01—Abstract
Summary
Summary of the 10-K filed October 14, 2015. Cited figures are marked; the original filing is the authoritative source.
Costco's fiscal 2015 10-K (52 weeks ended August 30, 2015) shows a company growing revenue steadily while margins were pressured by gasoline deflation and currency headwinds.
Total revenue rose 3% to $116.2 billiona, with net sales of $113.7 billion and membership fees of $2.5 billion (up 4%). Operating income grew 13% to $3.6 billion, and net income attributable to Costco increased 15% to $2.38 billion, or $5.37 per diluted share. Gross margin expanded 43 basis points to 11.09% of net sales, largely because falling gasoline prices lifted the percentage, while SG&A rose 18 basis points to 10.07%.
Comparable warehouse sales grew only 1% on a reported basis (7% excluding currency and gasoline effects), reflecting a roughly $3.3 billionb currency drag and a 22% drop in average gasoline prices. Capital allocation was heavily shareholder-focused. Costco paid a $5.00 special dividend in February 2015 (about $2.2 billion), raised its quarterly dividend from $0.355 to $0.40, and repurchased $494 million of stock under a new $4 billion authorization.
Total dividends paid reached $2.9 billionc, funded partly by a $1 billion senior notes issuance. Free cash flow remained positive, with operating cash flow of $4.3 billion against capital expenditures of $2.4 billion, and the company guided to $2.8-3.0 billion in fiscal 2016 capex and up to 32 new warehouses.
Investors should weigh continued warehouse expansion (686 locations, 23 net openings) and membership strength (44.6 million paid members, 91%d U.S./Canada renewal rate) against risks flagged in the filing. These include heavy dependence on U.S. and Canadian operations (88% of net sales), California concentration, foreign exchange exposure (international operations were 36% of operating income), a data breach at an online photo vendor, and a pending Citibank co-branded credit card transition that replaces American Express in 2016.
02—Key points
Key Highlights
- Total revenue rose 3% to $116.2 billion; membership fees increased 4% to $2.53 billion, with paid members reaching 44.6 million and a 91% U.S./Canada renewal rate.
- Operating income increased 13% to $3.62 billion, and net income attributable to Costco grew 15% to $2.38 billion ($5.37 per diluted share vs. $4.65 in fiscal 2014).
- Gross margin improved 43 basis points to 11.09% of net sales, driven mainly by gasoline price deflation, while SG&A rose 18 basis points to 10.07%.
- Currency translation was a meaningful headwind, reducing net sales by about $3.3 billion and diluting EPS by $0.28, primarily from the Canadian dollar.
- Comparable sales grew just 1% as reported but 7% excluding foreign currency and gasoline price effects, indicating solid underlying demand.
- Shareholder returns were large: a $5.00 special dividend (~$2.2 billion), a quarterly dividend increase to $0.40, and a new $4 billion buyback authorization.
- Expansion continued with 23 net new warehouses in 2015 (686 total) and plans for up to 32 openings in 2016 with $2.8-3.0 billion in planned capex.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Costco Wholesale Corp kept $0.02.
- Revenue$116.20B100.0%
- Cost of revenue−$101.06B87.0%
- Gross profit$15.13B13.0%
- Operating costs−$11.51B9.9%
- Operating income$3.62B3.1%
- Interest, other & tax−$1.25B1.1%
- Net income$2.38B2.0%
Where FY2015 revenue went
$116.20B- Cost of revenue: $101.06B, 87% of revenue
- Net income: $2.38B, 2.0% of revenue
- SG&A: $11.45B, 9.8% of revenue
- Interest, other & tax: $1.25B, 1.1% of revenue
Kept 2.0% as net incomeNet income $2.38B · 2.0%Interest, other & tax $1.25B · 1.1%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed October 14, 2015Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $116.20B$112.64B | +3.2% |
| Cost of Revenue | $101.06B$98.46B | +2.6% |
| Gross Profit | $15.13B$14.18B | +6.7% |
| SG&A Expenses | $11.45B$10.90B | +5.0% |
| Operating Income | $3.62B$3.22B | +12.5% |
| Interest Expense | $124.00M$113.00M | +9.7% |
| Net Income | $2.38B$2.06B | +15.5% |
| EPS (Basic) | $5.41$4.69 | +15.4% |
| EPS (Diluted) | $5.37$4.65 | +15.5% |
| Shares Outstanding (Basic) | 439.45M438.69M | +0.2% |
| Shares Outstanding (Diluted) | 442.72M442.49M | +0.1% |
05—Questions
Frequently Asked Questions
Why did Costco's gross margin rise in fiscal 2015 even though it was a weak year for sales growth?
Most of the 43 basis point gross margin improvement came from gasoline price deflation. Because gasoline carries a low margin, falling prices raise the margin percentage of total net sales. Excluding this effect, gross margin on adjusted sales rose about 15 basis points, helped by a stronger gasoline business and a LIFO benefit, partly offset by lower sales mix in core merchandise. Management noted that this effect reverses when gasoline prices rise.
How much did foreign currency affect Costco's results in 2015?
Currency was a significant headwind. Changes in foreign exchange reduced net sales by about $3.3 billion (303 basis points), gross margin by about $359 million, and EPS by $0.28. The impact was driven mainly by the Canadian dollar, along with Mexican peso and Japanese yen weakness. Because international operations represented 27% of net sales and 36% of operating income, Costco remains exposed to further currency volatility.
Is Costco's dividend sustainable after the $5.00 special dividend?
The special dividend was a one-time payment funded partly by $1 billion in new senior notes and operating cash flow. The regular quarterly dividend was raised from $0.355 to $0.40 per share, and management stated it expects to continue paying quarterly dividends. Operating cash flow of $4.3 billion covers the regular dividend comfortably, though total dividends paid of $2.9 billion in 2015 were well above the prior year's $584 million because of the special payout.
What are the main risks investors should monitor in the filing?
Key risks include heavy reliance on U.S. and Canadian operations (88% of net sales) and especially California; competition from Walmart's Sam's Club, BJ's, Amazon and others; currency fluctuations; commodity and gasoline price volatility; a July 2015 security breach at a vendor hosting Costco's online photo center; payment-related risks; and pending legal matters including a motor fuel temperature class action and a DEA inquiry into controlled-substance prescription fulfillment. Management stated it does not believe any pending matter will have a material adverse effect.
What changes are coming to Costco's co-branded credit card program?
In February 2015, Costco agreed with Citibank to become the exclusive issuer of its co-branded credit cards, with Visa replacing American Express as the U.S. and Puerto Rico network. Citi is expected to purchase the existing portfolio by April 1, 2016, with Visa cards issued by summer 2016. The ten-year agreement provides Costco royalty income on external spending, a lower base discount rate on card acceptance costs, and bounty payments for new accounts, which could benefit net sales, gross margin and membership growth.
06—Continue