Edited Transcript of Costco Q4 2014 Earnings Conference Call…
Company: Costco Wholesale Corporation (COST))
Event Name: Q4 2014 Results Earnings Conference Call
Date: October 8, 2014 11:00 AM ET
Operator: Good morning. My name is Brandi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco fourth quarter earnings conference call and year end conference call. (Operator Instructions)Thank you. Mr. Richard Galanti, CFO. You may begin your conference, sir.
Richard Galanti – CFO
Thank you, Brandi. Good morning to everyone. This morning we reported our 16-week fourth quarter and 52-week fiscal year 2014 operating results, both which ended on August 31. These results are compared to the similar 16-week and 52-week periods in the prior fiscal year ’13, which ended last year on September 1. In addition, we are reporting this morning our September sales results for the five weeks ended this past Sunday, October 5.
I will start by stating that the discussions we are having will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and these statements involve risks and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today’s call, as well as other risks identified from time to time in the company’s public statements and reports filed with the SEC.
To begin with, our fourth quarter earnings results. For the 16-week fourth quarter, earnings came in at $1.58 a share, up $0.18 or up 13% from last year’s fourth quarter earnings of $1.40.
In terms of sales for the fourth quarter. Total sales were up 9%, comp sales were up 6% on a reported basis, and excluding gas and FX impacts were up 7%. For the quarter, gas prices year over year were essentially flat, so no impact on the 6% U.S. comp figure. However, foreign currencies overall weakened relative to the U.S. dollar year over year in the fourth quarter with the biggest impact in Canada. Such that our reported 6% international comp figure assuming flat year-over-year FX rates would have been up 8%.
In terms of sales for the five-week September period, total sales increased 7% year over year and reported comp sales increased 4%, and again excluding both gas and FX impacts comp sales would have been up 6%.
In terms of comparing our $1.58 earnings figure for the fourth quarter this fiscal year to last year’s fourth quarter of $1.40, there are five items I’d like to point out.
First, FX, in the fourth quarter year over year, currencies in the foreign countries where we operate on an overall basis weakened versus the U.S. dollar, resulting in our reported foreign earnings in Q4, when converted into U.S. dollars being lower by about $14 million pretax or $0.02 a share than these earnings would have been had FX exchange rates been flat year over year.
Second point, LIFO, last year in the quarter we recorded an $8 million pretax LIFO credit or picked up of little over $0.01 a share. This year in the fourth quarter we had a LIFO charge of almost $11 million or about $0.02 a share charge.
Third point, income taxes. Our income taxes this year in Q4 included several discrete items that in the aggregate increased our income tax line by about $8 million. The $8 million of additional taxes included a few positive items that benefited or lowered our taxes by about $7 million in total. However, these positive items in total were more than offset by a $15 million income tax charge related to our decision to repatriate from Canada back to United States about US$1.2 billion or CAD$1.3 million or Canadian cash — operations cash balances in the near future. In all, the $8 million net income tax increase from these discrete items, a negative impact to earnings of about $0.02 a share.
Fourth item, our company bonus accrual. I discussed in last year’s earnings call that our fourth quarter 2013 quarter results benefited by reversing or bringing back a portion of the company’s bonus accrual, as our fiscal ‘13 results caused us to pay bonuses at a lower level than we had accrued throughout the year.
This year in the fourth quarter our accrual for the year-end bonuses was not reduced in the fourth quarter as it was — as it had been last year. Overall, this represented a $0.04 a share negative swing year over year to our bottom line. Remind you that the bonus program impacts a little more than 4,000 people who participated in throughout the company.
And last item I will point out is gas profits. This year our gas profits in Q4 were quite strong representing an additional $0.05 a share to earnings year-over-year. Overall, $1.58 earnings figure for the year’s fourth quarter was reached by several discrete items representing $0.05 or $0.06 a share in the aggregate that did not go our way.
Now to the subject to new openings. For all of fiscal ‘14 we opened 30 new locations, 17 new in the U.S., three each in Canada and Australia, two each in Japan and Korea, and one each in the UK, Mexico and Spain, that being our first unit opening in Spain.
We ended fiscal ‘14 with 663 locations operating worldwide. For the current fiscal year fiscal ’15, our plans are to open 31 new warehouses and also relocate four existing locations, 19 of the planned 31 new locations will be in the United States, with remaining in international markets. Inevitably, up to a few of these will get delayed. So I’d estimate that the number of new units in fiscal ‘15 will most likely be either in a very high 20s or up to 30, plus the four relos.
During the first four months of fiscal 2015, basically September through this coming calendar year-end, we plan to open eight of our fiscal ‘15 locations, six in the U.S. and one each in Australia and Mexico, as well we will complete one warehouse relo in Wayne, New Jersey. This will occur in two weeks from tomorrow on the 23rd.
This morning I will also review with you our membership trends and other activities, our e-commerce activities, additional discussion about margins and SG&A, our stock repurchase activities during the quarter. I will also comment on the recent switch in Canada of our co-branded credit card offering that’s going on right now.
Okay, for the fourth quarter results. Sales again, for the 16-week fourth quarter were up 9% to $34.8 billion, up $3 billion from $31.8 billion a year ago in the fourth quarter. On a reported comp basis, Q4 comp sales were up 6%. For the quarter our 6% reported comp was a combination of an average transaction increase of a little under 2% for the quarter and this included a FX detriment about a 0.5% and average frequency increase of 4.2%.
In terms of sales comparisons by geographic region. In the U.S. with a 6% fourth quarter comp overall, most U.S. regions registered in the mid single-digit comp increases with Midwest and Southeast being even stronger.
Internationally, within the plus 8% local currency comp, Australia and Japan were the weakest, due in large part to cannibalization with Taiwan, Korea, Canada and Mexico all coming in strong in terms of comp sales increases.
In terms of comp sales by merchandise categories for the quarter. Both food and sundries and hardlines comps were both in the mid-single digits range for the quarter, and both softlines and fresh foods comps were in the high-single digits range for the fourth quarter. Within fresh foods, of course, we are still experiencing inflation in the low to mid single-digit range on average.
For our September sales results, sales for the five-week September month, which ended October 5 were $10.57 billion, up 7% from last year’s September reporting period. Again, on a comp basis, reported plus 4%.
For September, our plus 4% reported comp sales results were a combination of a slightly positive average transaction, notwithstanding almost 2 percentage points impact from FX and gas deflation, and average frequency increase of right at 4%.
Cannibalization for the month negatively impacted our sales by just under 0.5 percentage point. Excluding FX and gas effects, comp sales for the month of September as I mentioned were up 6%.
In terms of sales by geographic region, most U.S. regions were in the 4% to 5% comp sales range with Midwest and Southeast being even stronger. Internationally in local currencies, Japan and Australia being impacted by cannibalization were the weakest performers, while Canada and Taiwan were the strongest in terms of comp sales increases.
In terms of sales by category for the September. Our food and sundries and softlines both enjoyed mid single-digit comps, hardlines low single-digit comps and fresh foods high single-digit comps, again having a little bit of extra inflation there as well.