10-QPeriod: Q2 FY2009

COSTCO WHOLESALE CORP /NEW Quarterly Report for Q2 Ended Feb 15, 2009

Filed March 18, 2009For Securities:COST

Summary

Costco Wholesale Corporation (COST) reported its financial results for the second quarter and first half of fiscal year 2009, ending February 15, 2009. The company experienced a slight decrease in net sales for the quarter, down 0.8% to $16.49 billion, attributed to a 3% decline in comparable warehouse sales, partially offset by new warehouse openings. This was significantly impacted by foreign currency headwinds and deflationary gasoline prices. Net income for the quarter fell 27% to $239 million, or $0.55 per diluted share, compared to $328 million, or $0.74 per diluted share, in the prior year's quarter. Despite the challenging economic environment impacting consumer spending, particularly in hardlines and softlines, Costco's membership fee revenue saw a modest increase of 3.7%, driven by new sign-ups and higher penetration of its Executive Membership program. The company continued its expansion efforts, with plans for further warehouse openings, and maintained a consistent member renewal rate. The report also details ongoing legal proceedings and stock option investigations, though the latter has been closed by the U.S. Attorney's Office.

Financial Highlights

26 data points
Beta

Revenue

$16.84B

12.3% Gross Margin

Net Income

$239.00M

1.4% Net Margin

EPS (Diluted)

$0.55

Cash & Equivalents

$2.71B

Free Cash Flow

$569.00M

Financial Statements
Beta
Revenue$16.84B
Cost of Revenue$14.77B
Gross Profit$2.07B
SG&A Expenses$1.67B
Operating Income$398.00M
Interest Expense$25.00M
Net Income$239.00M
EPS (Basic)$0.55
EPS (Diluted)$0.55
Shares Outstanding (Basic)433.48M
Shares Outstanding (Diluted)439.69M

Key Highlights

  • 1Net sales for the second quarter of fiscal 2009 decreased by 0.8% to $16.49 billion, impacted by a 3% decline in comparable warehouse sales, foreign currency fluctuations, and deflationary gasoline prices.
  • 2Net income for the second quarter decreased by 27% to $239 million, or $0.55 per diluted share, down from $328 million, or $0.74 per diluted share, in the same period last year.
  • 3Membership fees increased by 3.7% to $355 million, reflecting new member acquisitions and increased Executive Membership penetration.
  • 4Gross margin as a percentage of net sales decreased by 31 basis points to 10.42% in the second quarter, primarily due to lower margins in ancillary businesses (gasoline) and core merchandise categories.
  • 5Selling, general, and administrative (SG&A) expenses as a percentage of net sales increased by 39 basis points to 10.11% in the second quarter, largely due to higher warehouse operating costs and employee benefit expenses.
  • 6The company generated $822 million in cash flow from operating activities for the first half of fiscal 2009.
  • 7Costco announced a quarterly cash dividend of $0.16 per share and has approximately $2,004 million remaining under its approved stock repurchase programs.

Frequently Asked Questions

The primary driver for the decrease in net sales was a 3% decline in comparable warehouse sales. This was further compounded by negative impacts from foreign currency exchange rates and deflationary gasoline prices, which together accounted for a significant portion of the revenue shortfall compared to the prior year's quarter.

The general economic conditions negatively impacted sales in the second quarter, particularly in hardlines and softlines categories. Management believes Costco's business model, which focuses on offering low prices on a limited selection of nationally branded and private-label products with efficient operations, positions it better than many other retailers to navigate the challenging economic environment.

Costco is involved in several legal proceedings, including class-action lawsuits related to overtime pay, wage statements, and product labeling (organic milk, farm-raised salmon). While the company is contesting these matters, it has reserved $16 million for a partial settlement in one overtime case. The company does not currently believe that any pending litigation, individually or in aggregate, will have a material adverse effect on its financial position, though unfavorable outcomes could impact a single fiscal quarter.

Costco plans to continue its expansion, with approximately 13 to 14 new warehouses expected to open in the remainder of fiscal 2009. The company anticipates capital expenditures of approximately $1.4 billion to $1.5 billion for fiscal 2009, primarily for real estate, construction, remodeling, and equipment. These expenditures are expected to be financed through operating cash flow and existing liquid assets.