10-QPeriod: Q1 FY2007

COSTCO WHOLESALE CORP /NEW Quarterly Report for Q1 Ended Nov 26, 2006

Filed December 22, 2006For Securities:COST

Summary

Costco Wholesale Corporation's (COST) Q1 2007 filing for the period ending November 26, 2006, demonstrates continued robust growth. Net sales increased by 9.3% year-over-year, driven by a 4% increase in comparable warehouse sales and the opening of 29 new warehouses. Membership fees saw a significant 14.0% rise, reflecting strong member renewals, increased Executive Membership penetration, and a recent membership fee increase in the U.S. and Canada. Despite a slight 2 basis point decline in gross margin as a percentage of net sales, primarily due to the Executive Membership reward program, overall net income grew by 9.8% to $236.9 million, translating to $0.51 per diluted share, an increase from $0.45 in the prior year's quarter. The company also actively engaged in share repurchases, buying back 8.3 million shares for approximately $425 million during the quarter.

Key Highlights

  • 1Net sales increased by 9.3% to $13.85 billion, compared to $12.67 billion in the prior year's comparable quarter.
  • 2Membership fees grew by 14.0% to $299.3 million, indicating strong member loyalty and the positive impact of recent fee adjustments.
  • 3Net income rose by 9.8% to $236.9 million, with diluted earnings per share increasing to $0.51 from $0.45 in the prior year's quarter.
  • 4Comparable warehouse sales increased by 4%, showing consistent growth in existing store performance.
  • 5The company repurchased approximately $425 million of its common stock in the first quarter of fiscal 2007.
  • 6Operating income increased by 8.5% to $353.1 million.
  • 7Total revenue grew by 9.4% to $14.15 billion.

Frequently Asked Questions

Costco's sales growth was driven by a combination of comparable warehouse sales increase of 4% and the opening of 29 new warehouses (net of relocations) since the prior year's comparable quarter. Net sales increased by 9.3% year-over-year.

The increased penetration of the Executive Membership program led to a 14.0% rise in membership fees. However, it also contributed to a slight 2 basis point decrease in gross margin as a percentage of net sales due to the 2% reward program offered to these members.

Costco continues to return capital to shareholders through dividends and share repurchases. The company declared a quarterly cash dividend of $0.13 per share and repurchased approximately $425 million worth of its common stock in the first quarter of fiscal 2007. The company has a significant amount available under its authorized repurchase programs.

Costco is involved in several legal proceedings, including class-action lawsuits related to wage and hour disputes and alleged gender discrimination. While the company does not believe any of these, individually or in aggregate, will have a material adverse effect on its financial position, it acknowledges that an unfavorable outcome could lead to a material charge to earnings in an individual quarter. Additionally, the company received a grand jury subpoena concerning the receipt and handling of hazardous merchandise returned by members.