COST

Costco Wholesale Corporation (COST)

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Costco Wholesale (COST)

Q4 2011 Earnings Call

October 05, 2011 10:00 am ET

Executives

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

Analysts

Laura A. Champine - Cowen and Company, LLC, Research Division

Joseph Feldman - Telsey Advisory Group

Charles X. Grom - Deutsche Bank AG, Research Division

Charles Edward Cerankosky - Northcoast Research

Nathan Rich - Citigroup

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

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

Sean P. Naughton - Piper Jaffray Companies, Research Division

Christopher Horvers - JP Morgan Chase & Co, Research Division

Mark Wiltamuth - Morgan Stanley, Research Division

Michael Montani

Greg Melich - ISI Group Inc., Research Division

Robert S. Drbul - Barclays Capital, Research Division

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

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

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Presentation

Operator

Good morning. My name is Gerri, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Year-to-Date Operating Results for Fiscal Year 2011 and September Sales Conference Call. [Operator Instructions] At this time, I'd like to turn the call over to the CFO, Mr. Galanti. Sir, you may begin your conference.

Richard A. Galanti

Thanks, Gerri. Good morning to everyone. This morning for us, we reported our 16-week fourth quarter and 52-week fiscal year 2011 operating results, both ended August 28, as well our 5-week September sales results for the 5 weeks ended this past Sunday, October 2 and announced our plans to increase our annual membership fees in the U.S. and Canada, effective November 1 for new member sign-ups and January 1 for member renewals.

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 16-week fourth quarter operating results for the quarter, reported earnings per share came in at $1.08, up $0.11 -- up 11% from last year's reported EPS of $0.97. And of course, the dollar rate figure was $0.01 or $0.02 below first call estimate. Both fourth quarters included certain items that impacted the quarter-over-quarter comparisons.

As I mentioned on our fiscal '10 fourth quarter earnings call last October 6, last year's fiscal 2010 Q4 results included a few items that in total benefited last year's reported $0.97 figure by $0.02. And while there was no LIFO charge last year in Q4 as well as the whole year, the reported dollar rate this year included a $32 million pretax LIFO charge or $0.04 a share paid to earnings.

Other items that impacted the comparison year-over-year, our foreign country earnings results again benefited from relatively stronger foreign countries on average as compared to the U.S. dollar. In the fourth quarter, FX helped earnings by a little over $25 million pretax or a shade under $0.04 a share. That is assuming FX exchange rates were flat year-over-year. Our foreign currency -- foreign country operating results in Q4 when reported in dollars would have been lower by that amount.

For the entire year, the impact of FX, assuming FX rates have remained constant in every country as compared to the dollar year-over-year, was increased pretax earnings by about $63 million pretax or $0.10 a share after tax. Again, this calculation simply takes the currency exchange rates for the prior fiscal year and assume they had remained at those levels throughout the fiscal year.

I'll also point out later in my comments preopening expenses were higher by $12.6 million or about $0.02 a share after tax, higher this year in Q4 versus a year ago given the openings -- more openings year-over-year in the quarter. For the entire 2011 year, net income came in at a reported $1.462 billion or $3.30 a share compared to $1.303 billion or $2.92 a share in last year's fiscal 2010, so up 12% in dollars and up 13% on an earnings per share basis.

If you have followed our earnings conference calls for all of fiscal 2010, I had pointed out a few items each quarter over the course of the year. Together, the pluses and the minuses added up to about a wash in fiscal 2010. This fiscal year, of course the big impact to earnings in '11 was LIFO, hitting the second, third and fourth quarters for $0.01, $0.07 and $0.04 per share, respectively, or a total of $0.12 a share for the entire fiscal year. I'll speak more about their outlook for inflation a little bit later in the call.

In terms of sales for the fourth quarter, as we reported on August 31, our 16-week reported comparable sales figures showed a 12% increase, 10% in the U.S. and 19% internationally. Excluding gas inflation and the impact of FX from the U.S. dollar weakening year-over-year, the plus 10% U.S. reported comp would be plus 6%, the 19% reported international comp would be plus 10% and the 12% total company comp would be plus 7%. So the impact from gas was about 3%, while the lift from FX was about 2%. And that again was for the fiscal quarter. As you'll see when I talk about the September numbers, the FX impact was about 1%. So while still the dollar relatively is weaker versus -- on average all over the foreign countries where we operate, that impact is diminished.

In terms of sales for the -- comparable sales for the 5 weeks of September, for the 5 weeks, our comparable sales figures showed a 12% increase, with the U.S. coming in at 11% and international at 14%. The 11% reported U.S. comp would be at 7% without the nearly 4% impact from gas inflation. And given again the year-over-year U.S. dollar's weakness vis-a-vis the other currencies in the last month, well that's changed a little bit but for the whole month, our reported 14% international comp would've been plus 10% when expressed in euros -- in local currencies. Overall, the reported 12% total company comp would've been at plus 8%, excluding gas inflation of about 3% and FX, as I mentioned, of a little over 1%. For the month, our 12% reported comp sales results were a combination of an average transaction increase of 7.5% continuing good frequency increases, an average frequency increase of a little over 4%. Other topics I'll review with you, our opening activities. We opened a total of 20 net new locations during the fiscal year that just ended, 13 new in the U.S., 3 new in Canada and 2 new each in Taiwan and Australia. As well we relocated 2 units in fiscal '11 in San Marcos, California and Chesterfield, Virginia. For 2012, our current expansion plans include 20 net new locations, about half in the U.S. and half outside the U.S. Plus, at least one relocation and, of course, the reopening of Tamasakai, Japan unit, which has been closed since the tragic earthquake of March 11 this past year. We currently operate 592 locations around the world. During the first few months of fiscal '12, basically from September through the end of the calendar year, we plan to open 7 locations, 4 in the U.S., one each in Texas, Pennsylvania, Wisconsin and Georgia. We have a relocation plan for Ontario, Canada and 2 new locations in Japan. And that's of course on top of the Tamasakai opening that will happen in early calendar 2012.

Also this morning I'll review with you our Costco Online results, our membership trends and of course, the upcoming fee increases in the U.S. and Canada effective the first of next month. Additional discussion about our Q4 operating results, of course, and our stock repurchase activities during the fiscal quarter.

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