01—Abstract
Summary
Summary of the 10-K filed October 15, 2014. Cited figures are marked; the original filing is the authoritative source.
Costco Wholesale's fiscal 2014 10-K (52 weeks ended August 31, 2014) shows a business that kept growing steadily while absorbing currency headwinds.
Net sales rose 7% to $110.2 billiona, and comparable warehouse sales grew 4% (6% excluding gasoline price and foreign currency effects). Membership fees rose 6% to $2.43 billion, supported by a worldwide renewal rate of about 87% (91% in the U.S. and Canada) and rising Executive membership penetration, now 39% of eligible cardholders. Net income attributable to Costco grew modestly to $2.06 billion, or $4.65 per diluted share, versus $4.63 in 2013.
That 2013 comparison was flattered by a $62 millionb tax benefit tied to the special dividend, so underlying earnings growth was somewhat stronger than the headline figure suggests. Foreign currency was a meaningful drag, reducing diluted EPS by about $0.10, with the Canadian dollar and Japanese yen the main culprits. Profitability was stable rather than expanding.
Gross margin widened only four basis points to 10.66% of net sales, and SG&A rose seven basis points to 9.89%, mainly from continued investment in information systems. The effective tax rate increased to 34.7% from 32.4%. Operating income grew 5.5% to $3.22 billionc.
Cash generation was strong, with operating cash flow of $3.98 billiond against capital expenditures of $1.99 billion, leaving meaningful free cash flow. Management guided to $2.5 to $2.7 billion of capex in fiscal 2015 and up to 35 new warehouses, so cash deployment will remain heavy in the near term.
For shareholders, the key items are the dividend increase to $0.355 per quarter from $0.31, the $2.72 billion of remaining buyback authorization, and balance sheet capacity with $7.3 billion of cash and short-term investments against $5.1 billion of long-term debt. The main risks are concentration in the U.S. (87% of net sales and operating income combined with Canada) and especially California (32% of U.S. sales), exposure to gasoline price swings, and a stock price that, per management, already reflects high expectations.
02—Key points
Key Highlights
- Net sales rose 7% to $110.2 billion, with comparable warehouse sales up 4% (6% excluding gasoline and currency effects); currency reduced net sales by about $1.3 billion.
- Membership fees grew 6% to $2.43 billion. Worldwide renewal rate was about 87% (91% in U.S. and Canada), and Executive members reached 39% of eligible cardholders.
- Diluted EPS was $4.65, up from $4.63, but the prior year benefited from a $0.14 per-share tax benefit tied to the special dividend. Currency cut EPS by about $0.10.
- Gross margin improved only 4 basis points to 10.66% of net sales, while SG&A rose 7 basis points to 9.89%, driven by information systems investment.
- Operating cash flow was $3.98 billion, versus $1.99 billion of capex. Management plans $2.5-2.7 billion of capex in fiscal 2015 and up to 35 new warehouses.
- The quarterly dividend was raised to $0.355 from $0.31, and $2.72 billion remained under the $4 billion buyback authorization expiring April 2015.
- The network reached 663 warehouses, including 30 openings in 2014, and membership reached 76.4 million total cardholders.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Costco Wholesale Corp kept $0.02.
- Revenue$112.64B100.0%
- Cost of revenue−$98.46B87.4%
- Gross profit$14.18B12.6%
- Operating costs−$10.96B9.7%
- Operating income$3.22B2.9%
- Interest, other & tax−$1.16B1.0%
- Net income$2.06B1.8%
Where FY2014 revenue went
$112.64B- Cost of revenue: $98.46B, 87% of revenue
- Net income: $2.06B, 1.8% of revenue
- SG&A: $10.90B, 9.7% of revenue
- Interest, other & tax: $1.16B, 1.0% of revenue
Kept 1.8% as net incomeNet income $2.06B · 1.8%Interest, other & tax $1.16B · 1.0%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed October 15, 2014Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $112.64B$105.16B | +7.1% |
| Cost of Revenue | $98.46B$91.95B | +7.1% |
| Gross Profit | $14.18B$13.21B | +7.4% |
| SG&A Expenses | $10.90B$10.10B | +7.9% |
| Operating Income | $3.22B$3.05B | +5.5% |
| Interest Expense | $113.00M$99.00M | +14.1% |
| Net Income | $2.06B$2.04B | +0.9% |
| EPS (Basic) | $4.69$4.68 | +0.2% |
| EPS (Diluted) | $4.65$4.63 | +0.4% |
| Shares Outstanding (Basic) | 438.69M435.74M | +0.7% |
| Shares Outstanding (Diluted) | 442.49M440.51M | +0.4% |
05—Questions
Frequently Asked Questions
How strong was Costco's underlying sales growth in fiscal 2014?
Net sales grew 7% to $110.2 billion, but currency and gasoline price changes flattered and distorted the headline. Comparable warehouse sales rose 4% overall, and 6% when excluding gasoline price and foreign currency effects, which is a better gauge of underlying demand. International comparable sales grew 7% in local currency, while U.S. comps rose 5%.
Is Costco's membership model still growing and durable?
Yes. Paid cardholders reached 42.0 million, up from 39.0 million, and membership fees grew 6% to $2.43 billion. Renewal rates held at about 91% in the U.S. and Canada and 87% worldwide. The rising share of Executive members, who spend more and pay a higher fee, supports the model, though the 2014 fee growth was slower than the 10% seen in 2013, which was boosted by the fee increase.
Why did EPS barely grow despite higher sales and operating income?
Operating income rose about 5.5%, but several items held EPS growth to under 1%. Currency reduced diluted EPS by about $0.10. The prior year also included a $62 million tax benefit, worth $0.14 per share, from the special dividend paid through the 401(k) plan. The effective tax rate rose to 34.7% from 32.4%, and a $28 million LIFO charge replaced a prior-year benefit.
What are the biggest risks to Costco's business highlighted in the filing?
The filing points to concentration risk: the U.S. and Canada generated 87% of net sales and 83% of operating income, and California alone was 32% of U.S. sales. Other risks include gasoline price volatility, supplier and product safety issues, competition from Walmart, Amazon and others, IT system disruptions, and currency exposure from international operations, which now account for 28% of net sales. The filing also discloses pending litigation, including gender discrimination, motor fuel temperature, and DEA prescription subpoenas, none considered material.
How is Costco returning capital to shareholders, and what does its balance sheet look like?
Costco paid $584 million in regular dividends in 2014 ($1.33 per share, versus $8.17 in 2013 including the $7.00 special dividend) and repurchased $334 million of stock. The quarterly dividend rose to $0.355. The company held $7.3 billion in cash and short-term investments against $5.1 billion of long-term debt, mostly fixed-rate senior notes. Management believes cash and operating cash flow will cover capital needs for the foreseeable future.
06—Continue