10-QPeriod: Q3 FY2020

COSTCO WHOLESALE CORP /NEW Quarterly Report for Q3 Ended May 10, 2020

Filed June 4, 2020For Securities:COST

Summary

Costco Wholesale Corporation's (COST) third quarter of fiscal year 2020, ending May 10, 2020, demonstrated resilience amidst the COVID-19 pandemic. The company reported a 7% increase in net sales to $36.45 billion, driven by a 5% comparable sales increase and the contribution of new warehouse openings. Membership fees also saw a 5% rise, underscoring the strength of the membership model. Despite an increase in gross margin percentage, operating income was impacted by higher SG&A expenses, largely due to incremental wage and sanitation costs related to the pandemic. Net income attributable to Costco for the quarter was $838 million, or $1.89 per diluted share, a decrease from the prior year's $906 million ($2.05 per diluted share). This decline was primarily attributed to the significant COVID-19 related expenses, which offset a non-recurring tax benefit recognized in the prior year. The company also proactively managed its capital structure by issuing $4 billion in Senior Notes and maintained a strong liquidity position, ending the quarter with substantial cash and short-term investments.

Financial Highlights

52 data points
Beta

Revenue

$37.27B

13.5% Gross Margin

Net Income

$838.00M

2.2% Net Margin

EPS (Diluted)

$1.89

Total Assets

$51.73B

Cash & Equivalents

$10.83B

Free Cash Flow

$1.20B

Financial Statements
Beta
Revenue$37.27B
Cost of Revenue$32.25B
Gross Profit$5.02B
SG&A Expenses$3.83B
Operating Income$1.18B
Interest Expense$37.00M
Net Income$838.00M
EPS (Basic)$1.90
EPS (Diluted)$1.89
Shares Outstanding (Basic)442.32M
Shares Outstanding (Diluted)443.86M

Key Highlights

  • 1Net sales increased by 7% to $36.45 billion for the third quarter, supported by a 5% increase in comparable sales and the opening of 15 new warehouses.
  • 2Membership fees grew by 5% to $815 million, indicating continued member loyalty and acquisition.
  • 3Gross margin percentage improved by 54 basis points, driven by core merchandise and ancillary businesses, though partially offset by COVID-19 related costs.
  • 4Selling, General, and Administrative (SG&A) expenses as a percentage of net sales increased by 59 basis points, primarily due to incremental wage and sanitation costs related to COVID-19.
  • 5Diluted EPS decreased to $1.89 from $2.05 year-over-year, largely due to COVID-19 expenses and a prior year tax benefit.
  • 6The company acquired Innovel Solutions in March 2020, enhancing its capabilities for final mile delivery of large products.
  • 7Costco issued $4 billion in Senior Notes in April 2020 to strengthen its liquidity position.

Frequently Asked Questions

COVID-19 had a significant impact, leading to increased SG&A expenses of approximately $239 million due to incremental wage and sanitation costs. While sales shifted towards core merchandise categories, ancillary businesses like optical, hearing aid, and photo departments experienced reduced activity. The company also adjusted warehouse operating hours and implemented safety measures for employees and members.

Costco proactively managed its liquidity by issuing $4 billion in Senior Notes in April 2020. A portion of these proceeds was used to repay existing Senior Notes. The company ended the quarter with a strong cash position of $10.8 billion, indicating sufficient liquidity to meet its obligations and capital requirements.

Costco opened 15 net new warehouses in the first three quarters of fiscal year 2020. For the remainder of fiscal 2020, the company plans to open 10 additional new warehouses, including two relocations, although these plans are subject to change due to evolving business conditions.

The acquisition of Innovel Solutions in March 2020 for $998 million enhances Costco's capabilities in final mile delivery, installation, and white-glove services for large, bulky products. While its direct operational impact was not material to the consolidated results in the current quarter, it positions Costco to better serve members with these types of products.