Business context and reporting period
Costco Wholesale Corporation filed this unaudited Form 10-Q for the 12 weeks ended May 6, 2012, and the first 36 weeks of fiscal 2012. Fiscal 2012 is a 53-week year ending September 2, 2012. Costco operated 602 membership warehouses worldwide and Costco Online. Unless noted, dollar amounts are in millions.
Financial results and position
| Metric | 12 weeks ended May 6, 2012 | Comparable 2011 period | 36 weeks ended May 6, 2012 | Comparable 2011 period |
|---|---|---|---|---|
| Net sales | $21,849 | $20,188 | $65,538 | $59,460 |
| Membership fees | $475 | $435 | $1,381 | $1,277 |
| Total revenue | $22,324 | $20,623 | $66,919 | $60,737 |
| Operating income | $623 | $556 | $1,810 | $1,677 |
| Net income attributable to Costco | $386 | $324 | $1,100 | $984 |
| Diluted EPS | $0.88 | $0.73 | $2.50 | $2.22 |
| Operating cash flow | Not separately reported for the quarter | $2,327 | $2,257 |
- Quarterly net sales rose 8.2%; comparable warehouse sales rose 5%. Excluding gasoline-price inflation and currency effects, comparable sales increased 5% companywide. For the 36 weeks, comparable sales increased 8% (7% excluding those effects).
- Quarterly gross margin was 10.55% of net sales versus 10.50%; the 36-week rate was 10.57% versus 10.77%. SG&A was 9.84% of net sales in the quarter versus 9.86%, and 9.88% for the 36 weeks versus 10.04%.
- Cash and cash equivalents were $4,791 and short-term investments $1,185 at May 6, totaling $5,976. Current assets were $14,591 against current liabilities of $12,366. Total debt was $1,373, all long-term; the current portion was zero. Total liabilities were $14,653 and equity was $13,183.
- Capital expenditures were $900 for the first 36 weeks. Cash used in investing was $517 and cash used in financing was $1,011. Cash increased $782 from the fiscal-year start to $4,791.
Material changes versus comparable periods
- Quarterly net income increased 19% and diluted EPS rose from $0.73 to $0.88. For the first 36 weeks, net income increased from $984 to $1,100 and diluted EPS from $2.22 to $2.50.
- Sales growth reflected comparable sales and 20 net new warehouses opened since the prior-year third quarter. Gasoline-price inflation added about $141 to quarterly sales; foreign exchange reduced sales by about $151.
- Quarterly gross margin improved five basis points, helped by a smaller LIFO charge: $6 versus $49 in the prior-year quarter, a 21-basis-point favorable comparison. Core merchandise margins declined as Costco invested in pricing. For the 36 weeks, gross margin declined 20 basis points.
- Membership fees grew 8.9% for the quarter, supported by sign-ups, higher-fee Executive memberships, new locations and fee increases. Cardholders totaled 66.5 million; renewal rates were 89.6% in the U.S. and Canada and 86.2% worldwide.
- Costco repaid $900 of 5.3% Senior Notes in March using cash and short-term investments. Debt fell from $2,153 at fiscal year-end to $1,373 at May 6. Interest expense declined to $19 for the quarter from $27.
Outlook, management commentary, risks and unusual items
- Management said current cash and operating cash flows should meet capital requirements for the foreseeable future. It planned approximately $1,400 of fiscal 2012 spending on real estate, construction, remodeling and equipment; about $900 had been spent through the first 36 weeks. Up to six additional warehouse openings were planned for the remainder of the year.
- The board declared a post-quarter quarterly dividend of $0.275 per share, or $119 total, payable June 8, 2012. This was up from $0.24 per share in the 2011 third quarter.
- Management emphasized the low-margin model’s sensitivity to modest changes in gross margin and SG&A. It cited competition, economic and consumer-spending conditions, exchange rates, gasoline and commodity costs, employee healthcare costs, real estate availability and supplier actions as risks. It provided no specific earnings or sales forecast in the supplied filing text.
- The first-36-week effective tax rate was 36.4%, versus 35.3%; a $23 net discrete tax expense primarily reflected a Mexican tax audit and nondeductible costs related to a Washington State alcohol-law initiative.
- A hazardous-waste matter in California reached a May 2012 settlement requiring $2.6 in penalties and costs and an injunction, subject to court approval; Costco accrued the amount in the quarter. Other legal matters include an appeal related to a motor-fuel temperature settlement, environmental inquiries and unclaimed-property examinations. Costco stated it had not accrued other described matters where a material loss was not considered probable; potential losses generally could not be reasonably estimated.
- Foreign-exchange forward contracts had a $226 notional amount and were used for economic hedging, not speculation. The filing also describes energy-price exposure and related fixed-price contracts. Management reported no material change in market risks or risk factors from its prior annual report.
Most important facts for investors to verify
- Whether comparable-sales momentum and membership-fee growth continue, separating underlying trends from gasoline inflation, foreign exchange and new-warehouse effects.
- Whether pricing investments, LIFO comparisons and operating-cost trends sustain or pressure gross and operating margins.
- Execution of the fiscal 2012 capital-spending and warehouse-opening plans, and resulting cash-flow needs.
- Debt repayment, dividend and repurchase activity alongside liquidity; $2,226 of cash and short-term investments was held by non-U.S. subsidiaries and other entities, which Costco intended to use for international operations.
- Developments in the Mexican tax audit, California hazardous-waste settlement approval, and other litigation and regulatory matters, whose potential losses may be difficult to estimate.