10-QPeriod: Q1 FY2003

COSTCO WHOLESALE CORP /NEW Quarterly Report for Q1 Ended Nov 24, 2002

Filed December 20, 2002For Securities:COST

Summary

Costco Wholesale Corporation reported a solid first quarter for fiscal year 2003, with net income increasing 12% to $145.7 million, or $0.31 per diluted share, compared to $129.7 million, or $0.28 per diluted share, in the prior year's first quarter. This growth was driven by a 9% increase in net sales, reaching $9.01 billion, fueled by the opening of 29 new warehouses and a 4% rise in comparable warehouse sales. Membership fees also showed strength, growing 11% and representing 2.09% of net sales, indicating healthy member acquisition and retention, with an 86% renewal rate for existing members. Gross margin improved to 10.67% of net sales, up from 10.40% in the prior year, primarily due to better merchandise gross margins across key categories and international operations, though partially offset by increased costs related to the Executive Membership Two-Percent Reward Program. Despite increased selling, general, and administrative expenses as a percentage of sales, largely due to rising healthcare and payroll costs, the company demonstrated robust operational and financial performance.

Key Highlights

  • 1Net income increased by 12% to $145.7 million in Q1 FY2003, with diluted EPS rising to $0.31.
  • 2Net sales grew by 9% to $9.01 billion, supported by the addition of 29 new warehouses and 4% comparable warehouse sales growth.
  • 3Membership fees and other revenue increased 11%, contributing 2.09% to net sales, reflecting strong membership growth and an 86% renewal rate.
  • 4Gross margin improved to 10.67% of net sales, up from 10.40% in the prior year, driven by merchandise margin improvements.
  • 5Selling, general, and administrative expenses as a percentage of net sales increased to 9.86%, mainly due to higher healthcare, workers' compensation, and payroll costs.
  • 6The company plans capital expenditures of approximately $850 million to $950 million for U.S. and Canada expansion in fiscal 2003, with an additional $50 million to $100 million for international expansion.
  • 7Net cash provided by operating activities increased significantly by $75.6 million to $300.4 million in the first quarter of fiscal 2003.

Frequently Asked Questions

Costco's sales growth was primarily driven by the net opening of 29 new warehouses since the prior year's first quarter and a 4% increase in comparable warehouse sales. These factors contributed to a 9% overall increase in net sales.

Membership fees and other revenue increased by 11% and represented 2.09% of net sales in the first quarter of fiscal 2003. This growth is attributed to new membership sign-ups, both at new and existing locations, increased penetration of the Executive Membership, and a high member renewal rate of 86%.

The gross margin increased to 10.67% of net sales, up from 10.40% in the prior year's first quarter. This improvement was primarily due to better merchandise gross margins in core merchandising categories such as food and sundries, fresh foods, and hardlines, as well as margin improvements in international operations. This was partially offset by increased costs related to the Executive Membership Two-Percent Reward Program.

Costco intends to spend approximately $850 million to $950 million in fiscal 2003 for U.S. and Canada expansion, including real estate, construction, remodeling, and equipment for warehouse clubs. An additional $50 million to $100 million is allocated for international expansion. These expenditures will be financed through a combination of cash from operations, existing cash and short-term investments, and short-term borrowings under revolving credit facilities.