10-KPeriod: FY2018

COSTCO WHOLESALE CORP /NEW Annual Report, Year Ended Sep 2, 2018

Filed October 26, 2018For Securities:COST

Summary

Costco Wholesale Corporation's 2018 10-K report details a year of robust growth, with net sales increasing by 10% to $138.4 billion, driven by a strong 9% comparable sales increase and the opening of 25 new warehouses. Membership fee revenue also saw a significant 10% rise to $3.1 billion, bolstered by a prior year's annual fee increase and continued member sign-ups, highlighting the stickiness of Costco's membership model. The company's operational efficiency is reflected in a 24 basis point decrease in SG&A expenses as a percentage of net sales. Despite a 29 basis point decrease in gross margin percentage, largely due to the impact of gasoline price inflation and a shift towards lower-margin ancillary businesses, the overall financial health remains strong. Net income attributable to Costco grew by 17% to $3.13 billion, or $7.09 per diluted share. Investors should note the ongoing warehouse expansion, with plans for approximately 20 net new warehouses in the upcoming year, and a significant remaining authorization of $2.43 billion for share repurchases, indicating a commitment to returning value to shareholders. A key point of attention for investors is the identified material weakness in internal IT controls related to user access and program change management, which the company is actively working to remediate.

Financial Statements
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Key Highlights

  • 1Net sales increased by 10% to $138.4 billion, driven by a 9% increase in comparable sales and new warehouse openings.
  • 2Membership fee revenue grew by 10% to $3.1 billion, demonstrating strong member loyalty and the effectiveness of fee increases.
  • 3Net income increased by 17% to $3.13 billion, with diluted EPS reaching $7.09.
  • 4The company opened 25 net new warehouses globally, continuing its physical expansion strategy.
  • 5Selling, General, and Administrative (SG&A) expenses as a percentage of net sales decreased by 24 basis points, indicating improved operational leverage.
  • 6A material weakness in internal IT controls (ITGCs) related to user access and program change management was identified, with remediation efforts underway.
  • 7The company repurchased $322 million of its common stock in fiscal 2018 and maintained a remaining authorization of $2.43 billion.

Frequently Asked Questions

Costco's sales growth in fiscal 2018 was primarily driven by a 9% increase in comparable sales and the contribution from newly opened warehouses. The company's ability to attract and retain members, coupled with an increasing average ticket size, fueled this performance.

The material weakness relates to ineffective information technology general controls (ITGCs) concerning user access and program change management over IT systems supporting financial reporting. While it did not result in restated financial statements, it indicates a risk that financial misstatements might not be prevented or detected in a timely manner. Investors should monitor the company's progress in remediating this issue, which is expected to be completed by the end of fiscal 2019.

The overall gross margin percentage decreased by 29 basis points. This was mainly due to the impact of gasoline price inflation on net sales and a shift in sales mix towards lower-margin ancillary businesses like gasoline and pharmacies. However, the gross margin for core merchandise categories saw a slight increase.

Costco demonstrates its commitment to shareholder returns through a combination of quarterly cash dividends and share repurchases. In fiscal 2018, the company increased its quarterly dividend and repurchased approximately $322 million in stock, with a substantial $2.43 billion remaining authorization for future repurchases.