01—Abstract
Summary
Summary of the 10-K filed November 24, 1999. Cited figures are marked; the original filing is the authoritative source.
Costco Wholesale Corporation's 10-K for the fiscal year ended August 29, 1999 shows a company in strong expansion mode, with net sales up 13% to $26.98 billiona and total revenue of $27.46 billion.
Operating income rose 9% to $860 millionb before the charges discussed below, and comparable warehouse sales grew at a 10% annual rate, up from 8% the prior year. Fiscal 1999 reported net income fell to $397.3 million ($1.73 diluted EPS) from $459.8 million ($2.03), but this was driven by two one-time items: a $118.0 million after-tax non-cash charge from switching membership fee accounting from cash to deferred recognition, and a $50 million fourth-quarter provision for impaired assets and warehouse relocation costs. Excluding these items, net income would have been $545.3 million, or $2.36 per diluted share, roughly a 20% increase over the adjusted prior year.
The balance sheet remains conservative. Stockholders' equity reached $3.53 billionc, long-term debt was $919 million (mostly a 7 1/8% senior note and zero-coupon convertible notes), and cash plus short-term investments totaled about $697 million. Membership base stood at roughly 3.9 million business and 9.6 million Gold Star members, and the company operated 292 warehouses across the U.S., Canada, the U.K., Asia, and a 50%-owned Mexico joint venture.
Management plans $800d-950 million in domestic capital spending and $100-150 million internationally for fiscal 2000, opening 20 to 25 new U.S. and Canadian warehouses. The board also authorized a $500 million share repurchase program over three years, though no shares had been bought back as of year-end. Costco pays no regular dividend, and its credit agreements limit dividends to 50% of annual net income.
For investors, the key points are sustained double-digit sales growth, improving comparable sales, and a membership model that generates recurring fee revenue, weighed against a low gross margin (10.4%) that depends on keeping operating costs tight. The Year 2000 remediation was described as substantially complete at a cost under $7.5 million. The accounting change and impairment charges are the main items to separate from underlying performance when evaluating the company's earnings trajectory.
02—Key points
Key Highlights
- Net sales rose 13% to $26.98 billion in fiscal 1999, with comparable warehouse sales up 10% on an annual basis versus 8% in fiscal 1998.
- Reported diluted EPS was $1.73, down from $2.03, but excluding a $118.0 million one-time accounting change charge and a $50 million fourth-quarter impairment/closing provision, adjusted EPS was $2.36, up about 20%.
- Membership fee revenue reached $479.6 million, with about 3.9 million business and 9.6 million Gold Star memberships; the company changed to deferred recognition of membership fees in fiscal 1999.
- Gross margin held at 10.40% of net sales, supported by higher-margin ancillary businesses, lower inventory shrink, and improved international performance; SG&A was controlled at 8.67% of sales.
- The company operated 292 warehouses at year-end, with plans for 20-25 new U.S. and Canadian openings in fiscal 2000 and $900 million-$1.1 billion in total capital expenditures planned.
- Stockholders' equity grew to $3.53 billion, and the company held $697 million in cash and short-term investments against $919 million of long-term debt.
- A $500 million three-year share repurchase program was authorized in November 1998, but no shares had been repurchased as of August 29, 1999; the company pays no regular dividend.
03—Questions
Frequently Asked Questions
Why did Costco's reported net income decline in fiscal 1999 even though sales grew 13%?
Net income fell to $397.3 million from $459.8 million because of two one-time charges: a $118.0 million after-tax non-cash charge from changing how membership fees are recognized (from cash to deferred basis) and a $50 million fourth-quarter provision for asset impairment and warehouse relocation costs. Excluding these, net income would have been about $545.3 million, a meaningful increase over the prior year.
How is Costco's membership model contributing to the business?
Membership fees and other revenue were $479.6 million in fiscal 1999, up 9%. Business members pay $35 annually and Gold Star individual members pay $40, with Executive Memberships at $100 offering additional services. The company reported roughly 3.9 million business and 9.6 million Gold Star members, and membership fees provide a recurring revenue stream that supports the low-margin, high-volume merchandise model.
Is Costco's balance sheet strong enough to fund its expansion?
Yes, the company appears financially sound. Stockholders' equity was $3.53 billion, long-term debt was $919 million, and cash plus short-term investments totaled about $697 million. Bank credit facilities of $425 million backing a commercial paper program were fully available at year-end, and operating cash flow of $941 million covered most of the $788 million in capital expenditures.
Does Costco pay dividends, and is there a buyback program?
Costco does not pay regular dividends and has no current plans to do so. Its revolving credit agreements allow dividends of up to 50% of annual net income. In November 1998 the board authorized up to $500 million in share repurchases over three years, but no shares had been bought back as of August 29, 1999.
What are the main risks and competitive pressures highlighted in the filing?
The filing notes intense competition from Wal-Mart, Target, other warehouse clubs, and specialty retailers, as well as supermarkets offering bulk-size food lines. It also flags state and local laws that could restrict large-format retailers or mandate minimum markups, possible federal or state legislation affecting purchasing from manufacturers, and Year 2000 system risks, which management says are substantially remediated at a total cost under $7.5 million.
04—Continue