Sec 10-K Costco Wholesale Corporation

SEC 10-K Costco Wholesale Corporation

SEC 10-K Costco Wholesale Corporation
Introduction

On July 12, 1976 in San Diego, CA, Sol Price and his son Robert opened the first warehouse shopping facility and appropriately named it Price Club (Costco Wholesale Corporation).  Thirteen years later, Jeff Brotman and Jim Sinegal began their own wholesale club business and opened the doors to Costco in Seattle, WA (Costco Wholesale Corporation).  With both companies successfully prospering in the warehouse/wholesale supplier industry and selling in bulk, the two companies merged in 1993 and formed PriceCostco; opening their first warehouse in West Thurrock, England.  In November 1994, Price Enterprises separates itself from PriceCostco and Sol and Robert Price began PriceSmart, building smaller warehouse supply stores in the Caribbean and Central America (PriceSmart, 2009).  In 1997 PriceCostco changed its name to Costco Companies Inc. and again in August 1999 to what it is known as today, Costco Wholesale Corporation (Costco Wholesale Corporation).  

As of August 28, 2016, Costco Wholesale Corporation (herein referred to as Costco) had 715 warehouses in operation around the World, with 501 of them located domestically here in the U.S.A., and 5 more due to open by December 31, 2016 (KPMG LLP, 2016).  Additionally, with more than 213,000 people employed worldwide, the company offers goods and services in six different segments; Foods (dry and packaged goods), Sundries (snacks, candy, alcohol, and cleaning supplies), Hardlines (major electronics/appliances, garden/patio, health and beauty, and hardware), Softlines (small appliances and apparel), Fresh Foods (meat, produce, deli, and bakery), and lastly Other (gas station and pharmacy) (Costco Wholesale Corporation, 2017).  Per the company’s 2016 SEC 10-K, net sales in these six segments for fiscal year 2016 added to a little over $116 billion, which was 2.12% higher than sales in 2015 (Fig. 1).

Currently Costco is ranked number fifteen (#15) on the most current Fortune 500 list and its biggest competitor Sam’s Club, whose parent company is Walmart is ranked number one (#1) (Fortune 500, 2017).  However, in examining Walmart’s 2016 10-K, Sam’s Club’s 655 U.S. stores produced a net income of $56.8 billion (Walmart, 2016).  With 87% of Costco’s net income being generated from its 501 U.S. stores, Sam’s Clubs sales are nearly 44% less than Costco’s (KPMG LLP, 2016).

Main Body

[pic 1]Besides selling services and merchandise, Costco also earns income through its membership fees.  With 47 million paid members and an average membership fee/renewal of $55 USD, Costco earned approximately $2.6 million in membership fee revenue alone last year (KPMG LLP, 2016).  Comparing this to membership fees from the prior year, revenue in this area is up by 4% (Fig 1).  

Although net sales and membership fees increased, largely due to sales at one of twenty-one (21) newly opened warehouses this year, the percentage in change has slowly declined in the last two years (KPMG LLP, 2016).  Costco’s management attributes this to sales being flat, poor currency conversion for the U.S. dollar in foreign markets, and the price of gasoline.  However, while continuing to analyze Costco’s income, the company’s gross margin, compared to nets sales, has stayed consistent over the last few years.  With $102.9 billion in costs, Costco’s gross margin in 2016 was $13,172 billion, which calculates to 11.35% of net sales.  This figure is up from 2015, which in turn recorded a gross margin of $12,601 billion resulting in a 11.09% of net sales (Fig. 2).  Management ascribes this increase to sales to its hardline and softline segments as well of its use of the LIFO method in distributing inventory (KPMG LLP, 2016).  Finally, after deducting expenses which include SG&A, pre-opening costs (startup for newly remodeled or built warehouses), interest, and taxes, Costco’s bottom line was a net income of $2.35 billion and $5.33 earnings per share (1.14% lower than the net income of 2015) (Fig. 2).  The increased income in 2015 was due to a tax benefit of nearly $68 million from paying a special cash dividend to employees through their 401K plan (KPMG LLP, 2016).

[pic 2]

Cash flow from operating activities, earned after applying the year’s net income, was $3.29 billion, down from $4.29 billion in 2015, however the company paid nearly $1.7 billion in accounts payable in the last week of fiscal year 2016 with the intention of implementing a new modernized accounting system at the beginning of fiscal year 2017 (KPMG LLP, 2016).  Cash flow for investing activities, which was used to purchase land, building, and equipment to relocate/remodel warehouses as well as build new ones, totaled $2.345 billion and $2.48 billion in 2016 and 2015, respectively (KPMG LLP, 2016).  Lastly, per item 7 of the company’s latest 10-K filing, primary use of cash flow from financing activities include repayment of senior notes, paying cash dividends, and repurchase of common stock.  The $2.419 billion used repaid $1.2 billion of a senior note, $746 million in dividend payments (paying $1.70 per share), and repurchasing 3,184,000 shares of common stock averaging $149.90 per share.  Seen in Fig. 3 below is a snapshot of Costco’s cash flow activities for the last three years.