Costco Wholesale Corporation (COST)
Q1 2011 Earnings Call Transcript
December 8, 2010 11:00 a.m. ET

Executives

Richard A. Galanti – Chief Financial Officer

Analysts

Tina Hwang – Citigroup
Charles Grom – J.P. Morgan
Adrianne Shapira – Goldman Sachs
Mark Wiltamuth – Morgan Stanley
Mark Miller – William Blair & Company
Robert Drbul – Barclays Capital
Rob Simone – Cowen & Company
Mike Montani – ISI Group
Neil Currie – UBS

Presentation

Operator

Good morning. My name is Debbie and I''ll be your conference Operator today. At this time, I would like to welcome everyone to the Costco First Quarter Results. All lines have been placed on mute to prevent any background noise. After the speakers'' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw, press pound key. Thank you. Mr. Richard Galanti, Chief Financial Officer, please go ahead.

Richard A. Galanti

Thank you, Debbie. Good morning to everyone. This morning''s press release reviews our first quarter fiscal 2011 operating results for the 12 weeks that ended November 21st. As with every conference call, I''ll start by stating that the discussions we''re having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. And that these statements involve risks and certainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include but are not limited to those outlined in today''s call as well as other risks identified from time to time in the company''s public statements and reports filed with the SEC.

To begin with, our 12-week first quarter operating results, for the quarter our earnings per share came in at $0.71, an 18% increase over last year''s first quarter earnings per share of $0.60. Three items I will quickly note here. First, last year in first quarter we enjoyed very strong gasoline profits.

As many of you know, when gasoline prices are flat or falling, Costco''s gasoline operations can be quite profitable. And when prices are rising, they can be less profitable. This year''s first quarter gasoline operations were profitable but less profitable than a year ago to the tune of a little over $0.03 a share.

Second, you''ll note that our income tax rate is almost two percentage points lower year-over-year, 36.1% last year in the first quarter compared with 34.2% tax rate this year. In the first quarter of this year, one of our foreign operations received a tax refund in connection with a tax loss in 2007.

At that time, no tax benefit had been recorded due to the uncertainty of the refund claim. During the first quarter of ‘11 here, the issue was resolved and the refund issued. It reduced our first quarter 2011 provision for income taxes by approximately $9.6 million.

The impact to our first quarter EPS, however, was a benefit of about $0.01, not $0.02. That''s because half of it or $4.8 million, half of that benefit of -- half of the $9.6 million is backed out on the non-controlling interest line down below.

So again, the two things I mentioned here, a little over $0.03 benefit from gas and a detriment of gas year-over-year and a benefit of about $0.01 here due to this unusual tax item. And the third item, as I mentioned in our fiscal year-end conference call, effective the start of fiscal 2011, our current fiscal year, we have begun consolidating the results of the operations of our Mexico joint venture.

Historically, these operations were treated as an equity method investment. Thus, we only reported our 50% share of the joint venture''s net income within the non-operating interest income and other line item on our income statement. As of the beginning of this fiscal year, back in September, we are acquired to adopt a new accounting method, which makes it appropriate to fully consolidate the Costco-Mexico joint venture into our statements.

In effect, it adds approximately 2% to 3% to top line sales, assets and liabilities. 100% of the venture''s financial statements are now included in our P&L and balance sheet and cash flow and then the 50% portion held by our joint venture partner is backed out at the bottom of our income statement to offset it. That''s a line item called net income attributable to non-controlling interest such that there''s no effective cost to the bottom line or earnings per share. It does impact our discussion of gross margin, SG&A and earnings basis points. I''ll discuss that as we go along here in the conference.

In terms of sales for the quarter, 12 weeks reported comparable sales figures for first quarter showed a 7% increase, 5% in the U.S. and 14% internationally. Excluding gas price changes and the impact of FX, the 5% reported U.S. comp would actually be 4%, for the fiscal first quarter and the 14% international comp reported would be at 10% in local currencies. And overall, the 7% that we reported for total company comp would be at 5%.

The comp figures, by the way, do include Mexico in both years for the calculation, so that it is an apples-to-apples comparison as it relates to that. Other topics of interest I''ll review, our opening activities and plans. We opened a total of eight new locations during Q1, which ended November 21. Seven of these eight openings were in the U.S., including one new business center and the eighth new location was in Alberta, Canada.