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ISSAQUAH, Wash. — Costco Wholesale Corp. finished fiscal 2014 in stellar fashion, with earnings up 13% and sales growth of nearly 10% in the fourth quarter. Earnings per share exceeded Wall Street’s expectations for the first time in five quarters.
Costco Wholesale Corp. finished fiscal 2014 in stellar fashion, with earnings up 13% and sales growth of nearly 10% in the fourth quarter. Earnings per share exceeded Wall Street’s expectations for the first time in five quarters.
Reported net income for the year ended August 31 edged up 0.9% to $2.06 billion, or $4.65 per diluted share. Prior-year results, however, were buoyed by a tax benefit of $62 million, or 14 cents per share, stemming from a special cash dividend paid in December 2012 to the company’s 401(k) plan participants. Excluding that item, full-year net income increased 4.1% from an adjusted $1.98 billion, or $4.49 per share.
The bottom line for the fourth quarter, though, leapt 13% to $697 million, or $1.58 per diluted share, beating the $1.52 per share average estimate among analysts polled by Thomson Reuters.
During a conference call, chief financial officer Richard Galanti noted that foreign exchange rates trimmed the fourth quarter’s bottom line by about $14 million pretax, or 2 cents per share. Moreover, while the retailer booked a pretax LIFO credit of $8 million, or a penny per share, in the prior-year period, in the most recent quarter Costco recorded a LIFO charge of almost $11 million, or 2 cents per share.
In addition, Galanti said, income taxes were boosted by about $8 million, or 2 cents per share, by a decision to repatriate around $1.2 billion in cash from its Canadian operations.
Finally, the company’s strong performance resulted in a bonus accrual of about 4 cents per share, compared with a reversal of the bonus accrual in the year-ago period.
Net sales for fiscal 2014 advanced 7.1% to $110.21 billion, as comparable-warehouse results rose 4% for the year (versus 6% in fiscal 2013), reflecting a 5% increase in the United States and a 3% gain in international warehouses. Factoring out the negative effect of gasoline price deflation and foreign exchange rate fluctuations, comparable sales were up 6% companywide and 7% in international warehouses.
The top line for the final 16 weeks, meanwhile, climbed 9.4% to $34.76 billion, as comparable-warehouse sales expanded 6%, with both U.S. and international warehouses reporting identical 6% increases. During the conference call, Galanti added that the 6% increase reflects customer traffic that grew 4.2% and an average transaction that rose just under 2%, which included a negative impact of 0.5% from foreign exchange. Excluding the effects of foreign exchange and fuel sales, comparable-club sales were up 7% overall and 8% internationally.
Membership fees grew 6.2% for the year to $2.43 billion while advancing 7.3% to $768 million in the fourth quarter. As a result, total revenue rose 7.1% to $112.64 billion for the 52 weeks and escalated 9.3% to $35.52 billion in the final period — beating the average $35.47 billion forecast of analysts.
Operating income expanded 5.5% to $3.22 billion for the year and surged 14.4% in the fourth quarter to $1.09 billion.
Gross margin added 4 basis points to 10.66% over the 52 weeks and rose 15 basis points to 10.70% during the final period. Selling, general and administrative expenses, meanwhile, added 7 basis points to 9.68% of total revenues over the 52 weeks while shedding 3 basis points to 9.51% of revenues during the final quarter.
Galanti pointed out that the gross margin for Costco’s core merchandise categories — fresh food, food and sundries, soft lines, and hard lines — increased by 6 basis points in the fourth quarter, both as reported and excluding the effect of gasoline price inflation on shipping costs.
"Two of the four core categories — food and sundries and fresh foods — showed higher year-over-year gross margin percentages, while soft lines margins were essentially flat year over year and hard lines margins were slightly lower," he explained.
Full-year operating income also reflects a 23.5% leap in preopening expense to $63 million, related to 30 new warehouse openings in fiscal 2014 versus 26 in fiscal 2013, although fourth quarter expense fell 11.8% to $15 million.
Interest expense expanded 14.1% for the year to $113 million, while declining 2.8% to $35 million in the final period. Interest income fell 7.2% to $90 million for the 52 weeks and slipped 16.7% to $30 million in the final period.
With that, pretax income advanced 4.8% to $3.20 billion for fiscal 2014, while vaulting 13.8% to $1.09 billion in the final quarter.
During fiscal 2014, Costco opened 30 new locations, including 17 in the United States, three each in Canada and Australia, two each in Japan and Korea, and one each in the United Kingdom, Mexico and Spain, where Costco opened its first warehouse on the European mainland. Costco ended the fiscal year with 663 warehouses worldwide — a year-over-year increase of 29.
"For the current fiscal year 2015, our plans are to open 31 new warehouses and also relocate four existing locations," Galanti said. "Nineteen of the planned 31 new locations will be in the United States, with the remainder in international markets."
