Costco Wholesale Corporation — Fiscal 2018 First-Quarter 10-Q
Reporting period: 12 weeks ended November 26, 2017; comparable period ended November 20, 2016. Amounts are in millions of dollars except per-share data and where noted. Costco operated 746 warehouses and e-commerce sites in six countries.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $31,117 | $27,469 | +13% |
| Membership fees | $692 | $630 | +10% |
| Total revenue | $31,809 | $28,099 | +13% |
| Operating income | $951 | $849 | +12% |
| Net income attributable to Costco | $640 | $545 | +17% |
| Diluted EPS | $1.45 | $1.24 | +17% |
| Gross margin percentage | 11.25% | 11.58% | −33 basis points |
| SG&A as % of net sales | 10.36% | 10.70% | −34 basis points |
Comparable sales rose 10% overall (U.S. 10%, Canada 11%, Other International 10%); excluding foreign-exchange and gasoline-price effects, comparable sales increased 8%. Net sales growth also reflected 23 net new warehouses, approximately $396 of higher gasoline-price impact, and approximately $286 from favorable currency movements. Paid members increased to 49.9 million from 47.9 million; worldwide renewal was 87% (90% in the U.S. and Canada).
Gross margin percentage declined partly because the prior-year quarter included a nonrecurring $51 legal settlement benefit. Excluding gasoline-price inflation, gross margin percentage fell 19 basis points. SG&A leverage from higher sales partly offset margin pressure. The reported effective tax rate was 30.4%, versus 34.4%; a $41 stock-compensation accounting benefit reduced the current-quarter rate. Excluding that benefit, the rate was 34.8%.
Cash flow, liquidity and debt
- Operating cash flow was $2,006, down from $2,793. Management attributed the comparison primarily to approximately $1,700 of accelerated vendor payments in the prior-year period; excluding that timing effect, operating cash flow increased.
- Investing cash outflow was $785, including $820 of property and equipment additions. Financing cash outflow was $58. Cash and cash equivalents ended at $5,689; cash plus short-term investments totaled $6,885.
- Total debt carrying value was $6,594, including $116 current and $6,478 long-term. No short-term borrowings were outstanding under bank credit facilities. Available bank-facility capacity was $843, subject to letters of credit and facility terms.
- Current assets were $19,897 and current liabilities $20,360. Management said cash and operating cash flows should meet liquidity and capital needs for the foreseeable future. About $1,885 of cash and short-term investments held at certain non-U.S. subsidiaries was considered indefinitely reinvested.
- The quarterly dividend rate was raised to $0.50 per share from $0.45; the declared dividend was paid December 1, 2017. Costco repurchased 734,000 shares for approximately $119 during the quarter.
Outlook, commentary and risks
- Management planned 19–24 additional warehouse openings, including four relocations, during the remainder of fiscal 2018, and expected fiscal-year capital spending of approximately $2,500–$2,700. No earnings or revenue forecast was provided.
- Management emphasized comparable-sales growth, member loyalty and cost control, while noting that pricing investments can pressure gross margins. Competition, gasoline prices, foreign exchange, consumer spending, labor and health-care costs, utilities, energy and commodity costs, cybersecurity, and real-estate matters may affect results.
- Costco expects the new revenue-recognition standard, planned for adoption in fiscal 2019, to change the timing of cash-card breakage income and the balance-sheet presentation of estimated sales returns; other areas remained under review. The lease standard, planned for fiscal 2020, is expected to materially increase balance-sheet assets and liabilities, without a material impact on income or cash flows.
- Disclosed legal matters included a California employee-seating class action, an Ontario regulatory information request, and Connecticut hazardous-waste notices. The company said it did not expect pending matters to materially affect financial position, but an unfavorable outcome could materially affect an individual quarter; potential losses for certain matters could not be reasonably estimated.
Important facts for investors to verify
- How comparable-sales growth and membership renewals develop, particularly after separating gasoline and currency effects.
- Whether merchandise-margin pressure persists and how much reported earnings benefited from the $41 tax item versus underlying operations.
- Operating cash-flow trends after accounting for the prior-year vendor-payment timing difference, alongside inventory and capital-spending needs.
- Execution of the planned warehouse openings and $2,500–$2,700 fiscal-year capital-spending plan.
- Potential effects of new revenue and lease accounting standards, and developments in the disclosed legal and regulatory matters.