PWW

Portfolio AI Insights

pww.comCostco Wholesale Corporation, Q1 2011 Earnings Call, Dec 08, 2010 - NasdaqGS:COST

NasdaqGS:COST

Richard A. Galanti [Advisor & Director] 💬

Richard A. Galanti, the Chief Financial Officer of Costco Wholesale Corporation, provided an overview of the company's first quarter fiscal 2011 results and discussed various aspects of the company's performance and future plans. Here is a detailed summary of his comments:

Earnings Per Share

  • Earnings per share (EPS) for the first quarter of fiscal 2011 came in at $0.71, an 18% increase over the previous year's first quarter EPS of $0.60.

Factors Affecting EPS

  1. Gasoline Operations:
    • Last year's first quarter saw unusually strong gasoline profits due to falling gasoline prices.
    • This year's first quarter was less profitable due to rising prices, impacting EPS by about $0.03.
  2. Tax Rate:
    • The income tax rate decreased by almost 2 percentage points year-over-year, from 36.1% to 34.2%.
    • A tax refund in one of the foreign operations reduced the provision for income taxes by $9.6 million, benefiting EPS by about $0.01.
  3. Mexico Joint Venture Consolidation:
    • Effective from the start of fiscal 2011, the results of the Mexico joint venture are fully consolidated.
    • This added approximately 2% to 3% to top-line sales, assets, and liabilities.

Sales Performance

  • Total sales for the quarter were $18.8 billion, up 11% from the prior year's $16.9 billion.
  • Comparable sales (comps) increased by 7%:
    • 5% in the U.S.
    • 14% internationally.
  • Excluding gas price changes and FX, the U.S. comp would be 4%, and the international comp would be slightly positive in local currencies.

Opening Activities

  • Eight new locations were opened during the quarter, seven in the U.S. and one in Alberta, Canada.
  • Plans for fiscal 2011 include opening 27 net new locations, with 15 in the U.S. and the remainder overseas, notably in Asia.

Online Results

  • Online sales increased by 9% in the first quarter, an improvement from the 6% increase in fiscal 2010.

Membership Trends

  • Membership fees increased by 10.2% to $415.8 million, representing 2.21% of sales.
  • Renewal rates strengthened to 88.2% from 87.7% at the end of fiscal 2010.
  • Executive memberships grew by about 3%, with 10.76 million paid members.

Gross Margin

  • Gross margin increased by 9 basis points year-over-year to 10.97%.
  • Core merchandising margin improved by 19 basis points, with ancillary businesses contributing negatively due to lower profitability in the gasoline business.

Selling, General, and Administrative Expenses (SG&A)

  • SG&A expenses as a percentage of sales improved by 19 basis points to 10.31%.
  • Operations and central expenses improved, with equity and quarterly adjustments also contributing positively.

Other Financial Metrics

  • Pre-opening expenses were $11.9 million, up from $10.8 million in the previous year.
  • Interest expense remained relatively stable at $25.9 million.
  • Interest income and other revenue decreased by almost $13 million due to the full consolidation of Mexico's results.

Balance Sheet and Capital Expenditures

  • The company has a strong balance sheet, with accounts payable ratios improving.
  • Capital expenditures for fiscal 2011 are budgeted at just under $1.6 billion.

Stock Repurchases

  • The company has a remaining repurchase authorization of just under $1 billion.
  • In the first quarter, 2.4 million shares were repurchased for just over $150 million.

Holiday Outlook

  • Costco approached the holiday season with a positive outlook, expecting to pick up discretionary items and leveraging its member base.

Competitor Pricing

  • Costco aims to be the last to raise prices in response to inflationary pressures, maintaining competitiveness.

Membership Fee Increase

  • The company has not discussed a potential membership fee increase, although it has confidence in its renewal rates and member loyalty.

Expansion Plans

  • Higher percentages of new store openings are planned in Asia, with a focus on Korea, Taiwan, and Japan.
  • Store count targets are trending upwards, with potential for more stores in Australia and a second European country.

Inventory Availability

  • TVs and other electronics have sufficient inventory, but there are some availability issues with high-end cameras.
  • Apparel supply chains are facing challenges, but Costco is managing the situation well.

Healthcare Costs

  • Healthcare costs are increasing at a rate higher than top-line sales growth but subsiding compared to previous years.

Online Sales

  • Online sales are improving but not outpacing store sales, indicating room for improvement in online offerings.

Real Estate Environment

  • The real estate environment in the UK is challenging due to the economic downturn and regulatory restrictions, affecting store openings.
  • In Japan, the process of opening new stores is easier despite higher costs.

These points cover the key aspects of Richard A. Galanti's presentation and responses during the earnings call.

Feedback