10-QPeriod: Q2 FY2014

COSTCO WHOLESALE CORP /NEW Quarterly Report for Q2 Ended Feb 16, 2014

Filed March 14, 2014For Securities:COST

Summary

Costco Wholesale Corporation's Q2 fiscal year 2014 filing for the period ending February 16, 2014, indicates a period of continued sales growth, albeit with a decline in net income compared to the prior year. Net sales increased by 6% year-over-year, driven by comparable warehouse sales growth of 3% and contributions from newly opened locations. However, net income attributable to Costco saw a 15% decrease, impacted by a year-over-year unfavorable tax comparison and a slight increase in selling, general, and administrative (SG&A) expenses as a percentage of sales. Membership fees, a key profit driver, showed a healthy 4% increase. The company continues to invest in expansion, opening 16 new warehouses in the first half of the year with plans for approximately 14 more in the remainder of fiscal 2014, signaling a commitment to long-term growth. Despite the dip in quarterly net income, the company maintains a strong liquidity position, with substantial cash and cash equivalents and operating cash flows expected to meet future capital requirements. Investors should note the impact of foreign currency fluctuations and gasoline price changes on reported sales and margins.

Financial Highlights

46 data points
Beta

Revenue

$26.31B

12.4% Gross Margin

Net Income

$463.00M

1.8% Net Margin

EPS (Diluted)

$1.05

Total Assets

$31.57B

Cash & Equivalents

$5.13B

Free Cash Flow

$266.00M

Financial Statements
Beta
Revenue$26.31B
Cost of Revenue$23.04B
Gross Profit$3.26B
SG&A Expenses$2.53B
Operating Income$724.00M
Interest Expense$26.00M
Net Income$463.00M
EPS (Basic)$1.05
EPS (Diluted)$1.05
Shares Outstanding (Basic)439.78M
Shares Outstanding (Diluted)442.83M

Key Highlights

  • 1Net sales grew 6% to $25.76 billion for the 12 weeks ended February 16, 2014, compared to $24.34 billion in the prior year's quarter.
  • 2Comparable warehouse sales increased by 3% for the quarter, indicating steady underlying business performance.
  • 3Net income attributable to Costco decreased by 15% to $463 million ($1.05 per diluted share) from $547 million ($1.24 per diluted share) in the prior year's quarter, impacted by a prior year tax benefit.
  • 4Membership fees, a significant contributor to profitability, increased by 4% to $550 million.
  • 5The company opened 3 new warehouses in the quarter, part of an ongoing expansion strategy with plans for approximately 14 more in the rest of fiscal 2014.
  • 6Total assets grew to $31.57 billion from $30.28 billion at the end of fiscal year 2013, reflecting continued investment in the business.
  • 7The company maintained a strong liquidity position with $5.13 billion in cash and cash equivalents at the end of the quarter.

Frequently Asked Questions

The decrease in net income for the 12 weeks ended February 16, 2014, was primarily due to a favorable tax benefit of $62 million ($0.14 per diluted share) recognized in the prior year's comparable quarter related to a special cash dividend paid to 401(k) plan participants. Without this one-time benefit, the underlying profitability trends would show a different picture.

Costco noted that foreign currency fluctuations, particularly the Canadian dollar and Japanese yen, negatively impacted net sales by approximately $503 million in the second quarter. Similarly, changes in gasoline prices reduced net sales by about $70 million. The company continues to monitor these factors and adjust its strategies as needed.

Costco's growth strategy centers on comparable sales increases through member frequency and spending, alongside opening new warehouses. They opened 16 new warehouses in the first half of fiscal 2014 and plan to open approximately 14 more in the remainder of the year, indicating a continued focus on physical expansion, especially in international markets where growth rates are higher.

Selling, general, and administrative (SG&A) expenses increased as a percentage of net sales by thirteen basis points compared to the prior year's quarter. This increase was largely attributed to higher warehouse operating costs, including employee benefit and payroll expenses, and an increase in stock compensation costs. The company is investing in information systems modernization, which also contributes to these costs.