This summary is based on the third quarter fiscal 2008 earnings call conducted by Costco Wholesale Corp. (COST) on May 29, 2008.
Management:
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Chief Financial Officer, Executive Vice President, Director: Richard A. Galanti
Key Investors Issues
- Sales were up 13% to $16.3 billion from $14.3 billion in 2007.
- Earnings were $295 million or 67 cents a share, up 37%.
- The firm reported membership fees of $350.9 million, up about 10.5% or $33 million due to strong sales.
Year To Date Highlights:
- Net sales increased 12% to $48.35 billion, from $43 billion in 2007.
- Net income was $884.9 million, or $1.99 per diluted share, compared to $710.4 million, or $1.54 per diluted share in 2007.
Third Quarter Highlights
Total sales were up 13% to $16.3 billion from $14.3 billion in the prior year due to an 8% increase in comparable sales due to benefit from from both gasoline inflation and a weak dollar, or strong FX, primarily from Canada.
- The 8% reported comp figure was a combination of an average transaction increase of a little over 4.5% and average frequency increase of just under 3% for the quarter.
- Cannibalization negatively affected comps, as it always does, a little bit under 100 basis points.
- Northwest continues to be strong relative to the older, higher volume mature regions, while California continues to be a little weaker than it had been, although it’s trended up slightly from its weakest points a couple of quarters ago.
The East Coast has been fairly good, the Southeast being a little stronger than the Northeast, and newer regions like Texas and the Midwest tend to do a little better, in part because they are younger units.
- Tobacco continues to be a slight negative impact, otherwise, all sub-categories within food and sundries were up year over year on average mid- to high-single-digits, with the strongest departments being things like the deli departments and the canned foods.
- Within hard lines, electronics comps continue to be slightly negative, in the mid to high singles.
Earnings were $295 million or 67 cents a share, up 37% from $224 million or 49 cents a share due to revenue growth.
- The firm reported membership fees of $350.9 million, up about 10.5% or $33 million due to strong sales.
- The company had 19.7 million Gold Star members, up from 19.3 million at the end of the second quarter while the Primary business had 5.5 million members.
- The executive membership continued to do well with under 7.3 million members, an increase of 380,000 new members, or a 5.5% increase just in the last 12 weeks.
- Renewal rates continue to be strong at 92% for the business member.
The firm gave back to employees about $8 million in healthcare benefits based on having some better than planned performance in reducing some healthcare costs in fiscal 2007.
- Interest income and other was much lower year over year, at $42.8 million last year in the quarter, and $23.9 million this year due to a lower interest income rates.
- All of the funds Costco is currently have are restricted redemption, so it is in the process of undergoing the orderly liquidation of these as they mature.
- The firm still has repurchase authorization under the program of $1.3 billion.
Opening Activities and Plans:
- The firm opened five new units, three in the U.S. and one in Japan, along with a new location in Mexico which is not consolidated into the numbers as it is only a 50-50 interim partner. That was opened in Puerto Vallarta.
- The firm currently operates 536 locations around the world and by this weekend, will have opened four additional locations this quarter, two new locations and two relocations.
Key questions and answers from the third quarter earnings call conducted by Costco Wholesale Corp. (COST) on May 29, 2008.
Dan Binder (Jefferies & Company):
Looking at the company more broadly, are you seeing more of the strength in the core comp coming back from the more food and consumable type items versus other areas?
Richard A. Galanti: What really stands out when you look at the 27 or 30 sub-categories that comprise our four main categories, it’s the staples. It is your food categories. It’s your fresh food categories and the one anecdote mentioned earlier was while jewelry is still negative, it was not as negative.
So generally speaking, your furniture, your jewelry, even your electronics are all still weaker and what really stands out is the mid- to high-single-digit numbers on many of the basic canned goods and paper goods and fresh foods and things like that.
