10-QPeriod: Q1 FY2016

COSTCO WHOLESALE CORP /NEW Quarterly Report for Q1 Ended Nov 22, 2015

Filed December 18, 2015For Securities:COST

Summary

Costco Wholesale Corporation's (COST) 10-Q filing for the period ending November 21, 2015, reveals a company navigating a challenging sales environment characterized by currency headwinds and deflationary pressures, particularly in gasoline prices. Despite a slight year-over-year increase in net sales to $26.6 billion, driven by new warehouse openings, comparable sales saw a 1% decline. This was primarily attributed to unfavorable foreign currency movements and lower gasoline prices, which masked underlying strength in comparable sales when adjusted for these factors, showing a 6% increase. The company also experienced a decrease in net income to $480 million ($1.09 per diluted share) from $496 million ($1.12 per diluted share) in the prior year's comparable period. Despite these top-line pressures, Costco demonstrated robust operational management. Membership fee revenue saw a healthy 2% increase, signaling continued member loyalty and a growing base, with renewal rates remaining strong. The company also managed its expenses effectively, with Selling, General, and Administrative (SG&A) expenses as a percentage of net sales showing improvement when adjusted for gasoline price deflation. Significant capital allocation occurred through substantial stock repurchases and a dividend increase, indicating confidence in future performance and a commitment to returning value to shareholders. The company continues to invest in growth, with plans for further warehouse openings and a substantial capital expenditure budget for fiscal 2016.

Financial Highlights

45 data points
Beta

Revenue

$27.22B

13.2% Gross Margin

Net Income

$480.00M

1.8% Net Margin

EPS (Diluted)

$1.09

Total Assets

$35.04B

Cash & Equivalents

$5.05B

Free Cash Flow

$96.00M

Financial Statements
Beta
Revenue$27.22B
Cost of Revenue$23.62B
Gross Profit$3.60B
SG&A Expenses$2.81B
Operating Income$767.00M
Interest Expense$33.00M
Net Income$480.00M
EPS (Basic)$1.10
EPS (Diluted)$1.09
Shares Outstanding (Basic)438.34M
Shares Outstanding (Diluted)441.39M

Key Highlights

  • 1Net sales increased 1% to $26.6 billion for the 12 weeks ended November 22, 2015, driven by new warehouse openings, though comparable sales declined by 1%.
  • 2Comparable sales, excluding currency fluctuations and gasoline price changes, increased a healthy 6%, indicating underlying business strength.
  • 3Membership fees rose 2% to $593 million, supported by strong renewal rates (91% in U.S./Canada, 88% worldwide) and upgrades to Executive memberships.
  • 4Net income attributable to Costco decreased by 3% to $480 million ($1.09 per diluted share) compared to $496 million ($1.12 per diluted share) in the prior year's quarter.
  • 5Foreign currency fluctuations negatively impacted diluted EPS by $0.10, primarily due to changes in the Canadian dollar.
  • 6The company declared a quarterly cash dividend of $0.40 per share, an increase from $0.355 in the prior year's comparable quarter.
  • 7Costco repurchased approximately $130 million of its common stock during the quarter, with $3.57 billion remaining authorization.

Frequently Asked Questions

Net sales saw a modest 1% increase to $26.6 billion, largely driven by the addition of 11 net new warehouses. However, comparable warehouse sales decreased by 1%. This decline was primarily due to negative impacts from foreign currency exchange rate fluctuations and a decrease in gasoline prices. When adjusted for these factors, comparable sales actually increased by a robust 6%, indicating underlying growth in store traffic and spending.

Net income attributable to Costco declined by 3% to $480 million, or $1.09 per diluted share, compared to $496 million, or $1.12 per diluted share, in the same period last year. While gross margin percentage improved due to the impact of gasoline price deflation, this was partially offset by increased Selling, General, and Administrative (SG&A) expenses, partly due to higher stock compensation costs and investments in information systems. Foreign currency headwinds also had a notable negative impact on earnings per share.

The membership program remains a strong contributor, with membership fees increasing by 2% to $593 million. This is supported by high renewal rates (91% in the U.S. and Canada, 88% worldwide) and an increase in Executive member upgrades. In terms of shareholder returns, Costco declared a quarterly cash dividend of $0.40 per share, an increase from the previous year, and actively repurchased approximately $130 million worth of its common stock, demonstrating a commitment to returning capital to investors.

Merchandise inventories increased to $10.4 billion from $8.9 billion at the end of the prior fiscal year, reflecting inventory build-up for the holiday season and growth. Capital expenditures for the quarter were $715 million, primarily for new and remodeled warehouses. The company plans to spend between $2.8 billion and $3.0 billion in fiscal year 2016, funded by operations and existing cash reserves.