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Costco Wholesale (NASDAQ:COST)
Q4 2021 Earnings Call
Sep 23, 2021, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and thank you for standing by. Welcome to the fourth-quarter earnings call. [Operator instructions] Please be advised that today’s conference is being recorded. [Operator instructions] I would now like to hand the conference over to your first speaker for today, Mr.
Richard Galanti, CFO. Thank you. Please go ahead.
Richard Galanti — Chief Financial Officer
Thank you, Ann, and good afternoon to everyone. I’ll start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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.
Forward-looking statements speak only as of the date they are made, and the company does not undertake to update these statements, except as required by law. In today’s press release, we reported operating results for the fourth quarter of fiscal 2021 to 16 weeks ended August 29. Reported net income for the quarter came in at $1.67 billion or $3.76 per share. Last year’s fourth-quarter net income came in at $1.389 billion or $3.13 per diluted share.
This year’s fourth quarter included an $84 million pre-tax or $0.14 a share charge for the write-off of certain IT assets. Last year’s fourth quarter included $281 million pre-tax charge or $0.47 a share of COVID-related costs, as well included a $36 million or $0.06 a share pre-tax charge related to the prepayment of $1.5 billion of debt, partially offset by an $84 million or $0.15 per share benefit for the partial reversal of a reserve related to a product tax assessment taken in the fiscal-year 2019. Net sales for the quarter increased 17.5% to $61.44 billion, up from $52.28 billion a year earlier in the fourth quarter. Comparable sales for the fourth quarter, as reported an hour ago, for the 16 weeks on a reported basis, U.S.
was 14.9%. Excluding gas inflation and FX, the 14.9% would be 10.3% positive. Canada reported 19.5% plus; ex gas inflation and FX, 6.7%. Other international reported 15%.
Without gas inflation and FX, 7.3%; total company, 15.5% reported, 9.4% ex gas inflation and FX. E-commerce, by the way, reported was 11.2% positive; ex gas inflation and FX, 8.9%. In terms of Q4 comp sales metrics, traffic or shopping frequency increased 9.2% worldwide and 8.8% in the U.S. Our average transaction or basket was up 5.8% worldwide and 5.6% in the U.S.
during the fourth quarter. Those numbers including the positive impact from gas inflation and FX. Foreign currencies relative to the U.S. dollar positively impact sales by approximately 230 basis points, whereas gasoline price inflation positively impacted sales by approximately 385 basis points.
Moving down the income statement to the membership line. Membership fee income for the fourth quarter came in at $1.234 billion in the fourth quarter of 2021. That’s up $128 million from the prior year’s fourth-quarter membership fee income of $1.106 billion. The $128 million represents an 11.7% increase year over year.
Excluding the benefit from positive FX, the $128 million positive number would have been $107 million positive or a 9.7% effective increase. In terms of renewal rates, at the fourth quarter end, our U.S. and Canada renewal rate was 91.3%, up 0.3 percentage point from 16-week earlier number at Q3 end. And worldwide rate came in — renewal rate came in at 88.7%, also up 0.3 percentage point from Q3 and 16 weeks earlier.
Renewal rates are benefiting, we believe, for more members auto renewing, as well as increased penetration of executive members who, on average, renew at a higher rate than nonexecutive members. Our first year renewal rates have also improved as well during this time. In terms of number of members at Q4 end, member households and total cardholders, at Q4 — fiscal year-end a few weeks ago, total paid households were 61.7 million. That’s up 1.1 million from the 60.6 million figure we shared with you 16 weeks earlier.
Total cardholders came in at 111.6 million or 1.8 million higher than the 109.8 million we had as of Q3 end. At Q4 end, paid executive members were — came in at 25.6 million, an increase of a little over 1 million new executive members, and that’s during the 16-week period as well. Moving down to the gross margin line. Our reported gross margin in the fourth quarter was lower year over year by 32 basis points.
And actually, excluding gas inflation, it was higher by five basis points. As I usually do, I ask you jot down two columns of numbers, a little gross margin matrix, if you will. The line items will be core merchandise, ancillary — second line item would be ancillary and other businesses. Third line item would be 2% reward.
Fourth line item would be LIFO. And last line item would be other. And then the — finally, the last line item would be total. Two columns.
The first one being reported year over year in the fourth quarter, and the second column, excluding gas inflation. So core merchandise on a reported basis was lower year over year by 90 basis points. Ex gas inflation, it was lower, minus 57 basis points. Ancillary and other businesses, plus 44 on a reported basis and plus 53 ex gas inflation.
2% reward, plus one basis point and minus three year over year on ex gas inflation. LIFO, minus five and minus five basis points. And other, plus 18 and plus 17. If you add up to two columns, you get the total for reported, the 32 basis points that I just mentioned.
And again, ex gas inflation, plus five basis points. Now the core merchandise component you see here are lower by 90 year over year and lower by 57 ex gas inflation. Similar to last quarter, this is primarily a function of sales shifting from core to ancillary versus the last year as we begin to revert back to more historical sales penetrations. Recall last year, we saw a significant shift of sales out of ancillary and other businesses and into the core.
In terms of the core margin on their own sales, in the fourth quarter, the core-on-core margins were lower by 40 basis points with nonfood slightly up, food and sundries slightly lower year over year. Fresh foods was down and was the fundamental driver of the core, and core being lower in the quarter. Now fresh foods is lapping exceptional labor productivity and low product spoilage that occurred from the outsized sales a year ago in Q4. We retained some of that productivity gains — some of those productivity gains as volumes have remained high.
However, we’ve also elected to hold, delay and/or mitigate some of the price increases in this increasingly inflationary environment over the last few months. Ancillary and other business gross margin, as you see in the chart in the matrix, was higher by 44 basis points and higher by 53 ex gas inflation in the quarter. Gasoline had a good quarter as we are lapping year over year a softer quarter due to the pandemic. We also showed improvement in food court, optical, travel, all of which were benefited by easy compares versus last year, also due to the impacts of COVID on those businesses.
Now LIFO, this is a gross margin charge that we haven’t seen in this matrix for about seven years. LIFO was lower by five basis points, both with and without gas inflation. We had a $30 millio n LIFO charge in the quarter, the first such charge since 2014. This is a result of the continued inflationary cost pressures, which I’ll discuss more in a few minutes.
2% reward, higher by one basis point on a reported basis, but more importantly, lower by three basis points ex gas inflation, again, implying a slightly higher penetration of sales going to the executive member and the associated rewards that come with it. And other is up 18 basis points and then up 17 ex gas inflation. This is primarily related to COVID-related costs from a year ago. Moving to SG&A.
Our reported SG&A in the fourth quarter was lower or better year over year by 45 basis points and lower or better by 13 basis points, excluding gas inflation. Second matrix of the day, the two columns reported and ex gas inflation and five line items: operations; second line item, central; third line item, stock compensation; fourth line item, other; and then total. On a reported basis, core operations was lower or better by plus 19 basis points and ex gas inflation higher by eight basis points or minus eight basis points. Central, plus 12 and plus eight.
Stock compensation, plus two and plus two. And other, plus 12 and plus 11. Adding up the columns again, SG&A on a reported basis was better or lower by 45 basis points and lower ex gas inflation by 13. As you can see in the matrix, the core operations component again was better by 19 and higher by — lower by 19 and then — or higher by eight, excluding the impact from gas inflation.
Keep in mind, this result includes the permanent $1 an hour wage increase that we implemented in March of this year. This higher by eight basis point year-over-year expense result includes the 14 basis point cost of the $1 an hour wage increase. Central, again, improved by eight basis points ex gas inflation. And stock compensation, also with strong sales, helped by two basis points.
Now the other of plus 12 or plus 11 without gas inflation, so lower — that was another basis points. Included in other last year was the COVID expense of $217 million or 42 basis points and the reversal of a product tax assessment reserve of $84 million or 16 basis points. This year includes the write-off of the IT assets totaling $84 million or 14 basis points. So you add all those up, that’s where you get the 11.
Next on the income statement is preopening. Preopening this year was $35 million. Last year, $26 million, so higher by $9 million. Preopening is up year over year in part due to the timing of openings and given different amount of preopening on a given location but within the quarter and in the following quarter.
All told, reported operating income in the fourth quarter increased by 18%, coming in at $2.275 billion this year, compared to $1.929 billion a year earlier. Below the operating income line, interest expense was $52 million this year, essentially the same at $51 million a year ago. Interest income and other for the quarter was higher by $77 million year over year. Roughly half of that is due to favorable FX, and the other half is related to last year’s fourth quarter charge for the make-whole debt prepayment.
Overall, reported pre-tax earnings in the fourth quarter of 2021 came in up 23%, coming in at $2.291 billion, compared to last year’s $1.869 billion. Now our tax rate in the fourth quarter was 26.1%, higher than last year’s fourth-quarter rate of 24.9%. For fiscal ’22, based on our current estimates, which, of course, can always change, we anticipate that our effective normalized total company tax rate to be similar to fiscal ’21, somewhere in the 26% to 27% range. Unless, of course, there are changes to the U.S.
corporate tax rates, we’ll have to see — wait and see. A few other items of note, warehouse expansion. For fiscal ’21 we just ended, we opened net openings of 20. We actually had 22 openings, including two relocations, but a total increase of 20 net units.
This year, we’re looking to open at least 25 net new units, including second warehouses in each of China and France and our first location in New Zealand. As well, we plan to relocate five locations. Regarding capital expenditures, our fourth quarter 2021…