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pww.comCostco Wholesale Corporation, Q4 2009 Earnings Call, Oct-07-2009 - NasdaqGS:COST

NasdaqGS:COST

Richard A. Galanti [Advisor & Director] đź’¬

Richard A. Galanti provided a comprehensive overview of Costco Wholesale Corporation’s financial performance for the fourth quarter and fiscal year 2009, along with insights into various aspects of the business. Here is a detailed summary of the key points he discussed:

Fourth Quarter Results:

  • Earnings Per Share (EPS): Reported EPS was $0.85, down 6% from the previous year's $0.90.
  • Impact of Items: The 2008 quarter included a $32.3 million LIFO charge and a $15.9 million litigation settlement charge, impacting reported results by $0.07 per share. The 2009 quarter had a $16.6 million LIFO benefit, representing a $0.02 per share benefit.
  • Year-Over-Year Swing: The three items mentioned above represented a $0.09 per share year-over-year swing.

Factors Impacting Year-Over-Year Comparison:

  • Foreign Exchange (FX) Headwinds: FX negatively impacted earnings by $0.04 per share in the fourth quarter and $0.14 per share for the full fiscal year.
  • Employee Benefits Costs: Higher U.S. healthcare expenses negatively impacted earnings by $0.04 per share.
  • Income Tax Rate: The tax rate increased to 35.5% from 34.5% the previous year, impacting earnings by $0.01 per share.
  • Gross Profits: Gross profits on gas sales were lower by nearly $0.04 per share compared to the previous year.
  • Interest Income: Interest income was $0.02 per share lower due to reduced interest rates.

Sales Performance:

  • Fourth Quarter Comparable Sales: Reported a 5% decrease in the U.S. and a 3% decrease internationally. Excluding gas deflation and FX, the U.S. comp would have been a -1% and the international comp would have been a +7%.
  • September Sales: Reported a -1% comp in the U.S., a +6% comp internationally, and a +1% comp for the total company. Excluding gas and FX, the U.S. comp would have been a +3% and the total company comp would have been a +4%.

Other Financial Highlights:

  • Membership Fees: Increased by about 4% to $490 million or 2.24% of sales. Adjusting for FX, the increase would have been about 6%.
  • Renewal Rates: Remained stable at around 87.5%.
  • Gross Margin: Increased by 56 basis points to 10.85%.
  • SG&A Expenses: Higher by 63 basis points to 10.29% of sales.
  • Pre-Opening Expense: Lower at $12 million versus $17.8 million the previous year.
  • Provision for Impaired Assets and Closing Costs: A net charge of $2.7 million versus a net credit of $6.2 million the previous year.

Balance Sheet:

  • Cash and Equivalents: $3,727 billion.
  • Inventories: $5,405 billion.
  • Total Assets: $21,979 billion.
  • Short-Term Debt: $97 million.
  • Long-Term Debt: $2,206 million.

Expansion and Future Plans:

  • Fiscal 2009 Openings: 15 net new locations, including one in Mexico.
  • Fiscal 2010 Plans: Expect to open 15-18 new locations and relocate 2-3 units.
  • Fiscal 2011: Anticipated increase in expansion levels.

Other Topics:

  • Online Sales: Down about 4% to $1.6 billion.
  • CapEx: $1.279 billion for fiscal 2009, with plans for similar levels in fiscal 2010.
  • Dividends: Increased quarterly dividend from $0.16 to $0.18, representing a total cost of $320 million.

Competitive Environment and Deflation:

  • Competition: Remains tough but not getting more competitive.
  • Deflation: Continues, with significant impacts in food and sundries, fresh foods, and hardlines.

Healthcare Costs:

  • Increased Utilization: Healthcare costs spiked due to increased utilization and reduced employee turnover.
  • Plan Changes: No immediate plans to change benefits design or deductibles.

Share Repurchase Program:

  • Status: Stopped in late September 2008 due to market uncertainty. Resumed briefly in March 2009 when the stock dipped below $40.
  • Future: Continued evaluation and potential purchases over time.

Private Label Penetration:

  • Increase: Penetration increased by 2.5 to 3 percentage points, driven by higher sales in food and sundries.
  • Historical Growth: Historically grew less than 1 percentage point annually.

SG&A Expense Control:

  • Performance: One of the better performances in recent years, despite pressures from healthcare costs and reduced sales.
  • Efforts: Savings achieved through measures like optimizing copy machine usage and bending warehouse schedules.

Non-Food Category Margins:

  • Improvement: Core category merchandise margins improved by 6 basis points.
  • Private Label Help: Contribution from increased private label sales.

Outlook:

  • Sales Trends: Uncertainty around sales trends, with hopes for improvements as gas deflation and FX headwinds anniversary.

  • Operating Margin Leverage: Potential for leverage as traffic trends remain strong and average ticket improves.

  • Expansion Opportunities: Acceleration in expansion, particularly in Asia, with plans for 4-6 to 8-10 units in the next few years.

  • Strategic Focus: Focus on SG&A improvement, with margins remaining a secondary consideration.

  • Membership Trends: New member trends expected to improve sequentially, with a lag time between store openings and membership growth.

  • Food Stamp Acceptance: Expanded acceptance in certain locations, with plans to further expand based on technology improvements and member demand.

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