Net income rose nearly 19% at Costco Wholesale Corp. during fiscal 2013’s third quarter, propelled by robust sales and double-digit growth in membership fees. Earnings exceeded Wall Street’s expectations, although revenue fell just shy of analysts’ forecasts.


Costco Wholesale Corp., third quarter, Richard Galanti, Costco














































































































































































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Inside This Issue - News

Costco stays strong

June 24th, 2013

ISSAQUAH, Wash. – Net income rose nearly 19% at Costco Wholesale Corp. during fiscal 2013’s third quarter, propelled by robust sales and double-digit growth in membership fees. Earnings exceeded Wall Street’s expectations, although revenue fell just shy of analysts’ forecasts.

Net income for the 12 weeks ended May 12 vaulted 18.9% to $459 million, or $1.04 per diluted share. Analysts surveyed by FactSet projected earnings of $1.02 per share, on average.

Net sales advanced 7.8% to $23.55 billion. Gasoline price deflation and foreign currency exchange both had negative impacts on the top line for the quarter. Comparable-store sales gained 5%, with domestic clubs up 6% and international units turning in a 4% increase. Backing out the negative impact of gasoline price inflation and foreign exchange rates, comparable-store results would have grown 7%, with U.S. and international comparable-store sales both up 7%.

Membership fees, meanwhile, climbed 11.8% to $531 million, helping total revenue to a 7.9% increase to $24.08 billion, just short of the $24.09 billion expected by analysts. During a conference call, chief financial officer Richard Galanti pointed out that membership fee renewals and new membership sign-ups have continued to be strong, with the latter up 19% in the quarter. "That strong performance is mostly reflective of the very strong sign-ups we’ve had in our openings this past March in Japan," he said.

Moving down the income statement, third quarter gross margin expanded 12 basis points to 10.67%. Selling, general and administrative (SG&A) expense decreased 4 basis points to 9.6% of revenue, while preopening expense soared 66.7% to $10 million, reflecting five warehouse openings in the most recent quarter compared with four a year ago.

With that, operating income advanced 15.9% to $722 million, or 3.07% of sales, representing an increase in operating margin of 22 basis points year over year.

Net interest expense, meanwhile, escalated 31.6% to $25 million, while interest and other income fell 16.7% to $15 million. Pretax income consequently grew more slowly than operating profit, rising 14.5% to $712 ­million.

Year-to-date net income soared 29.3% to $1.42 billion as sales gained 8.5% to $71.10 billion, while membership fees leapt 13.7% to $1.57 billion. With that, total revenue moved up 8.6% to $72.67 billion.

Gross margin for the first 36 weeks added 8 basis points to 10.65%, while SG&A expense contracted 3 basis points to 9.64% of revenues. Preopening expenses jumped 54.5% to $34 million, reflecting 19 warehouse openings year to date. As a result, operating income for the nine months advanced 16% to $2.10 billion, or 2.95% of sales, representing an 18-basis-point hike in operating margin.

Interest expense decreased 13.7% to $63 million while interest and other income dipped 6.2% to $61 million. Pretax income growth consequently exceeded that of operating earnings, climbing 16.4% to $2.10 billion.

During the third quarter Costco opened five new warehouses: two in Japan and one each in Mexico, the United Kingdom and the United States (Wheaton, Md.). The company ended the third quarter with 627 warehouse clubs (a year-over-year increase of 25), including 449 in the United States and Puerto Rico, 85 in Canada, 33 in Mexico, 24 in the United Kingdom, 15 in Japan, nine in Taiwan, nine in Korea, and three in ­Australia.

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