10-QPeriod: Q3 FY2001

COSTCO WHOLESALE CORP /NEW Quarterly Report for Q3 Ended May 13, 2001

Filed June 18, 2001For Securities:COST

Summary

Costco Wholesale Corporation reported its third-quarter results for fiscal year 2001, ending May 13, 2001. While net sales showed a healthy 12% increase year-over-year to $7.56 billion, driven by new warehouse openings and a 5% increase in comparable warehouse sales, net income saw a 13% decline to $105.3 million ($0.23 per diluted share). This decrease in profitability was primarily attributed to increased selling, general, and administrative (SG&A) expenses, including higher wages, new warehouse opening costs, and increased utility expenses. The company also highlighted a 23% rise in membership fees, bolstered by a modest fee increase and strong renewal rates, which partially offset margin pressures from the Executive Membership reward program and lower gasoline margins.

Key Highlights

  • 1Net sales increased by 12% to $7.56 billion in Q3 FY2001, driven by 35 net new warehouses and 5% comparable warehouse sales growth.
  • 2Net income decreased by 13% to $105.3 million ($0.23 per diluted share) in Q3 FY2001, compared to $120.3 million ($0.26 per diluted share) in the prior year's quarter.
  • 3Membership fees and other revenue grew by 23% to $155.4 million, reflecting a membership fee increase and high renewal rates (86%).
  • 4Gross margin as a percentage of net sales declined to 9.76% from 10.11% due to the cost of the Executive Membership reward program and lower gasoline margins, though partially offset by reduced merchandise costs.
  • 5Selling, general, and administrative (SG&A) expenses as a percentage of net sales increased to 9.33% from 8.94%, driven by wage increases, new warehouse openings, credit card program expansion, and higher utility costs.
  • 6The company plans significant capital expenditures of $1.00-1.10 billion for US and Canada expansion and $150-200 million for international growth in fiscal year 2001.
  • 7Cash flow from operations increased by 29.6% to $753.6 million for the first 36 weeks of fiscal 2001, supporting the aggressive expansion plans.

Frequently Asked Questions

The decrease in net income was primarily driven by increased selling, general, and administrative (SG&A) expenses. This included higher wages for hourly employees, increased costs associated with opening new warehouses (which have higher expense ratios), expansion of the co-branded credit card program, and higher utility costs. Additionally, the Executive Membership two percent reward program and lower year-over-year gasoline gross margins also put pressure on profitability.

Membership fees and other revenue increased significantly by 23% in the third quarter of fiscal 2001. This growth is attributed to an average $5 increase in annual membership fees beginning October 1, 2000, new membership sign-ups at both new and existing locations, increased penetration of the Executive Membership program, and high overall member renewal rates, which stood at 86%.

Costco is pursuing aggressive expansion, with plans to spend approximately $1.00 to $1.10 billion in fiscal 2001 on real estate, construction, and equipment for new warehouses and operations in the United States and Canada. An additional $150 to $200 million is earmarked for international expansion. These expenditures are expected to be financed through a combination of cash from operations, existing cash and short-term investments, and short-term borrowings under revolving credit facilities.

The company experienced a decrease in working capital, resulting in a deficit of $194.4 million as of May 13, 2001, compared to a positive working capital of $65.8 million at the end of fiscal year 2000. This change was largely due to a reduction in net inventory levels (inventories less accounts payable) and an increase in short-term borrowings, partially offset by increases in receivables and deferred membership income.