01—Abstract
Summary
Summary of the 10-K filed October 16, 2013. Cited figures are marked; the original filing is the authoritative source.
Costco Wholesale's fiscal 2013 10-K (52 weeks ended September 1, 2013) shows a business that kept growing its top line while profitability rose more modestly.
Net sales increased 6% to $102.9 billiona, driven by a 6% increase in comparable warehouse sales and 26 new warehouses, bringing the fleet to 634 locations. Membership fee revenue grew 10% to $2.3 billion, supported by the November 2011/January 2012 fee increase and sign-ups, and the Executive membership program (38% of eligible cardholders) continued to gain share. Net income attributable to Costco rose 19% to $2.04 billion, or $4.63 per diluted share, though gross margin improved only 7 basis points to 10.62% of sales and SG&A was roughly flat at 9.82%.
Note that fiscal 2012 included one extra week, which flatters some year-over-year comparisons, and the 2013 earnings benefited from a $62 millionb tax benefit tied to the special dividend. The most important capital allocation event was the $7.00 per share special dividend paid in December 2012 (about $3.05 billion), funded largely by $3.5 billion of new senior notes. As a result, total cash dividends declared rose to $8.17 per share from $1.03, and long-term debt increased to about $5.0 billion from $1.4 billion, while stockholders' equity fell to $10.8 billion from $12.4 billion.
Share repurchases were minimal in 2013 ($34 millionc), with $3.1 billion remaining under the $4 billion authorization. Management expects to spend $2.3 to $2.5 billion in capital expenditures in fiscal 2014 and to open 30 to 36 warehouses.
Key risks highlighted in the filing include heavy dependence on U.S. and Canadian operations (88%d of net sales, with California alone at 23%), competition from warehouse clubs and general retailers, exposure to commodity and gasoline price swings, international currency and political risk (international operations were 28% of sales), and cybersecurity and payment-related exposures. Legal matters are described as immaterial individually, though a gender discrimination class action was settled in principle in October 2013.
02—Key points
Key Highlights
- Net sales rose 6% to $102.9 billion, with comparable warehouse sales up 6% in total (U.S. 6%, international 6%) and 26 new warehouses opened during the year.
- Membership fees increased 10% to $2.29 billion, aided by the fee increase effective late 2011/early 2012 and a growing Executive membership base, now 38% of eligible cardholders.
- Net income attributable to Costco increased 19% to $2.04 billion, or $4.63 per diluted share, versus $3.89 in fiscal 2012 (which had a 53rd week).
- Gross margin improved only 7 basis points to 10.62% of net sales, and SG&A was flat at 9.82%, leaving operating margins thin and highly sensitive to pricing and cost pressures.
- A $7.00 per share special dividend (about $3.05 billion) was paid in December 2012, funded by $3.5 billion of new senior notes; total dividends declared rose to $8.17 per share.
- Long-term debt increased to $5.0 billion from $1.4 billion, while stockholders' equity declined to $10.8 billion from $12.4 billion after the special dividend.
- Fiscal 2014 plans call for $2.3 to $2.5 billion in capital expenditures and 30 to 36 new warehouses, with 90% U.S./Canada and 86% worldwide membership renewal rates.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, Costco Wholesale Corp kept $0.02.
- Revenue$105.16B100.0%
- Cost of revenue−$91.95B87.4%
- Gross profit$13.21B12.6%
- Operating costs−$10.15B9.7%
- Operating income$3.05B2.9%
- Interest, other & tax−$1.01B1.0%
- Net income$2.04B1.9%
Where FY2013 revenue went
$105.16B- Cost of revenue: $91.95B, 87% of revenue
- Net income: $2.04B, 1.9% of revenue
- SG&A: $10.10B, 9.6% of revenue
- Interest, other & tax: $1.01B, 1.0% of revenue
Kept 1.9% as net incomeNet income $2.04B · 1.9%Interest, other & tax $1.01B · 1.0%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2013filed October 16, 2013Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $105.16B$99.14B | +6.1% |
| Cost of Revenue | $91.95B$86.82B | +5.9% |
| Gross Profit | $13.21B$12.31B | +7.3% |
| SG&A Expenses | $10.10B$9.52B | +6.2% |
| Operating Income | $3.05B$2.76B | +10.7% |
| Interest Expense | $99.00M$95.00M | +4.2% |
| Net Income | $2.04B$1.71B | +19.3% |
| EPS (Basic) | $4.68$3.94 | +18.8% |
| EPS (Diluted) | $4.63$3.89 | +19.0% |
| Shares Outstanding (Basic) | 435.74M433.62M | +0.5% |
| Shares Outstanding (Diluted) | 440.51M439.37M | +0.3% |
05—Questions
Frequently Asked Questions
How did Costco's profitability change in fiscal 2013?
Net income attributable to Costco rose 19% to $2.04 billion, or $4.63 per diluted share, compared with $1.71 billion, or $3.89, in fiscal 2012. The improvement came mainly from sales growth and higher membership fees, not margin expansion: gross margin rose only 7 basis points and SG&A was roughly flat as a percentage of sales. The fiscal 2013 results also included a $62 million tax benefit tied to the special dividend, and fiscal 2012 included an extra week, which affects the comparison.
Why did Costco's debt and cash dividend change so much?
In December 2012 Costco paid a $7.00 per share special dividend totaling about $3.05 billion and funded it mostly with $3.5 billion of senior notes issued that month, due in 2015, 2017, and 2019. Total dividends declared were $8.17 per share in 2013 versus $1.03 in 2012. The quarterly dividend was also raised from $0.275 to $0.31 per share in April 2013. Long-term debt rose to about $5.0 billion, and management stated that U.S. liquidity remains sufficient.
What are the biggest risks to Costco's business?
The filing emphasizes concentration risk: U.S. and Canadian operations generated 88% of net sales and operating income, and California alone accounted for 23% of net sales. Other key risks include intense competition from warehouse clubs and general retailers, exposure to volatile gasoline and food commodity prices, international currency and political risk, reliance on suppliers and depots, cybersecurity and payment fraud, and dependence on senior management, which has no key-man insurance. Management also notes that the stock price reflects high expectations, so any shortfall could weigh on the share price.
Is Costco's membership model growing and sustainable?
Membership is growing steadily, with total paid cardholders reaching 39.0 million, up from 36.9 million, and total cardholders at 71.2 million. Renewal rates remain high at about 90% in the U.S. and Canada and 86% worldwide. Executive members, who receive a 2% reward up to $750 per year, represent 38% of eligible cardholders and tend to spend more. The annual fee is about $55 for standard memberships and $110 for Executive, and the fee revenue is recognized ratably over the year.
What is Costco's growth outlook for fiscal 2014?
Management plans to open 30 to 36 new warehouses in fiscal 2014, following 26 openings in 2013, and expects capital expenditures of roughly $2.3 to $2.5 billion, covering real estate, construction, remodeling, and information systems modernization. Growth is expected to come from new warehouses, comparable sales increases driven by shopping frequency and spending per visit, and a higher share of Executive membership and private-label Kirkland Signature products. Future results remain exposed to economic conditions, fuel prices, and currency movements, and the company says it will fund these plans from operating cash flow and existing cash and investments.
06—Continue