01—Abstract
Summary
Summary of the 10-K filed October 18, 2017. Cited figures are marked; the original filing is the authoritative source.
Costco's fiscal 2017 10-K (53 weeks ended September 3, 2017) shows a business that grew net sales 9% to $126.2 billion and total revenue to $129.0 billiona, with net income attributable to Costco rising 14% to $2.68 billion, or $6.08 per diluted share.
Growth was driven by a 4% increase in comparable sales, 28 new warehouses (741 total at year-end), and one extra week in the fiscal year. Membership fees rose 8% to $2.85 billionb, supported by a June 2017 fee increase, 49.4 million paid members (up roughly 4%), and a 90% U.S./Canada renewal rate. Gross margin percentage held roughly flat at 11.33%, while SG&A fell to 10.26% of sales, aided by a one-time benefit from the renegotiated U.S. co-branded credit card agreement that management said will not recur at the same magnitude.
Cash generation was strong, with operating cash flow of $6.7 billionc, but that figure was flattered by roughly $1.7 billion of vendor payments accelerated into fiscal 2016. Costco paid a $7.00 special dividend in May 2017 (about $3.1 billion), funded with $3.8 billion of new senior notes, which pushed long-term debt up to $6.6 billion and cut stockholders' equity to $10.8 billion. The quarterly dividend was raised from $0.45 to $0.50, and the company repurchased about $473 million of stock.
Management expects fiscal 2018 capital expenditures of $2.5 to $2.7 billiond and up to 24 new warehouses, and it flagged that the new lease accounting standard will materially increase reported lease liabilities. Investors should weigh the solid top-line momentum and membership economics against concentration risk: U.S. and Canadian operations generated 87% and 85% of net sales and operating income, respectively, and California alone accounts for about 30% of U.S. net sales. Results also carry exposure to gasoline prices, foreign exchange (international operations contributed 36% of operating income), and the one-time items noted above, which make underlying year-over-year comparisons less clean.
02—Key points
Key Highlights
- Net sales rose 9% to $126.2B and total revenue reached $129.0B, aided by a 4% comparable sales increase and an extra week in the 53-week fiscal year
- Net income attributable to Costco grew 14% to $2.68B ($6.08 diluted EPS), though the result includes a $0.19 tax benefit from the 401(k) special dividend and about $0.07 from non-recurring legal and other items
- Membership fees grew 8% to $2.85B; paid members reached 49.4M and the U.S./Canada renewal rate held at 90%, with Executive members at 38% of paid members
- Operating income increased 12% to $4.1B; SG&A fell to 10.26% of sales, helped by a co-branded credit card agreement benefit that management said will not recur at the same scale
- Operating cash flow jumped to $6.7B, but this was inflated by roughly $1.7B of vendor payments accelerated from fiscal 2016 into the prior year
- Costco paid a $7.00 special dividend in May 2017 (about $3.1B) funded by $3.8B of new senior notes; long-term debt rose to $6.6B while stockholders' equity declined to $10.8B
- Concentration risk remains high: U.S. and Canadian operations represent 87% and 85% of net sales and operating income, and California accounts for roughly 30% of U.S. net sales
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Costco Wholesale Corp kept $0.02.
- Revenue$129.03B100.0%
- Cost of revenue−$111.88B86.7%
- Gross profit$17.14B13.3%
- Operating costs−$13.03B10.1%
- Operating income$4.11B3.2%
- Interest, other & tax−$1.43B1.1%
- Net income$2.68B2.1%
Where FY2017 revenue went
$129.03B- Cost of revenue: $111.88B, 87% of revenue
- Net income: $2.68B, 2.1% of revenue
- SG&A: $12.95B, 10% of revenue
- Interest, other & tax: $1.43B, 1.1% of revenue
Kept 2.1% as net incomeNet income $2.68B · 2.1%Interest, other & tax $1.43B · 1.1%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed October 18, 2017Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $129.03B$118.72B | +8.7% |
| Cost of Revenue | $111.88B$102.90B | +8.7% |
| Gross Profit | $17.14B$15.82B | +8.4% |
| SG&A Expenses | $12.95B$12.07B | +7.3% |
| Operating Income | $4.11B$3.67B | +12.0% |
| Interest Expense | $134.00M$133.00M | +0.8% |
| Net Income | $2.68B$2.35B | +14.0% |
| EPS (Basic) | $6.11$5.36 | +14.0% |
| EPS (Diluted) | $6.08$5.33 | +14.1% |
| Shares Outstanding (Basic) | 438.44M438.58M | 0.0% |
| Shares Outstanding (Diluted) | 440.94M441.26M | −0.1% |
05—Questions
Frequently Asked Questions
How did Costco perform financially in fiscal 2017?
Net sales grew 9% to $126.2 billion and net income attributable to Costco rose 14% to $2.68 billion, or $6.08 per diluted share. The fiscal year had 53 weeks, so part of the growth reflects an extra week, and some earnings items (tax benefits and non-recurring legal settlements) were one-time in nature.
Why did Costco take on significant new debt in 2017?
Costco issued $3.8 billion of senior notes in May 2017 to fund a $7.00 per share special dividend (about $3.1 billion) and to retire the 1.125% notes. Long-term debt increased to $6.6 billion from $4.1 billion the prior year, but management said its cash position and operating cash flows are sufficient to meet liquidity needs.
Is Costco's membership model still growing?
Yes. Paid members grew to 49.4 million from 47.6 million, and membership fee revenue rose 8% to $2.85 billion. The June 2017 fee increase (Gold Star and Business to $60, Executive to $120) is expected to add about $175 million in fiscal 2018, and the U.S./Canada renewal rate remained at 90%.
What are the main risks investors should monitor?
The most significant risks are concentration in the U.S. and Canada (87% and 85% of net sales and operating income), reliance on California (about 30% of U.S. sales), exposure to gasoline prices and foreign exchange, and the high market expectations embedded in the stock price. Management also noted that the new revenue and lease accounting standards will change reported results and balance sheet presentation beginning in fiscal 2018 and 2020.
06—Continue