This summary is based on the fourth quarter fiscal 2008 earnings call conducted by Costco Wholesale Corporation (COST) on October 8, 2008.
Management:
Chief Financial Officer, Executive Vice President and Director: Richard Galanti
Key Investors Issues
- EPS were 90 cents per share compared to last year’s fourth quarter of 83 cents per share.
- Net income rose to $397.8 million from $372.4 million in the year-ago period.
- Sales were $22.6 billion, up 13% from last year’s $20.1 billion.
Fourth Quarter Highlights
EPS were 90 cents per share compared to last year’s fourth quarter of 83 cents per share.
- In last year’s fourth quarter the company reported a one-time non-cash charge of $56.2 million pre-tax or 8 cents per share related to refining accounting for deferred membership fee revenues. Excluding this charge company has reported 83 cents fourth quarter last year in the fourth quarter it would have been 91 cents per share.
- This year’s quarter included two items: 5 cents per share LIFO charge and 2 cents per share charge related to a litigation settlement. Together, these two items impacted the 90 cents fourth quarter number this year by 7 cents per share. Excluding these items this year’s fourth quarter results would have been 97 cents and on an apples-to-apples basis the 97 cents would have compared to a more normalized last year 91 cents per share. So, a 6% year-over-year increase on an apples-to-apples basis.
- Comparable sales showed an increase of 9%.
Sales were $22.6 billion, up 13% from last year’s $20.1 billion.
-On a comparable basis, comparable store sales were up 9%. For the quarter 9% comparable store sales results were a combination of an average transaction of better than six for the quarter with continuing strong average frequency increase of about 3% for the quarter. The 9% U.S. comparable store sales and the greater than six average transactions both include about 300 basis points from gasoline inflation year-over-year in the fourth quarter.
- International results had an 11% comparable store sales again through all of last year and again it has continued trending towards the other way in the fourth quarter and still the U.S. dollar was relatively week year-over-year so international results of 11% was actually an 8% in local currencies.
- Average building continues to enjoy great sales productivity. In 2007 company wide average warehouse generated $130 million in annual sales and for the U.S. $132 million.
- Last year the company reported member fee with $56 billion charge to it, a non-cash charge to it, so last year’s reported membership fees were $388.2 million or 1.93% compared to this year $473 or 2.09%. Excluding this one-time hit to membership fees last year, again on an apples-to-apples basis, membership fees last year would have been $444 or 2.21% compared to $473 or 2.09%. So an increase of $29 million exclusive of that one-time charge last year, about 7% increase in reported dollars. About 8% on a cash basis and about 12 basis points lower.
- Gross margin was lower year-over-year by 45 basis points coming in at 10.29 this year versus 10.74 last year.
- Core merchandise sales, which is food, sundries, hard line, soft lines and fresh foods, represents between 75%-80% of total sales. During the fourth quarter three of these departments, all but fresh foods, showed year-over-year gross margin gains ranging from 10-90 basis points. One showed a gross margin reduction of about 50. Altogether these four core departments divided by their respective sales, again representing over ¾ of total company sales, actually showed a year-over-year gross margin increase of 19 basis points and that is on top of last year’s fourth quarter year-over-year increase core gross margin of 34.
- Pharmacy, optical, one-hour photo, food courts and hearing aides, which was a -6 basis point to the total company gross margin variance, pharmacy and hearing aides actually showed improvement year-over-year. However, one-hour photo, food court, optical and gas were lower year-over-year. One-hour photo of course is a challenged business right now given the nature of people printing some of their own things and the whole transition over the last few years.
- Food court margins were down year-over-year but they actually showed improvement trends in the first three quarters of this year compared to the first three quarters of last year profitability in food courts showed a detriment of 200 basis points on margin. Whereas, in the fourth quarter on a year-over-year basis it was about 0.5 percentage point to 55 basis points.
- LIFO represented a $32.3 million or 14 basis point charge to gross margin.
- On a reported basis SG&A was lower year-over-year or better by 15 basis points coming in at 9.66 versus 9.81.
- In terms of the provision for impaired asset closing costs in the fourth quarter 2007 the company had a $4.9 million charge. In the fourth quarter 2008 the company had a net benefit of about $6 million, a combination of some closing costs and more than offset by some gains and the sale of assets where the company moved some locations and sold the underlying assets.
- Operating income was up year-over-year from $555 to $604 or 9%. Again, excluding the charge last year to membership of $56 million and excluding the two items in this year, that 9% number would have been up 7%.
Interest expense was essentially the same year-over-year coming in at $32.1 million this year versus $32.3 million last year. Interest income was down by $24 million coming in at $35 million versus $59 million a year ago.
- Pre-tax income was up about 4% year-over-year.
- Cash and equivalents were $3.275 billion.
- Inventories were $5.039 billion.
- Other current assets were $1.148 billion for total current assets of $9.462 billion.
- Net fixed assets were $10.355 billion.
- Other assets were $8.65 with total assets $20.682 billion.
- Short-term debt is $140 million.
- Accounts payable was $5.225 billion.
- Other current was $3.509 billion.
- Total current was $8.874 billion.
- Long-term debt was $2.206 billion.
- Deferred and other were 328 for total liabilities of $11.408 billion.
- Minority interest was 82 and stock holders equity was $9.192 billion for a total again of $20.682 billion.
- Debt to capital was about 20% with plenty of financial strength. Accounts payable as a percent of inventories was over 100%, 105% last year fourth quarter end and 104% this year. That includes payables related to construction since the company has $1.7 billion in annual capital expenditures.
- Average inventory per warehouse is down about $157,000 year-over-year.
Fiscal 2008 Highlights
- In terms of capEx the company spent $1.65 billion.
- The company opened 25 units, one in Mexico.
- The company repurchased 13.8 million shares for $887 million or $64.22 a share.
- The company came in at a reported $1.28 billion or $2.89 per share compared to $1.08 billion or $2.87 per share for last year’s fiscal 2007.
- The average company wide has gone from $130 million to $137 million and the U.S. has gone from $132 million to $138 million.
