10-KPeriod: FY2019

COSTCO WHOLESALE CORP /NEW Annual Report, Year Ended Sep 1, 2019

Filed October 11, 2019For Securities:COST

Summary

Costco Wholesale Corporation's 2019 10-K filing reveals a company demonstrating steady growth and operational efficiency. The company reported an 8% increase in net sales, reaching $149.35 billion, driven by a 6% rise in comparable sales and contributions from new warehouse openings. Membership fee revenue also saw a healthy 7% increase, underscoring the loyalty and value proposition offered to its member base, with global renewal rates remaining robust at 88%. The company continues to execute its growth strategy by opening new warehouses, including its first in China, and investing in its e-commerce capabilities. Financially, Costco maintained strong operational control, with selling, general, and administrative expenses as a percentage of net sales showing only a marginal increase. The effective tax rate significantly decreased due to the Tax Cuts and Jobs Act, contributing to a 17% increase in net income, which reached $3.66 billion, or $8.26 per diluted share. The company also returned capital to shareholders through increased dividends and initiated a new $4 billion share repurchase program, signaling confidence in its financial health and future prospects. The company also successfully remediated a previously identified material weakness in internal IT controls.

Financial Highlights

51 data points
Beta

Revenue

$152.70B

10.8% Gross Margin

Net Income

$3.66B

2.4% Net Margin

EPS (Diluted)

$8.26

Total Assets

$45.40B

Cash & Equivalents

$8.38B

Free Cash Flow

$3.36B

Financial Statements
Beta
Revenue$152.70B
Cost of Revenue$132.89B
Gross Profit$16.46B
SG&A Expenses$14.99B
Operating Income$4.74B
Interest Expense$150.00M
Net Income$3.66B
EPS (Basic)$8.32
EPS (Diluted)$8.26
Shares Outstanding (Basic)439.75M
Shares Outstanding (Diluted)442.92M

Key Highlights

  • 1Net sales grew 8% to $149.35 billion in fiscal year 2019, driven by a 6% increase in comparable sales and new warehouse openings.
  • 2Membership fee revenue increased by 7% to $3.35 billion, demonstrating strong member retention with a worldwide renewal rate of 88%.
  • 3Costco opened 25 new warehouses, expanding its global footprint, including its first location in China.
  • 4Net income increased by 17% to $3.66 billion, and diluted earnings per share rose to $8.26.
  • 5The effective tax rate decreased to 22.3% in 2019 compared to 28.4% in 2018, largely due to the Tax Cuts and Jobs Act.
  • 6The company declared a 17% increase in its quarterly cash dividend to $0.65 per share and authorized a new $4 billion share repurchase program.
  • 7Internal control over financial reporting was deemed effective as of September 1, 2019, with a previously identified material weakness related to IT general controls successfully remediated.

Frequently Asked Questions

Costco's core strategy is to offer members low prices on a limited selection of high-quality, nationally branded, and private-label products, driving high sales volume and rapid inventory turnover. This is evident in the company's low gross margins (around 11%), efficient operations, and a focus on membership loyalty, as highlighted by strong renewal rates and consistent membership fee revenue growth.

Sales growth was primarily driven by a 6% increase in comparable sales, indicating strong performance from existing warehouses and websites. Additionally, the opening of 25 new warehouses, including the first in China, and continued growth in e-commerce operations contributed to the overall 8% increase in net sales.

Costco demonstrated effective cost management. While Selling, General, and Administrative (SG&A) expenses as a percentage of net sales saw a slight increase (2 basis points), this was largely due to a $123 million product tax assessment charge. Excluding this, SG&A as a percentage of adjusted net sales increased by 11 basis points. The effective tax rate reduction significantly boosted net income by 17% to $3.66 billion.

Key risks include significant dependence on U.S. and Canadian operations, potential challenges in executing growth strategies (e.g., new market expansion like China), maintaining membership growth and loyalty, disruptions in the supply chain, failure to adapt to consumer trends, IT system failures, data security breaches, and general economic downturns. Competition from other retailers and warehouse clubs is also a persistent risk.