This summary is based on the second quarter fiscal 2007 earnings call conducted by Costco Wholesale Corp. (COST) on March 8, 2007.
Key Investors Issues
- Earnings per share were 54 cents, versus 62 cents in the year ago period.
- Quarterly revenue rose 7.5% to $15.112 billion, versus the year ago period.
- Third quarter fiscal 2007 EPS are anticipated in the range of 52 cents to 56 cents.
Second Quarter Fiscal 2007 Financial Highlights
Net income was $249.478 million versus $296.203 million in the prior year period.
Earnings per share were 54 cents, versus 62 cents in the year ago period. Included in quarterly results were three non-recurring items:
- The $48.1 million pre-tax charge reflecting reduced gross margin on the revised sales return reserve.
- A pre-tax charge of $46.4 million associated with reducing adverse income tax consequences arising from the review of stock options by a special committee of the Board of Directors (this is $23.6 million less than the estimated expected charge announced last quarter).
- A $10.1 million pre-tax benefit primarily to merchandise costs for an excise tax refund on prior merchandise sales of phone cards.
Excluding these one-time items, second quarter net income would have been $302.9 million, or 66 cents per share.
Total revenue for the quarter was $15.112 billion, up 7.5% versus $14.059 billion in the year ago period.
Quarterly net sales were $14.804 billion, up 7% versus $13.789 billion in the year ago period. Excluding the sales adjustment to the returns reserve, the normalized sales number would be $15.03 billion, up 9% over the year ago period.
Membership fees were $307.32 million, up 14% versus $269.766 million in the prior year period, including the $224 million sales adjustment.
The number of gold star members were 18 million at the end of the quarter. There were 26.7 million member households at the end of the quarter, up 200,000 from the end of the prior quarter with spouse card''s 49 million members, up under 500,000 from the prior quarter. There were 5.7 million paid executive members at the end of the quarter, up about 177,000 over the prior quarter. This roughly 21% of the membership base generates a little over 50% of U.S. and Canadian sales. Membership renewal rates continue at around 87%.
The increase in membership fee income also reflected the $5 increase in annual membership fee for U.S. and Canada gold star, business and business add-on members, which was effective May 1, 2006 for new members and July 1, 2006 for existing members.
- Sales from Costco Online were up 34%, versus the year ago period.
In connection with recent changes to the consumer electronics returns policy, the company undertook a more detailed analysis of its returns than it had performed historically.
The information indicated a longer timeframe over which returns are received and a lower realization rate on returned items than were previously estimated. Accordingly, as part of the quarterly analysis of estimated reserve for sales returns, the sales reserve balance was increased by $224.4 million and a charge to income for the quarter amounting to approximately $48.1 million ($30.4 million after tax) was taken. Excluding the sales reserve increase, net sales for the second quarter were $15.03 billion, up 9% over the prior year period.
The company announced a new return policy for consumer electronics devices including televisions, computers, cameras, camcorders, digital music players, and cell phones. In the past, the company gave customers unlimited time to return those items, but according to the new policy, customers can return those items only within 90 days of purchase. The company has a harder time recouping losses from returned consumer electronics products, either by reselling the items at full price or at a discount, or returning the items to the merchants.
The new return policy also extends the manufacturer''s warranty on consumer electronics, excluding cell phones, to 2 years. Costco is contracting with an outside company to provide concierge technical support, which is expected to result in shorter wait times before calls are answered and a greater likelihood that a problem will be solved by the technician who picks up the phone. These measures come at a cost to the company.
Total company comparable store sales rose 5% over the prior year period.
- Comparable sales for U.S. rose 5% over the year ago period.
- Comparable international sales rose 4% over the year ago period.
Quarterly average transactions rose by around 3% and average frequency of shopping increased by about 1.5%, over the year ago period.
- Included in the 3% average transaction increase was half a point decline due to foreign exchange. Gas inflation had a 13 basis points positive impact on comparable sales, over the year ago period.
- Cannibalization (established warehouses losing sales to newly opened locations) impacted comparable sales negatively by about 150 basis points, over the year ago period.
