Costco Wholesale (COST)

Q3 2012 Earnings Call

May 24, 2012 11:00 am ET

Executives

Richard A. Galanti - Chief Financial Officer, Executive Vice President and Director

Bob Nelson - Vice President of Financial Planning & Investor Relations

Analysts

John Heinbockel - Guggenheim Securities, LLC, Research Division

Charles X. Grom - Deutsche Bank AG, Research Division

Daniel T. Binder - Jefferies & Company, Inc., Research Division

Nathan Rich

Adrianne Shapira - Goldman Sachs Group Inc., Research Division

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

Peter S. Benedict - Robert W. Baird & Co. Incorporated, Research Division

Mark R. Miller - William Blair & Company L.L.C., Research Division

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

Christopher Horvers - JP Morgan Chase & Co, Research Division

Mark Wiltamuth - Morgan Stanley, Research Division

Sean P. Naughton - Piper Jaffray Companies, Research Division

Presentation

Operator

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Good morning. My name is Dawn, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter and year-to-date operating results for FY '12 conference call. [Operator Instructions] Thank you. Mr. Richard Galanti, you may begin your conference, sir.

Richard A. Galanti

Thank you, Dawn. Good morning to everybody. This morning's press release reviews our third quarter operating results for the 12 weeks ended this past May 6. As with every conference call, I'll start by stating that the discussions we're 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 uncertainty 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, for the quarter, our earnings per share came in at $0.88, up a little over 20% from last year's third quarter earnings per share of $0.73 and $0.01 greater than the first call consensus of $0.87. As was mentioned in this morning's release, this year's third quarter included a pretax LIFO charge of $6.5 million or about $0.01 a share. Last year's Q3 had a pretax LIFO charge of $49 million pretax or about $0.07 a share.

A few other items of note when reviewing the year-over-year earnings comparison. Again, our sales results: an 8% overall sales increase and a 5% comp sales increase. The FX impact from earnings of our foreign operations year-over-year, assuming FX rates have been flat year-over-year, that was a hit to pretax earnings of about $8 million or also about $0.01 a share. Also, we had a 9% increase in membership fees that I'll talk about. This increase included a small benefit from last November's fee increase in the U.S. and Canada, also about $8 million pretax or about $0.01 a share. Lastly, we had a favorable year-over-year income tax rate comparison similar to what we saw in Q2.

In terms of sales for the quarter, our reported sales were up 8% total and on a comp basis, up 5%. For the quarter, both total sales and comp sales were impacted by gasoline price inflation, which was largely offset by the weakening of foreign currencies on average relative to the U.S. dollar year-over-year. On a comp sales basis, the 5% U.S. comp sales increase in Q3, excluding gas inflation would've been a 4% and the reported 5% international comp figure, assuming flat year-over-year FX rates, would have been a plus 8%. If you take those 2 together, they offset each other, and the reported 5%, excluding both gas inflation and FX, would have remained at a 5% for the total company on a comp basis.

Other topics of interest, our opening activities and plans. After opening 4 new locations in Q1, which ended last November 20, we opened 2 locations in Q2, both in Japan. In the third quarter, we opened a location -- another location in Japan near Osaka, and we also reopened our Tamasakai warehouse in Japan, which had been closed since the tragic events of last March 11 in Japan. We also relocated a unit in Ontario, Canada and opened 2 new units in the third quarter as well in Pharr, Texas and in Huntington Beach, California.

At the end of Q3, our worldwide unit count was 602. All told, that would put our fiscal '12 expected opening schedule at 16 net new units: the 10 we have opened fiscal year-to-date and 6 more planned by fiscal year end here in the fourth quarter. These total 16 would include 10 in the U.S. and 6 in Asia: 1 in Korea, 1 in Taiwan and 4 in Japan. A quarter ago, I had indicated we expected the total number for the year to be 17; 1 has since slipped into early fiscal 2013.Also this morning, I'll review with you our E-commerce results, our membership results and also a little bit of a further discussion on margins and SG&A and repurchase activities.

Again, sales were $21.8 billion, up 8% from last year's $20.2 billion and 5% comp. For the quarter, the 5% reported comp figure was a result of a combination of average transaction increase of 1.7% for the quarter and average frequency increase of 3.6% for the quarter. In terms of sales comparisons by geographic region, in terms of -- in the U.S., the Midwest, Northeast and Southeast regions were the strongest. International and local currencies, Canada and Mexico were the strongest; with Taiwan and Japan being the weakest, mostly due to the small base of existing units in both of those countries and the cannibalization associated with recent openings over the last year, as well as a year ago the very strong post-earthquake business that we experienced in Japan in the third quarter.

In terms of merchandise categories, for the quarter, within Food and Sundries, we had a comp result in the mid single-digit range, a little below where it had been running in the each of the past couple of fiscal quarters. All subcategories are positive, ranging from 1% to 11% each among those 7 or 8 subcategories.

Within Hardlines, which was in the low single digits positive, the strongest subcategories were hardware and automotive, with electronics being slightly negative for the quarter.

Within the high single-digit Softlines' comp, small appliances, domestics and apparel were the strongest performers. In Fresh Foods, all subcategories were all centered around the mid single-digit range and -- as was the entire category.

Food and Sundries and Fresh Foods continue to experience inflation on a year-over-year basis at the low single-digit range, but we are seeing a little bit of inflation abatement, if you will, in the past few weeks; in fact, some price reductions on some food items like milk, cheese, bacon, butter, coffee, olive oil, flour, et cetera. Still, some inflation we see in beef and across many of the nuts categories.

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