10-QPeriod: Q2 FY2019

COSTCO WHOLESALE CORP /NEW Quarterly Report for Q2 Ended Feb 17, 2019

Filed March 13, 2019For Securities:COST

Summary

Costco Wholesale Corporation reported solid financial results for the period ending February 16, 2019, with a notable increase in net sales and net income compared to the prior year. Net sales grew by 7% to $34.6 billion for the quarter and 9% to $68.9 billion for the first half of the fiscal year, driven by comparable sales growth of 5% and 7% respectively, and contributions from new warehouse openings. Net income attributable to Costco saw a significant jump of 27% to $889 million ($2.01 per diluted share) for the quarter, and a 22% increase to $1.66 billion ($3.74 per diluted share) for the first half. This performance reflects effective cost management and strong membership retention. The company's balance sheet remains strong, with total assets increasing to $42.8 billion. Inventory levels saw a slight increase, consistent with sales growth. While accounts payable decreased, overall liabilities increased, primarily due to a rise in current liabilities. Equity also grew, driven by retained earnings. Cash flow from operations remained robust, providing ample liquidity, while capital expenditures were significant, supporting planned warehouse expansion. Management remains confident in the company's liquidity and ability to meet future obligations.

Financial Highlights

48 data points
Beta

Revenue

$35.40B

11.0% Gross Margin

Net Income

$889.00M

2.5% Net Margin

EPS (Diluted)

$2.01

Total Assets

$42.80B

Cash & Equivalents

$6.08B

Free Cash Flow

-$806.00M

Financial Statements
Beta
Revenue$35.40B
Cost of Revenue$30.72B
Gross Profit$3.91B
SG&A Expenses$3.46B
Operating Income$1.20B
Interest Expense$34.00M
Net Income$889.00M
EPS (Basic)$2.02
EPS (Diluted)$2.01
Shares Outstanding (Basic)440.28M
Shares Outstanding (Diluted)442.34M

Key Highlights

  • 1Net sales increased by 7% to $34.6 billion for the 12 weeks ended February 17, 2019, and by 9% to $68.9 billion for the 24 weeks ended February 17, 2019.
  • 2Net income attributable to Costco increased by 27% to $889 million ($2.01 per diluted share) for the 12 weeks ended February 17, 2019, and by 22% to $1.66 billion ($3.74 per diluted share) for the 24 weeks ended February 17, 2019.
  • 3Comparable sales increased by 5% for the 12-week period and 7% for the 24-week period, indicating sustained customer demand.
  • 4Membership fee revenue grew by 7% to $768 million for the quarter, highlighting strong member loyalty and the impact of prior fee increases.
  • 5Gross margin percentage improved by 31 basis points to 11.29% for the quarter, largely driven by ancillary businesses and the gasoline segment.
  • 6Selling, general, and administrative (SG&A) expenses as a percentage of net sales decreased by 2 basis points to 10.00% for the quarter, demonstrating effective cost leverage.
  • 7The company announced plans to declassify its Board of Directors starting in 2020, moving towards annual director elections.

Frequently Asked Questions

Revenue growth was primarily driven by an increase in comparable sales, which rose by 5% for the quarter and 7% for the first half of the year. This was complemented by sales from 22 net new warehouses opened since the end of the prior fiscal year. Membership fee revenue also contributed positively, growing by 7% due to new member sign-ups and the impact of prior fee adjustments in the U.S. and Canada.

Costco demonstrated effective cost management. Selling, general, and administrative (SG&A) expenses as a percentage of net sales decreased by two basis points to 10.00% for the quarter, attributed to leveraging increased sales. The gross margin percentage also improved by 31 basis points, mainly due to contributions from warehouse ancillary and other businesses, particularly the gasoline segment.

Costco's liquidity remains strong, with cash and cash equivalents and short-term investments totaling $7.1 billion. Net cash provided by operating activities was robust at $1.96 billion for the first half of the year. The company plans significant capital expenditures, approximately $2.8 billion to $3.1 billion, for fiscal year 2019 to support new warehouse openings and other investments, and management believes its cash position and operating cash flows are sufficient to meet its liquidity and capital requirements.

The company is involved in several legal proceedings, including class actions related to wage and hour claims in California, a matter concerning anti-rebate provisions in Canada that resulted in a $5 million payment, and multidistrict litigation related to opioid abuse. Additionally, shareholder derivative and class action lawsuits have been filed concerning disclosures about internal controls over financial reporting. While the company has accrued an immaterial amount for one matter, it does not believe any pending litigation, individually or in aggregate, will have a material adverse effect on its financial position. However, it is possible an unfavorable outcome could result in a material charge to individual quarters.