Why did PriceCostco report a net loss in fiscal 1994 when it was profitable in 1993?

The loss was driven by non-operating and non-recurring charges rather than core warehouse failure. The company recorded a $120 million pre-tax ($80 million after-tax) merger and restructuring charge from the Price-Costco combination, and a $182.5 million estimated loss on disposal of the non-club real estate business being transferred to Price Enterprises. Income from continuing operations before the merger charge was $190.9 million, or $0.87 per share, though that is still below fiscal 1993's $0.92.

How healthy is the core warehouse business?

Mixed. Total net sales grew 6.6% to $16.16 billion, driven by 29 new warehouses, but comparable sales fell about 3%, meaning existing warehouses sold less. Gross margin held roughly flat at 9.27% of sales, and SG&A rose to 8.82% of sales from 8.67%. Early fiscal 1995 data (eight weeks to October 23, 1994) show sales up 11% and comparable sales up 1%, suggesting the decline may be bottoming, though this is a short period.

What is the Exchange Transaction and how could it affect shareholders?

PriceCostco will offer to exchange shares of Price Enterprises, a new entity holding its commercial real estate, Mexico, international and Quest interests, for PriceCostco common stock, up to 27 million shares. If 21.6 million or fewer shares are tendered, the remaining Price Enterprises shares are distributed pro rata to all shareholders. The final accounting loss will depend on the Price Enterprises share price, the level of subscription, and transaction costs, so the $182.5 million estimate could move significantly. Conversion prices on the convertible debentures may also be adjusted downward under certain outcomes.

Does the company pay dividends, and what is its financial position?

PriceCostco does not pay regular dividends and does not expect to declare cash dividends in the foreseeable future. Its revolving credit agreements limit dividends to 50% of annual consolidated net income. Total assets were $4.24 billion and stockholders' equity was $1.68 billion. Working capital was negative $113 million, reflecting a reduction in cash and short-term investments and higher notes payable of $149 million. Management believes operating cash flow and financing capacity are adequate to fund planned expansion, which it estimates at $600 to $700 million for fiscal 1995.

What competitive pressures does the company face?

Management cites intense competition from Wal-Mart and Kmart, which have expanded into food; Target; approximately 800 warehouse clubs across the U.S. and Canada; category specialists such as Home Depot and Office Depot; and supermarkets offering bulk food at comparable prices. Smart & Final is taking institutional food share in Arizona and California. Management says these pressures, together with cannibalization from new openings, are the main drivers of the comparable sales decline.

COST 10-K FY1994 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed November 17, 1994. Cited figures are marked; the original filing is the authoritative source.

This 10-K covers fiscal 1994 (52 weeks ended August 28, 1994) for PriceCostco, Inc., the holding company formed in the October 1993 merger of The Price Company and Costco Wholesale.

The filing shows a net loss of $112.4 million^a, or $0.51 per share, versus net income of $223.2 million in fiscal 1993. The loss reflects a $120 million pre-tax merger and restructuring charge and a $182.5 million estimated loss on disposal of discontinued non-club real estate operations. Excluding the merger charge, income from continuing operations was $190.9 million, or $0.87 per share, compared with $0.92 per share in fiscal 1993, so underlying earnings declined modestly.

Operationally, net sales rose 6.6% to $16.16 billion^b, but comparable warehouse sales fell about 3% for a second straight year. Management attributed the decline to cannibalization from new openings, competition from Wal-Mart, Kmart, Smart & Final and supermarkets, deflation in several categories, a weak California economy, and a weak Canadian dollar. Sales in the eight weeks ended October 23, 1994 rose 11% with comparable sales up 1%, an early sign of stabilization.

The company operated 221 warehouses at year end and plans 30 to 35 new U.S. and Canadian openings in fiscal 1995, with capital spending guided at $600 to $700 million^c in Item 1 (the MD&A gives a different split that sums to a similar range). The most significant structural event is the planned Exchange Transaction, under which PriceCostco will offer shareholders Price Enterprises shares in exchange for PriceCostco stock, spinning off its non-club real estate and certain international and Quest assets.

The loss on disposal is an estimate based on an assumed $15.25^d Price Enterprises share price and a fully subscribed offer, so the final charge will change with market value and take-up. Investors should also note the company pays no regular dividend, a working capital deficit of $113 million, and $801.9 million of long-term debt, mostly convertible subordinated debentures.

02—Key points

Key Highlights

Fiscal 1994 net loss of $112.4 million ($0.51 per share) versus net income of $223.2 million ($1.00 per share) in fiscal 1993, driven by a $120 million pre-tax merger charge and a $182.5 million estimated loss on disposal of discontinued real estate operations.
Income from continuing operations was $110.9 million ($0.51 per share), or $190.9 million ($0.87 per share) excluding the merger charge, down from $0.92 per share in fiscal 1993.
Net sales grew 6.6% to $16.16 billion, but comparable warehouse sales declined about 3%, the same rate as fiscal 1993, reflecting cannibalization, competition, deflation, and weak economic conditions in California and Canada.
Recent trend is encouraging: net sales rose 11% and comparable sales rose 1% in the eight weeks ended October 23, 1994.
The Exchange Transaction would spin off up to 27 million shares of Price Enterprises, holding the non-club real estate segment, while the final loss will depend on the Price Enterprises share price and take-up in the offer.
Operations span 221 warehouses in the U.S., Canada and the U.K., with 3,400,000 business and 6,400,000 Gold Star memberships; membership fees of $319.7 million are a high-margin revenue stream.
No regular dividend is paid, and the company carries a $113 million working capital deficit and $801.9 million of long-term debt, largely 5 3/4%, 6 3/4% and 5 1/2% convertible subordinated debentures.

03—Questions

Frequently Asked Questions

Why did PriceCostco report a net loss in fiscal 1994 when it was profitable in 1993?
The loss was driven by non-operating and non-recurring charges rather than core warehouse failure. The company recorded a $120 million pre-tax ($80 million after-tax) merger and restructuring charge from the Price-Costco combination, and a $182.5 million estimated loss on disposal of the non-club real estate business being transferred to Price Enterprises. Income from continuing operations before the merger charge was $190.9 million, or $0.87 per share, though that is still below fiscal 1993's $0.92.
How healthy is the core warehouse business?
Mixed. Total net sales grew 6.6% to $16.16 billion, driven by 29 new warehouses, but comparable sales fell about 3%, meaning existing warehouses sold less. Gross margin held roughly flat at 9.27% of sales, and SG&A rose to 8.82% of sales from 8.67%. Early fiscal 1995 data (eight weeks to October 23, 1994) show sales up 11% and comparable sales up 1%, suggesting the decline may be bottoming, though this is a short period.
What is the Exchange Transaction and how could it affect shareholders?
PriceCostco will offer to exchange shares of Price Enterprises, a new entity holding its commercial real estate, Mexico, international and Quest interests, for PriceCostco common stock, up to 27 million shares. If 21.6 million or fewer shares are tendered, the remaining Price Enterprises shares are distributed pro rata to all shareholders. The final accounting loss will depend on the Price Enterprises share price, the level of subscription, and transaction costs, so the $182.5 million estimate could move significantly. Conversion prices on the convertible debentures may also be adjusted downward under certain outcomes.
Does the company pay dividends, and what is its financial position?
PriceCostco does not pay regular dividends and does not expect to declare cash dividends in the foreseeable future. Its revolving credit agreements limit dividends to 50% of annual consolidated net income. Total assets were $4.24 billion and stockholders' equity was $1.68 billion. Working capital was negative $113 million, reflecting a reduction in cash and short-term investments and higher notes payable of $149 million. Management believes operating cash flow and financing capacity are adequate to fund planned expansion, which it estimates at $600 to $700 million for fiscal 1995.
What competitive pressures does the company face?
Management cites intense competition from Wal-Mart and Kmart, which have expanded into food; Target; approximately 800 warehouse clubs across the U.S. and Canada; category specialists such as Home Depot and Office Depot; and supermarkets offering bulk food at comparable prices. Smart & Final is taking institutional food share in Arizona and California. Management says these pressures, together with cannibalization from new openings, are the main drivers of the comparable sales decline.

04—Continue

← View all 10-K filings