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The Science of Hitting
The Science of Hitting
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Costco: Q4 & FY2011 Results

October 05, 2011 | About:

On Wednesday morning, Costco (NASDAQ:COST), the well-known membership warehouse operator, reported fourth quarter and fiscal year 2011 results. As I noted in an article early last month, co-founder and long-time CEO Jim Sinegal, who Charlie Munger has called “one of the most admirable retailers to ever live on this planet” has announced that he is stepping down at the end of January. Here are some of the highlights from the call and the press release:

Net sales for the fourth quarter were $27.59 billion, an increase of 17% from $23.59 billion in 2010; after adjusting for sales from the company’s Mexico JV (which were not included in 2010 figures), the increase was 14%. Comparable sales in Q4 were up 10% in the United States, 19% in the International markets, and 12% overall (average transaction increase of 8%, and average frequency increase of 4%); excluding gasoline and foreign currency, the increase was 6% in the U.S., 10% internationally, and 7% overall. Amazingly, the company does roughly $146 million in sales per location on an annual basis, an average of $400,000 a day.

For the fiscal year, sales were $87.05 billion, an increase of 14% from $76.25 billion last year; excluding the Mexico HV discussed above, the increase in sales would have been 11%. On a full year comparison, sales increased 7% in the U.S., 16% in International markets, and 10% companywide; excluding gasoline and foreign currency effects, the increase was 5% domestically, 10% in international markets, and 6% overall.

Net income for the fourth quarter of fiscal 2011 was $478 million, or $1.08 per diluted share, compared to $432 million, or $0.97 per diluted share, in the fourth quarter of fiscal 2010. For the full year 2011, net income was $1.46 billion (up 12.3%), or $3.30 per diluted share (up 13%), compared to $1.30 billion, or $2.92 per diluted share, during fiscal year 2010. The consolidation of the Mexico JV had no impact on net income or earnings per share for reporting purposes.

The Company also announced that effective November 1 of this year it will increase annual membership fees, a long awaited move by Wall Street analysts since the company’s last increase in May 2006. For U.S. Goldstar (individual), Business, Business add-on and Canada Business member, the increase will be $5 to an annual fee of $55. For the Executive Membership, this marks the first increase since the inception of the program in 1997; annual fees will increase from $100 to $110, and the maximum 2% reward associated with Executive Membership will increase from $500 to $750. The fee increases will impact a little over 22 million members, roughly half of which are Executive Members; a simplified calculation (which assumes the company can maintain their impressive retention level in the mid-80’s, or make up for lost customers with new add-ons) shows that this should add roughly $165 million to the bottom line; importantly, membership fees are accounted for on a deferred basis, meaning the full impact will take nearly 2 years to roll through the P&L.

In the words of CFO Richard Galanti, “We feel that the enhanced value of the Costco membership over the past 5 to 10 years far exceeds the modest $5 and $10 increase in the annual membership fee levels, and it will continue to allow us to bring our members even greater value in everything we offer”. In regards to the potential impact on renewals, Mr. Galanti had this to say: “Historically, we have very low fall-off from it. We don't take it lightly. We didn't take it lightly by doing it and when we do it, but we recognize that it's part of what we have done historically over 25 years, doing modest increases in the fee. But every time we've done it, we feel -- and we take a hard look ourselves, we look at ourselves in the mirror and feel that we have continued to enhance the value of that membership by a lot more than that. And we say that sincerely. Maybe we're fooling ourselves, but we don't think so.”

As of the end of the year, Costco operates 592 warehouses, with 429 in the United States and Puerto Rico, 82 in Canada, 32 in Mexico, 22 in the United Kingdom, nine in Japan, eight in Taiwan, seven in Korea, and three in Australia; for the year, the company opened 20 net new locations, with 13 in the U.S., 3 in Canada and 2 each in Taiwan and Australia. For 2012, expansion plans call for 20 net new locations, split evenly between the U.S. and international. ‘

For the day, the stock was down 1.71%, closing just above $80 per share.

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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