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pww.comCostco Wholesale Corporation, Q1 2008 Earnings Call, Dec-13-2007 - NasdaqGS:COST

NasdaqGS:COST

Richard A. Galanti [Executives] 💬

Richard A. Galanti provided a comprehensive overview of Costco Wholesale Corporation's first quarter fiscal 2008 results and discussed various aspects of the company's performance. Here is a detailed summary of his remarks:

Overall Results:

  • EPS: Reported $0.59 per share, in line with expectations.
  • Revenue Growth: Total sales up 12%; comparable store sales (comps) up 8%.
  • Impact on EPS:
    • Increased SG&A expense related to sharing healthcare savings with employees ($0.01).
    • Income tax benefit ($0.02).
    • Negative impact from gas operations ($0.04).

Sales Performance:

  • Total Sales: $15.5 billion, up 12%.
  • Comps: 8%, benefiting from gas inflation and FX.
  • Cannibalization: Negatively impacted comps by 110 basis points.
  • Geographic Performance:
    • United States:
      • Strongest in the Northwest.
      • California weaker, particularly in the Los Angeles market.
    • International:
      • Canada: Mid-single-digit local, high-teens U.S. dollar.
      • Other international: Mid to high single-digit local, low double-digit U.S. dollar.
  • Merchandise Categories:
    • Food and sundries, ancillary businesses, and fresh foods stood out.
    • Hard lines were positive but down from 2007.
    • Soft lines were mid to low single digits.

Membership Fees:

  • Up 13% to $338 million.
  • Renewal rates at 86.4%.
  • Executive memberships at 6.69 million, 24% of the membership base, generating over 50% of sales.

Gross Margin:

  • Up by 9 basis points.
  • Core merchandise margin up by 41 basis points.
  • Ancillary businesses margin down by 30 basis points.
  • Gross margin outlook is positive, expecting less negative impact from gas.

SG&A Expenses:

  • Up 17 basis points.
  • Operations expenses up 9 basis points.
  • Central expenses improved by 2 basis points.
  • Stock compensation expense down by 1 basis point.
  • Quarterly adjustment includes healthcare savings sharing with employees ($0.01).

Pre-Opening Expense:

  • Lower by $1.2 million.

Impaired Assets and Closing Costs:

  • $79,000 in Q1, compared to $4.3 million in the previous year.

Operating Income:

  • Up 12% to $394.9 million.

Interest Expense:

  • Substantially higher due to $2 billion debt offering.

Balance Sheet:

  • Cash and equivalents: $3.210 billion.
  • Inventories: $5.773 billion.
  • Debt-to-cap ratio: 20%.
  • Accounts payable as a percent of inventory improved.

Capital Expenditures:

  • $1.4 billion in FY2007.
  • Expectations for $1.7 to $1.8 billion in FY2008.

Dividends:

  • Increased quarterly dividend from $0.13 to $0.145 per share.

Online Business:

  • Costco.com up 45% in Q1.
  • Expected to exceed $1.5 billion in sales.

Expansion:

  • Opened 10 locations in Q1.
  • Plans to open 39 locations in total, including 9 relocations.

Stock Repurchases:

  • Repurchased 78.4 million shares at $4.125 billion.
  • Remaining authorization: $1.7 billion.

Outlook:

  • Q2 EPS: Likely at the high end of a small range.
  • Full-year EPS: $2.99, considered a fair number.

Other Points:

  • TV Returns: Improved since policy change, with the greatest spikes typically occurring during the holiday season.
  • Promotional Perspective: Black Friday handout was good but had no significant year-over-year change.
  • Membership Revenues: Growth slowed, attributed to the anniversary of the membership fee increase.
  • Core Merchandise Margin Expansion: 41 basis points, driven by factors like better sourcing, private label penetration, and fair pricing.
  • Healthcare Benefits: $9 million adjustment to share savings with employees, which will be distributed in February or March.
  • Gross Margin Opportunities: Continued improvement expected, but not at the same pace as the recent quarters.
  • Internet Business: Electronics dominate sales mix, with a lower gross margin but higher pretax contribution.
  • California Trends: Discernible slowdown, partly due to macroeconomic factors and cannibalization.
  • Basket Analysis: Ticket increase of 5.5% and traffic increase of 2%; 2% of the ticket increase is attributed to regular pass-through inflation.
  • Gas Sales Impact: SG&A leverage minimal due to gas sales.
  • Competitive Landscape: No significant changes, with Sam’s Club remaining a fierce competitor.
  • Executive Membership Fee: No immediate plans to increase, but the possibility exists in the future.
  • Renewal Rates: No regional variances, with renewal rates holding steady.

Galanti provided a detailed and comprehensive overview of the company's performance, highlighting key financial metrics, operational achievements, and strategic initiatives.

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