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ISSAQUAH, Wash. -- Costco Wholesale Corp. here reported robust sales gains and profits that were better than expected in the fourth quarter and full year ended Sept. 3.
Quarter net sales of $19.50 billion, a 19 percent surge from $16.37 billion during the year-ago period. Comparable warehouse sales during the quarter grew 8 percent.
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Net sales for fiscal 2006, the 53 weeks ended Sept. 3, were $58.96 billion, a jump of 14 percent from the $51.88 billion reported for the year-ago period, while comparable warehouse sales increased 8 percent over the year-ago period.
Net income for the fourth quarter came to $355.6 million, or $.75 per diluted share, vs. $354.7 million, or $.73 per diluted share, during the fourth quarter of fiscal 2005. Fiscal 2006 net income rose to $1.10 billion, or $2.30 per diluted share, from $1.06 billion or $2.18 per diluted share, last year.
"Several factors enabled earnings results to be better than we anticipated six weeks ago," said c.f.o. Richard Galanti in a statement. "Recognition of income tax benefits in connection with reserves previously established, which more than offset the $14 million income tax charge previously disclosed; stronger-than-planned operating results in the final five-week period of the fiscal quarter; improved gasoline profitability in the final week of the quarter; and lower-than-expected costs related to workers' compensation and other expense accruals."
The club chain also revealed results of an internal review of its practices regarding stock options, and changes it has made to those practices, in the wake of negative publicity. Said c.e.o. Jim Sinegal, "I take full responsibility for the fact that the administration of our stock option program did not live up to the high standards we follow in other aspects of our business. We believe that the steps we have taken should put this issue behind us both from a financial statement and a controls standpoint."
The chain undertook an internal review of its historical stock option grant practices to find out whether the stated grant dates of options were backed up by the company's books and records. A committee of independent directors reviewed all equity grants made during the years 1996 through 2005, and late last month, reported its conclusions and recommendations. While the review didn't uncover any evidence of fraud, falsification of records, concealment of actions or documentation, or intentional deviation from generally accepted accounting principles, the committee did find that in several cases, it couldn't precisely determine the appropriate measurement date for specific grants.
Based on the findings of the review, Costco said it doesn't anticipate any restatement of its previously filed financial statements. Consistent with an SEC bulletin, the company has transferred $116.1 million of net worth shown on its balance sheet from retained earnings to paid-in capital, and increased its deferred tax asset account by $31.5 million. The company's total net income over the 10-year period reflected in the adjustments was about $6 billion. Fiscal 2006 stock option expense has been upped by $2 million (after-tax) following the review. Because of the lack of historical documentation, it isn't possible to determine the exact amount of the adjustments that should be made, so the actual adjustments made are based on assumptions that are more likely to overstate than understate the effects of the "imprecisions" found in the company's option grants. Costco currently believes that the impact on its historical federal income tax filings resulting from the review will be under $2 million.
Costco has additionally decided to establish standing equity grant dates, applicable to its restricted stock units, to option grants, in case the company decides to offer option grants, and to any other form of equity grant, to be set as the fifth trading day after the release of quarterly or annual earnings results, with any exceptions from that policy needing the prior formal approval of the board's compensation committee. Costco has also informed the SEC of the investigation's conclusions and will cooperate fully in the event of an inquiry.
Costco operates 488 warehouses, including 359 in the United States and Puerto Rico, 68 in Canada, 18 in the United Kingdom, five in Korea, four in Taiwan, five in Japan, and 29 in Mexico. The company plans to open an additional 15 to 16 new warehouses before the end of calendar year 2006.
In a conference call yesterday c.f.o. Richard Galante said that of Costco's core merchandising categories, fresh foods was a "bellwether," yielding "low double-digit comps" and showing "particular strength in produce." Additionally, the food and sundries category turned in a "relatively strong" performance, with all of its subcategories up year over year. Galante forecast that the company's key categories, which also include hardlines and softlines "should be okay" in fiscal 2007.
Also during the call, Galante noted that Costco had opened "27 net new locations" during fiscal 2006, encompassing 20 in the United States, three in Canada, two in the United Kingdom, and two in Mexico. Additionally there were three relocations. For FY 2007 "we are planning a higher level of expansion," noted Galante, who forecast 37 units, including two in Mexico, and at least two relocations. In FY 2008 the company's goal is to go "a little higher from [FY 2007,] perhaps five more."
Among the new markets the company is entering in fiscal 2007 are Louisville, Ky. and Columbus, Ohio, the company said.
The company's ramped-up expansion will likely be reflected in its capital expenditures, which amounted to $1.2 billion in fiscal 2006 but projected to be $1.5 billion in fiscal 2007, according to Galante.
The c.f.o. further noted that Costco had gone from offering "hardly any private label" to store brand items comprising "15 [percent] to 16 percent of our sales."