarily approved for one overtime case.
- Environmental: The Department of Justice is prepared to allege violations of Clean Air Act leak-repair and recordkeeping requirements at warehouses in Arizona, California, Hawaii, and Nevada.
- Market Risks: Significant exposure to foreign currency exchange rates (particularly Canadian, Korean, and U.K. currencies) and energy price fluctuations.
Investor Verification Checklist
- Gasoline Price Sensitivity: Verify the impact of volatile fuel prices on comparable sales and gross margins, as a 41% price drop significantly reduced revenue in the quarter.
- Foreign Currency Exposure: Assess the translation impact of weakening international currencies on reported revenue and cash flows.
- Investment Portfolio Liquidity: Review the status of the Columbia, BlackRock, and Merrill Lynch enhanced money funds, which have restricted liquidity and have incurred impairment losses.
- Legal Contingencies: Monitor the status of the California class action lawsuits regarding overtime and wage statements, and the EPA/Clean Air Act allegations.
- Membership Renewal Policy: Note the change in membership renewal policy effective March 1, 2009, which may defer revenue recognition for late-renewing members.