Costco Wholesale Corporation — FY2020 Form 10-K
Reporting period: 52 weeks ended August 30, 2020. The filing’s fourth quarter comprised 16 weeks; FY2019’s comparable quarter also comprised 16 weeks. Financial amounts are in millions, except per-share data.
Business context and performance
Costco operates membership warehouses and e-commerce sites, using a high-volume, low-price model. It ended FY2020 with 795 warehouses, up from 782. U.S. and Canadian operations generated 87% of net sales. COVID-19 drove a shift toward food and fresh-food sales and online shopping, while closures and reduced demand hurt several ancillary businesses.
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $163,220 | $149,351 | +9% |
| Membership fees | $3,541 | $3,352 | +6% |
| Gross margin | $18,281 | $16,465 | +11% |
| Gross margin as % of net sales | 11.20% | 11.02% | +18 bps |
| SG&A as % of net sales | 10.01% | 10.04% | -3 bps |
| Operating income | $5,435 | $4,737 | +15% |
| Net income attributable to Costco | $4,002 | $3,659 | +9% |
| Diluted EPS | $9.02 | $8.26 | +9% |
| Operating cash flow | $8,861 | $6,356 | +$2,505 |
Fourth quarter: Net sales were $52,277 versus $46,448, total revenue $53,383 versus $47,498, operating income $1,929 versus $1,463, net income attributable to Costco $1,389 versus $1,097, and diluted EPS $3.13 versus $2.47.
Cash, debt and capital
- Cash and cash equivalents were $12,277; short-term investments were $1,028. Together, they totaled $13,305, versus $9,444 at FY2019 year-end.
- Long-term debt, including current maturities, was $7,657; long-term debt excluding the current portion was $7,514. Costco issued $4,000 of Senior Notes and used part of the proceeds to repay $1,500 of older notes before maturity.
- Net cash used in investing activities was $3,891, including $2,810 of capital expenditures and acquisitions. Net cash used in financing activities was $1,147.
- FY2020 declared dividends totaled $2.70 per share; the quarterly rate was raised from $0.65 to $0.70. Share repurchases totaled $198.
- Current ratio was approximately 1.13, based on current assets of $28,120 and current liabilities of $24,844.
Material changes and management commentary
- Total comparable sales increased 8%; excluding foreign-currency and gasoline-price effects, they increased 9%. E-commerce comparable sales rose 50%, including 80% in the second half.
- Gasoline price declines and lower volume reduced net sales by a combined $2,203; foreign-exchange movements reduced sales by approximately $663.
- COVID-19 resulted in $564 of incremental wages and sanitation costs. Management cited strong core-category sales and better leverage of expenses, offset by pressure on ancillary businesses and product availability.
- U.S. and Canada renewal rates were 91%; worldwide renewal was 88%. The reported membership count included a methodology change that added about 1.3 million paid members in 2020; membership fee revenue and renewal-rate calculations were unaffected.
- The company acquired Innovel Solutions for $998 and a 35% interest in Navitus Health Solutions. Innovel’s results were not material to FY2020; its acquisition accounting remained provisional at year-end, with $934 recorded as goodwill.
- Adoption of lease accounting standard ASC 842 added $2,632 of operating lease assets and liabilities at transition. The filing notes no material impact on income or cash flows, but balance-sheet comparisons with FY2019 are affected.
Outlook, risks and contingencies
- Management expected FY2021 capital expenditures of approximately $3,000–$3,200 and planned about 23 new warehouses, including three relocations. COVID-related real-estate and construction delays could affect these plans. These are stated expectations, not earnings guidance.
- Management said existing cash, investments and operating cash flows should meet liquidity and capital needs for the foreseeable future. Future pandemic effects remain uncertain, including supply disruptions, labor and sanitation costs, changing demand, fulfillment delays and possible facility interruptions.
- Other key risks include intense retail competition, dependence on U.S. and Canadian results, supplier availability, currency and commodity volatility, cybersecurity and IT resilience, labor and self-insurance costs, and legal, tax and regulatory matters.
- Costco reported immaterial accruals for the legal matters described, but said an unfavorable outcome could cause a material charge in an individual quarter or year. A product-tax assessment dispute resulted in an $84 benefit in FY2020 after a $123 charge in FY2019.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified self-insurance liability estimation as a critical audit matter; recorded insurance liabilities were $1,188.
Important facts for investors to verify
- Whether COVID-related category mix, ancillary-business recovery, supply availability and elevated operating costs persist beyond FY2020.
- Whether membership growth and renewal rates remain strong, considering the membership-count methodology change.
- Execution and returns from planned capital spending, warehouse openings and the Innovel acquisition, including final purchase-price allocation.
- Debt maturities, lease obligations and the sustainability of the higher dividend and planned capital requirements.
- Developments in legal proceedings, tax audits and self-insurance estimates that could affect reported results.