Costco Wholesale Corporation (COST)
Q3 2009 Earnings Call Transcript
May 28, 2009 11:00 a.m. ET

Executives

Richard A. Galanti - Chief Financial Officer, Executive Vice President, & Director

Analysts

Charles Grom – JPMorgan
Deborah Weinswig - Citigroup
Mark Wiltamuth - Morgan Stanley
Robert Drbul - Barclays Capital
Daniel Binder – Jefferies & Company
Mark Miller - William Blair & Company
Adrianne Shapira - Goldman Sachs
Andy Wagstaff - Touchstone Investments
Wayne Hood - BMO Capital Markets
Chuck Cerankosky – Northcoast Research

Presentation

Operator

Good morning. My name is Brandy and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco third quarter conference call. 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. If you would like to withdraw your question, press the pound key. Thank you.

I would now like to turn the call over to Richard Galanti, CFO. Please go ahead, sir.

Richard A. Galanti

Thank you, Brandy. Good morning to everyone. This morning’s press release reviews our third quarter fiscal 2009 operating results for the 12-weeks ended May 10th. As with every conference call, I will start by stating that the discussions we are 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 uncertainties 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 third quarter fiscal ’09 operating results for the quarter, as you saw this morning earnings per share came in at $0.48 a share, down 28% from last year’s third quarter of $0.67. Current First Call consensus currently stood at $0.53 as we announced earnings this morning.

As outlined in this morning’s release, this year’s third quarter earnings results include an impact of several items, nearly all of which negatively impacted our results for the quarter, and these include a pretax charge of $34.1 million, mostly non-cash, related to a litigation settlement covering our membership renewal policy, so that’s about $0.05 a share. From a couple of the e-mails I got this morning, there was a little bit of confusion of where that lands -- about $27 million of it hits the membership income line and about $7 million hits the SG&A line, the $7 million being the cost related to the plaintiff attorney’s cost as well as mailing and production costs on our side.

In addition, we mentioned in the press release higher employee benefits costs -- about two-thirds consisting of higher healthcare usage and then other benefits as well. In all, about $0.03 a share negative impact. What I mentioned for the last two quarters and I’ll probably mention next quarter as well, ongoing FX headwinds, our foreign currency earnings results when converted and reported in U.S. dollars hurt us again in the third quarter by a little over $25 million pretax, or about $0.035 a share after tax. That is assuming FX exchange rates were flat year over year, which are not of course. Our foreign currency operating results in Q3 would have been higher by this amount.

Assuming no major currency changes throughout the rest of the fiscal year, we would expect a continued hit to reported earnings of a little over $0.01 a month, or about $0.04 to $0.05 a share in the upcoming 16-week fiscal fourth quarter.

It could be a shade less than that at this point. In the last few weeks, foreign currencies relative to the U.S. dollar have rebounded a little bit, but again that would just simply mean the $0.04 to $0.05 in my view might be $0.03 to $0.04 as a hit.

As you’ll recall, there was significant strengthening of the U.S. dollar relative to several of the foreign currencies of several of the foreign countries in which we operate back in mid-September to early November of last year. Again, hopefully once we get past that anniversary and hopefully see a little more stability in those exchange rates, that won’t be an issue to discuss.

As you can see in our income statement, our income tax rate was higher year over year in Q3. It came in at 38% this year in Q3 versus 36.6% last year in Q3. This represented about $0.01 a share negative impact to our Q3 results. There are a couple of discrete items that I will talk about later, nothing terribly exciting.

Other items hitting, if you will, Q3 P&L, about a $4.5 million pretax charge to our investment accounts. These are the remnants of the $1.1 billion we had in enhanced money market funds starting about a year-and-a-half ago when some of the markets melted out there and liquidity got held up.

In addition, there’s just under about a -- just under $5 million pretax charge to reserve for the closing and related costs of closing the two Costco Home stores effective July 3rd. Again in Q3, we have a hit of about 4.9 -- almost just under $5 million. We expect to incur up to $2 million to $2.5 million pretax in Q4 when they actually close, so this will be another small hit in Q4.