10-QPeriod: Q3 FY2006

COSTCO WHOLESALE CORP /NEW Quarterly Report for Q3 Ended May 7, 2006

Filed June 16, 2006For Securities:COST

Summary

Costco Wholesale Corporation (COST) reported strong financial performance for the third quarter ended May 7, 2006. The company demonstrated robust top-line growth, with net sales increasing by 10.6% year-over-year, driven by comparable store sales growth of 7% and the addition of 22 new warehouses. Membership fees also saw a healthy increase of 10.6%, reflecting new member acquisition and strong renewal rates. While gross margin experienced a slight decline of 11 basis points due to factors like the executive membership reward program and the lower-margin gasoline business, this was partially offset by improved selling, general, and administrative (SG&A) expenses, which decreased by 12 basis points as a percentage of net sales due to expense leverage and lower workers' compensation costs. Net income grew by a solid 12.3% to $235.6 million, translating to diluted earnings per share of $0.49, up from $0.43 in the prior year quarter. The company also announced an increase in its quarterly cash dividend and continued its commitment to shareholder returns through a significant share repurchase program.

Key Highlights

  • 1Net sales grew 10.6% to $12.997 billion for the third quarter, driven by 7% comparable sales growth and new warehouse openings.
  • 2Membership fees increased by 10.6%, indicating continued member acquisition and retention.
  • 3Net income rose 12.3% to $235.6 million, with diluted EPS growing to $0.49 from $0.43 in the prior year's quarter.
  • 4Gross margin as a percentage of net sales slightly declined by 11 basis points, primarily due to the executive membership reward program and gasoline sales.
  • 5Selling, general, and administrative (SG&A) expenses improved by 12 basis points as a percentage of net sales.
  • 6The company increased its quarterly cash dividend by 13% to $0.13 per share.
  • 7Costco repurchased approximately $290 million of its common stock during the third quarter.

Frequently Asked Questions

Costco's net sales increased by 10.6% due to a combination of comparable warehouse sales growth of 7% and the net opening of 22 new warehouses since the end of the prior year's third quarter. Gasoline sales also contributed to the total sales increase.

The gross margin as a percentage of net sales declined by 11 basis points primarily due to the increased penetration of the executive membership's two-percent reward program and the lower gross margin associated with the gasoline business. These were partially offset by a favorable absence of a LIFO charge.

Costco's capital is primarily sourced from operating cash flows. The company is actively returning value to shareholders through a 13% increase in its quarterly cash dividend to $0.13 per share and a substantial share repurchase program, with approximately $1.16 billion remaining for future repurchases as of May 7, 2006.

Costco is involved in several legal proceedings, including class-action lawsuits related to overtime compensation, wage and hour claims, and alleged gender discrimination. However, the company states that it does not believe any of these claims, individually or in aggregate, will have a material adverse effect on its financial position or results of operations.