Costco Management Discusses F1Q2011 Results - Earnings Call Transcript

Costco Management Discusses F1Q2011 Results - Earnings Call Transcript
By Seeking Alpha ,

Costco Wholesale Corporation (COST)

F1Q2011 Earnings Conference Call

December 8, 2010 11:00 a.m. ET

Executives

Richard Galanti – EVP and CFO

Analysts

Tina Wang [ph] – Citigroup

Charles Grom – JPMorgan

Adrianne Shapira – Goldman Sachs & Co.

Mark Wiltamuth - Morgan Stanley

Mark Miller – William Blair & Company

Bob Drbul – Barclays Capital

Rob [ph] – Cowen and Company

Mike Montani– ISI

Neil Currie – UBS

Presentation

Operator

Compare to:
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Good morning. My name is Debbie and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco first quarter results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Richard Galanti, Chief Financial Officer, please go ahead.

Richard Galanti

Thank you Debbie. Good morning to everyone. This morning's press release reviewed our first quarter fiscal 2011 operating results for 12-weeks that ended November 21.

As with every conference call, I'll 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 that 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 12-week first quarter operating results. For the quarter, earnings per share came in at $0.71 a share, an 18% increase over last year first quarter earnings per share of $0.60.

Three items I'll quickly note here. First, last year first quarter we enjoyed very strong gasoline profits. As many of you know when gasoline prices are flat or falling, Costco's gasoline operations can be quite profitable and when prices are rising, they can be less profitable. This year’s first quarter gasoline operations were profitable but less profitable than a year ago to the tune of a little over $0.03 a share.

Second, you'll note that our income tax rate is almost two-percentage point’s lower year-over-year, 36.1% last year in the first quarter compared to 34.2% tax rate this year. In the first quarter of this year, one of our foreign operations received a tax refund in connection with a tax loss in 2007. At that time, no tax benefit had been recorded due to the uncertainty of the refund claim. During the first quarter of '11 here, the issue was resolved and the refund issued. It reduced our first quarter 2011 provision for income taxes by approximately $9.6 million. The impact to our first quarter EPS however was a benefit of about $0.01 not $0.02. That's because half of it or $4.8 million, half of that benefit, half of the 9.6 is backed up on the non controlling interest line down below.

So again, the two things I mentioned here, a little over $0.03 benefit from gas and a detriment of gas year-over-year and a benefit of about a penny here due to this unusual tax item.

And the third item, as I mentioned in our fiscal year end conference call, effective the start of fiscal '11 our current fiscal year, we have begun consolidating the results of the operations of our Mexico joint venture. Historically, these operations were treated as an equity method investment, thus we only reported our 50% share of the joint ventures net income within the non-operating interest and other income line item on our income statement.

As of the beginning of this fiscal year, back in September we were required to adopt a new accounting method, which makes it appropriate to fully consolidate the cost from our Mexico joint venture to our statements. In effect, it adds approximately 2 to 3% in top line sales, assets and liabilities. One hundred percent of the ventures financial statements are now included in our P&L, balance sheet and cash flow and then the 50% portion held by our joint venture partner is backed out at the bottom of our income statement to offset it. That's in the line item called net income attributable to non controlling interests. Such that is no effective cost on the bottom line or earnings per share.

It does impact our discussion with gross margin, SG&A and earnings basis points and I'll discuss that as we go along here in this conference.

In terms of sales for the quarter, 12-week reported comparable sales figures for first quarter showed a 7% increase, 5% in the U.S. and 14% internationally. Excluding gas price changes and the impact of FX, the 5% reported U.S. comp would actually be four in the fiscal first quarter and the 14% international comp reported would be a 10 in local currencies. And overall, the 7% that we reported for a total company comp would remain, would be at 5%.

The comp figures by the way do include Mexico in both years of calculations so that it is an (inaudible) comparison as relates to that.

Other topics of interest I will review are opening activities and plans. We opened a total of eight new locations during Q1, which ended November 21. Seven of these eight openings were in the U.S., including one new business center and the eighth location was in Alberta, Canada.

For all of fiscal 2011, our current plan is 27 units, net new locations. Two of those are new relocations, 15 of which would be in the U.S. And, as I meneioned two relocation.

Since Q1 end on November 21, we opened two new locations. One in Minnesota and one in the State of Washington so we now operate 582 locations around the world.

I will also touch on our line results, our membership trends, some discussion about margins, SG&A of course, stock repurchase activities and as you know from last quarter, we include in our press release our balance sheets so we'll go through that.

Okay, the discussion of our results, very briefly, sales for the quarter were 18.8 billion, up 11% from last years 16.9 billion. If you exclude Mexico, because this is not apples to apples, it's included in the share not last year, without these sales the 11% increase would have been 8% in total basis. Our reported comp basis, Q1 comps as I mentioned were 7%, excluding gas price changes and FX were up 5%. Again, on a comparable basis those numbers include Mexico for both years. For the quarter, our 7% reported comps sales number was a combination of an average transaction increase of a little over 2% for the quarter, an average frequency increase of 5% for the quarter. So continuing very strong frequency now going on an almost complete second year at relatively strong frequency, shopper frequency numbers. I might mention that the average transaction increase of 2%, that figure would be slightly positive if you exclude gas inflation and the FX issues.

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