10-QPeriod: Q3 FY2007

COSTCO WHOLESALE CORP /NEW Quarterly Report for Q3 Ended May 13, 2007

Filed June 15, 2007For Securities:COST

Summary

Costco Wholesale Corporation (COST) reported its third-quarter results for fiscal year 2007, ending May 13, 2007. The company demonstrated solid top-line growth with a 10.3% increase in net sales to $14.3 billion, driven by comparable warehouse sales growth and new store openings. However, net income saw a slight decrease to $224.0 million from $235.6 million in the prior year, largely impacted by a significant increase in the sales returns reserve, which affected gross margins. Excluding this and other unusual items, adjusted net income showed a healthy increase. Financially, Costco maintained a strong liquidity position, with total liquid assets exceeding $3.8 billion. The company continued its capital allocation strategy through significant share repurchases, totaling $1.5 billion year-to-date, and a consistent dividend payout, with an 11.5% increase in the quarterly dividend. Management expects to continue investing in expansion, with capital expenditures projected between $1.3 billion and $1.4 billion for fiscal year 2007.

Key Highlights

  • 1Net sales increased by 10.3% to $14.3 billion for the third quarter, with adjusted net sales (excluding a $228.2 million increase in sales returns reserve) showing a 12.0% rise.
  • 2Net income for the quarter was $224.0 million ($0.49 per diluted share), a decrease from $235.6 million ($0.49 per diluted share) in the prior year, primarily due to a large adjustment to the sales returns reserve.
  • 3Excluding unusual items, adjusted diluted earnings per share for the quarter increased by 14% to $0.56.
  • 4Membership fees grew by 15.0%, driven by new store openings, Executive Membership growth, and a prior year membership fee increase.
  • 5The company repurchased approximately $614.5 million of its common stock in the third quarter, and $1.5 billion year-to-date.
  • 6Costco declared a quarterly cash dividend of $0.145 per share, an increase of 11.5% on an annualized basis.
  • 7Total liquid assets (cash and cash equivalents and short-term investments) stood at $3.8 billion as of May 13, 2007, an increase driven by debt issuance and operating cash flows.

Frequently Asked Questions

The decrease in net income was primarily due to a significant increase in the company's reserve for sales returns. In the third quarter of fiscal 2007, Costco increased this reserve by $228.2 million to better reflect historical return patterns, which negatively impacted reported net sales and gross margin. Excluding this and other unusual items, adjusted net income showed a substantial increase.

Costco is actively managing its capital through significant share repurchases, spending $1.5 billion year-to-date in fiscal 2007, and by consistently returning cash to shareholders via dividends. The company recently increased its quarterly dividend by 11.5% on an annualized basis, reflecting confidence in its financial performance and a commitment to shareholder returns.

Costco plans to continue its growth strategy through new warehouse openings. For fiscal year 2007, the company anticipates capital expenditures between $1.3 billion and $1.4 billion, primarily for real estate, construction, and equipment for new and remodeled warehouses, funded through operating cash flows and existing liquid assets.

The company is involved in various legal proceedings, including several class-action lawsuits primarily related to employment practices (overtime, compensation) and consumer claims (membership renewals, fuel temperature). Additionally, there are ongoing investigations by the U.S. Attorney's Office regarding hazardous merchandise returns and stock option granting practices. While Costco believes these matters will not materially affect its financial position, unfavorable outcomes could impact quarterly results.