Business context and reporting period
Costco Wholesale Corporation operates membership warehouses and related businesses. This Form 10-K covers the 52-week fiscal year ended August 28, 2011. Fiscal Q4 was 16 weeks; the annual report provides unaudited quarterly results as well as full-year audited results. Dollar amounts below are in millions, except per-share data.
At year-end, Costco operated 592 warehouses. Its low-price, limited-assortment model depends on high sales volume, rapid inventory turnover, membership fees, and tight cost control.
Financial performance and condition
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $87,048 | $76,255 |
| Membership fees | $1,867 | $1,691 |
| Total revenue | $88,915 | $77,946 |
| Gross margin | $9,309; 10.69% of net sales | $8,260; 10.83% of net sales |
| Operating income | $2,439 | $2,077 |
| Net income attributable to Costco | $1,462 | $1,303 |
| Diluted EPS | $3.30 | $2.92 |
| Operating cash flow | $3,198 | $2,780 |
| Capital expenditures | $1,290 | $1,055 |
In fiscal Q4, net sales were $27,588, membership fees were $590, and total revenue was $28,178. Operating income was $762, net income attributable to Costco was $478, and diluted EPS was $1.08. In the 16-week prior-year Q4, the corresponding figures were $23,592, $533, $24,125, $688, $432, and $0.97.
Year-end cash and cash equivalents were $4,009 and short-term investments were $1,604, for combined liquid assets of $5,613. Current assets were $13,706 and current liabilities $12,050. Total debt was $2,153, including $900 of 5.3% notes due March 2012; no short-term borrowings were outstanding. Management said existing liquidity and operating cash flows should fund foreseeable requirements.
Material changes versus prior comparable period
- Annual net sales increased 14.2%; comparable warehouse sales rose 10%. The comparable-sales increase reflected higher spending per visit and shopping frequency, and included approximately 220 basis points of gasoline price inflation and 162 basis points from currency movements.
- Membership-fee revenue grew 10.4%, driven by Executive Membership penetration and new sign-ups. Renewal rates were 89% in the U.S. and Canada and approximately 86% worldwide.
- Gross margin as a share of net sales declined 14 basis points. An $87 LIFO inventory charge reduced the comparison by about 10 basis points; higher gasoline sales mix also weighed on the rate. SG&A declined 31 basis points as a share of sales.
- Operating cash flow rose $418. Investing cash outflow fell to $1,180 from $2,015, while financing cash outflow increased to $1,277, including higher share repurchases and a reduction in outstanding bank checks.
- Costco began consolidating its 50%-owned Mexico joint venture in fiscal 2011 following an accounting-standard change. This increased reported revenue, assets, and liabilities by approximately 3%, but did not affect net income or EPS attributable to Costco. Prior-year Mexico results were equity-accounted, limiting direct comparability.
Outlook, commentary, risks, and unusual items
- Management planned fiscal 2012 capital spending of approximately $1,400–$1,600 and up to 20 net new warehouses, plus at least one relocation. These were plans, not guaranteed outcomes. A Japan warehouse closed after the March 2011 earthquake was expected to reopen in fiscal Q3 2012.
- The Board increased the quarterly dividend from $0.205 to $0.24 per share. Costco repurchased 8.939 million shares for approximately $641 during fiscal 2011 and had $3,706 remaining under its repurchase authorization at year-end.
- Management emphasized comparable-sales growth and preserving Costco’s price-value reputation, noting that absorbing merchandise-cost increases can pressure gross margin. Economic conditions, competition, commodity prices, labor and health-care costs, and currency movements may affect results.
- Other principal risks include dependence on U.S. and Canadian operations (89% of consolidated net sales and 83% of operating income), new-site availability and cannibalization, supply and product-safety disruptions, international and foreign-exchange exposure, technology and cybersecurity, environmental regulation, and litigation.
- The filing describes employment-related class actions, gasoline-temperature and product-labeling claims, government inquiries, and unclaimed-property examinations. Costco said it could not reasonably estimate possible losses for most matters; it did not believe pending matters would materially affect financial position, though an unfavorable outcome could materially affect an individual quarter.
- Unusual items included the $87 LIFO charge and the fiscal-year change in Mexico consolidation. The CEO transition was also announced: Jim Sinegal was to retire effective January 1, 2012, with Craig Jelinek succeeding him.
Important facts for investors to verify
- How much comparable-sales growth persists after separating gasoline-price and foreign-currency effects.
- Whether margins hold up as merchandise costs, gasoline mix, wages, health-care expenses, and Executive Member rewards change.
- Repayment of the $900 million notes due March 2012 and the availability of cash held outside the U.S.; $1,828 million of cash and short-term investments was held by non-U.S. entities and other entities.
- Execution of fiscal 2012 capital-spending and warehouse-opening plans, including Japan’s expected reopening.
- Developments and potential financial exposure in material litigation, environmental inquiries, and unclaimed-property audits.
- The filing reports unqualified audit opinions on the financial statements and internal controls; management also concluded disclosure controls were effective.