01—Abstract
Summary
Summary of the 10-K filed November 10, 1997. Cited figures are marked; the original filing is the authoritative source.
Costco Companies, Inc. (NASDAQ: COST) reported fiscal 1997 (52 weeks ended August 31, 1997) net income of $312.2 milliona, or $1.46 per fully diluted share, up 28% from $248.8 million, or $1.22, in fiscal 1996.
Net sales rose 12% to $21.48 billionb, and comparable warehouse sales grew at a 9% annual rate versus 5% the prior year. Results absorbed a non-cash, pre-tax $65 million SFAS 121 impairment charge (about $0.17 per share); excluding it, fully diluted EPS would have been $1.63. Operating income grew 18% to $580.7 million, and gross margin widened to 10.10% of sales from 9.73%, reflecting purchasing power, lower shrink, and depot use.
The balance sheet strengthened materially. Long-term debt fell to $917 millionc from $1.23 billion as convertible subordinated debentures were called and largely converted into common stock, and stockholders' equity rose to $2.47 billion from $1.78 billion. The company issued $900 million (face value) of 3 1/2% zero coupon convertible notes for $449.6 million of proceeds.
Cash rose to $175.5 milliond and operating cash flow reached $590 million, which funded $553 million of capital expenditures. Costco ended the year with 261 warehouses (200 U.S., 54 Canada, six U.K., one Taiwan), plus 13 Mexico warehouses through a 50%-owned joint venture. Looking ahead, management plans roughly $400-450 million of U.S. and Canadian capital spending and $80-100 million for international expansion in fiscal 1998, including about 20 new U.S./Canada warehouses.
The company pays no regular dividend. The main risks disclosed are the competitive warehouse-club and discount landscape, a class action tied to The Price Company's 1992 stock disclosures (which management believes lacks merit), and the pending Hechinger acquisition of seven Michigan locations, which is subject to third-party approvals. Sales for the nine weeks ended November 2, 1997 rose 11%, with comparable sales up 8%.
02—Key points
Key Highlights
- Fiscal 1997 net income rose 28% to $312.2 million ($1.46 fully diluted EPS) from $248.8 million ($1.22), despite a $65 million non-cash SFAS 121 impairment charge.
- Net sales grew 12% to $21.48 billion; comparable warehouse sales increased at a 9% annual rate versus 5% in fiscal 1996.
- Gross margin improved to 10.10% of net sales from 9.73%, while SG&A fell to 8.74% of sales from 8.80%.
- Long-term debt was reduced by about $312 million to $917 million after convertible debenture redemptions, with most of the 6 3/4% and 5 1/2% debentures converted into roughly 13 million common shares.
- Stockholders' equity increased 39% to $2.47 billion, and operating cash flow reached $590 million against $553 million of capital expenditures.
- The network reached 261 warehouses at year-end, with 20+ U.S./Canada openings planned for fiscal 1998, and the company is pursuing a Hechinger acquisition of seven Michigan locations (about $80 million).
- Membership base of roughly 4.0 million business and 7.7 million Gold Star members, with membership fee revenue of $390 million (1.82% of net sales).
03—Questions
Frequently Asked Questions
How strong was Costco's underlying profitability in fiscal 1997 excluding one-time charges?
Excluding the $65 million pre-tax SFAS 121 impairment charge, fully diluted EPS would have been $1.63 versus $1.46 reported, implying roughly 33% growth over fiscal 1996's $1.22. The company also incurred about $13 million of pre-tax debenture redemption costs, which the filing discusses separately. The gross margin expansion and lower SG&A ratio point to improving operating leverage.
What drove the decline in interest expense and the balance sheet deleveraging?
Interest expense fell to $76.3 million from $78.1 million as the company called three convertible debenture issues. Most of the 6 3/4% and 5 1/2% debentures converted into common stock, eliminating future interest. The 5 3/4% debentures were redeemed using proceeds from the 3 1/2% zero coupon convertible notes, which raised $449.6 million in August 1997. Long-term debt fell to $917 million from $1.23 billion.
What are the main risks and legal exposures disclosed in the filing?
The company faces intense competition from other warehouse clubs, Wal-Mart, Target, and specialty retailers, and it operates in a market where manufacturers sometimes refuse to sell to discounters. There is also a securities class action (Fecht v. The Price Company) relating to 1991-1992 stock purchases; management believes it lacks merit and does not expect a material adverse effect. The company has $184 million in letters of credit outstanding and relies on 52 leased warehouses.
What is the outlook for capital spending and expansion in fiscal 1998?
Management intends to spend $400-450 million in the U.S. and Canada and $80-100 million internationally, including Mexico, the U.K., and Asia. Plans call for about 20 new U.S./Canada warehouses, one or two more U.K. units, a Taiwan joint venture warehouse, and the Hechinger purchase. The company says these plans are subject to change, and financing will come from operating cash flow, cash on hand, and short-term facilities.
Does Costco pay dividends, and how is its liquidity position?
Costco does not pay regular dividends and has no current plans to declare one, though its revolving credit agreements would permit dividends up to 50% of annual net income. Liquidity is solid: cash was $175.5 million, and the company has a $500 million U.S. commercial paper program backed by a $500 million bank facility, plus a Canadian program with a $101 million backstop. No U.S. commercial paper was outstanding at year-end.
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