Costco Wholesale Corporation — Q1 FY2021 Form 10-Q
Reporting period: 12 weeks ended November 22, 2020; comparisons are to the 12 weeks ended November 24, 2019. Costco operated 803 warehouses and e-commerce websites in eight countries. Amounts below are in millions except per-share data, percentages, and where noted.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change / context |
|---|---|---|---|
| Net sales | $42,347 | $36,236 | Up 17%; comparable sales rose 15% versus 4%. |
| Membership-fee revenue | $861 | $804 | Up 7%. |
| Total revenue | $43,208 | $37,040 | Up 17%. |
| Gross margin | $4,889; 11.55% | $4,003; 11.05% | Margin increased 50 basis points. |
| Operating income | $1,430 | $1,061 | Up 35%. |
| Net income attributable to Costco | $1,166 | $844 | Up 38%. |
| Diluted EPS | $2.62 | $1.90 | Up 38%. |
| Operating cash flow | $2,647 | $2,102 | Up $545. |
| Capital expenditures | $893 | $715 | Cash used in investing activities was $682. |
SG&A was $4,298, or 10.15% of net sales, down from 10.30%. Management attributed the improvement primarily to sales leverage, partly offset by COVID-related incremental wages. Those wages totaled $212 and reduced gross margin by 12 basis points and increased SG&A as a percentage of sales by 37 basis points. Interest expense was $39, compared with $38.
The reported effective tax rate was 16.8%, versus 19.1%, reflecting $135 of net discrete tax benefits. Excluding those benefits, the Q1 FY2021 rate was 26.3%. The benefits included $75 from stock compensation and $70 related to the special dividend payable to employee 401(k) participants.
Balance sheet and liquidity
- At November 22, 2020, cash and cash equivalents were $13,590 and short-term investments were $833, totaling $14,423. The total included approximately $2,048 of unsettled card receivables, generally settled within four days.
- Total debt carrying value was $7,625, comprising $96 current and $7,529 long-term. No short-term bank-facility borrowings were outstanding.
- Current assets were $32,096 and current liabilities were $32,667. Current liabilities included the approximately $4,430 special dividend declared before quarter-end and paid December 11, 2020.
- Net cash from financing activities was an outflow of $700, including $310 of cash dividends paid and $80 of share repurchases. The quarter-end balance sheet reflects the declared special dividend as a liability; it was paid after quarter-end.
- Management stated that cash resources and operating cash flows would be sufficient for liquidity and capital requirements for the foreseeable future. Available bank borrowing capacity was $1,002.
Drivers and material changes
- Comparable sales growth was 15%; excluding foreign exchange and gasoline-price changes, it was 17%. E-commerce comparable sales increased 86%. Growth reflected higher average ticket and shopping frequency, strong core-category sales, and pandemic-related demand.
- Sales increased across the U.S. (16%), Canada (18%), and Other International (22%). The company opened 10 warehouses, including relocations, during the quarter and had opened 18 net new warehouses since the comparable prior-year period.
- Gasoline price declines reduced sales by $727, or 201 basis points; lower gasoline volume reduced sales by another $399, or 110 basis points. Average gasoline price per gallon fell 19%, and volume fell approximately 10%. Foreign exchange increased sales by approximately $105, or 29 basis points.
- Core merchandise gross margin improved, notably in fresh foods, while ancillary and other businesses were pressured by COVID-related weakness. Gasoline and travel sales were weaker; travel demand was minimal. E-commerce and fresh foods and foods and sundries benefited from changed shopping patterns.
- Membership fees rose 7%, with 59.1 million paid members versus 54.7 million. Renewal rates were 91% in the U.S. and Canada and 88% worldwide.
- Operating cash flow increased despite a $2,580 inventory cash outflow, partly offset by a $2,785 increase in accounts payable.
Outlook, risks, and contingencies
- Management expected to spend $3.0–$3.2 billion on capital expenditures in FY2021 and planned 12–14 additional warehouse openings for the remainder of the year. COVID-related construction delays had affected some projects; plans could change.
- The filing did not provide earnings or sales guidance. Management emphasized comparable-sales growth, membership trends, and cost control as key performance drivers.
- COVID-19-related uncertainty included possible changes in demand, workforce availability, supply-chain disruption, logistics capacity constraints, and temporary closures. Other cited risks included competition, economic conditions, foreign exchange, tariffs, commodity and employee costs, cybersecurity, and internal-control matters.
- Costco reported multiple legal matters, including wage-and-hour claims, opioid litigation, shareholder-related cases, and an ERISA claim. Accruals for the described matters were immaterial; the company said possible losses could not be reasonably estimated in certain cases. It did not believe pending matters would materially affect its overall financial position, results, or cash flows, but acknowledged an adverse outcome could materially affect an individual quarter or year.
- The Innovel acquisition’s purchase-price allocation remained provisional. The filing reported $934 of goodwill from the preliminary allocation, subject to refinement as additional information became available.
Important facts for investors to verify
- Whether unusually high pandemic-era comparable sales and e-commerce growth persist, and how subsequent periods compare.
- The effect of gasoline prices and volume, ancillary-business recovery, and incremental COVID-related labor costs on margins.
- Membership growth, Executive Membership upgrades, and renewal rates, which management identifies as important to profitability.
- Payment of the $4.43 billion special dividend and its effect on subsequent cash, liquidity, and equity; the filing states it was paid December 11, 2020.
- Execution of the FY2021 capital-spending and warehouse-opening plans, including construction delays.
- Developments in legal contingencies and the final purchase-price allocation for Innovel.