Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations
(amounts in millions, except per share, share, and warehouse count data)
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For these purposes, forward-looking statements are statements that address activities, events, conditions or developments that the Company expects or anticipates may occur in the future and may relate to such matters as net sales growth, changes in comparable sales, cannibalization of existing locations by new openings, price or fee changes, earnings performance, earnings per share, stock-based compensation expense, warehouse openings and closures, capital spending, the effect of adopting certain accounting standards, future financial reporting, financing, margins, return on invested capital, strategic direction, expense controls, membership renewal rates, shopping frequency, litigation, and the demand for our products and services. In some cases, forward-looking statements can be identified because they contain words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. Such forward-looking statements involve risks and uncertainties that may cause actual events, results, or performance to differ materially from those indicated by such statements. These risks and uncertainties include, but are not limited to, domestic and international economic conditions, including exchange rates, the effects of competition and regulation, uncertainties in the financial markets, consumer and small-business spending patterns and debt levels, breaches of security or privacy of member or business information, conditions affecting the acquisition, development, ownership or use of real estate, capital spending, actions of vendors, rising costs associated with employees (generally including health-care costs), energy and certain commodities, geopolitical conditions (including tariffs), the ability to maintain effective internal control over financial reporting, COVID-19 related factors and challenges, including among others, the duration of the pandemic, the unknown long-term economic impacts, reduced member shopping due to illness, travel restrictions or financial hardship, shifts in demand away from discretionary or higher-priced products, reduced workforce due to illness, quarantine, or government mandates, temporary store closures due to reduced workforces or government mandates, supply-chain disruptions, or capacity constraints of third-party logistics suppliers and other risks identified from time to time in the Company's public statements and reports filed with the Securities and Exchange Commission (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.
This management discussion should be read in conjunction with the management discussion included in our fiscal 2020 Annual Report on Form 10-K, previously filed with the SEC.
OVERVIEW
We operate membership warehouses and e-commerce websites based on the concept that offering our members low prices on a limited selection of nationally branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. When combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, these volumes and turnover enable us to operate profitably at significantly lower gross margins (net sales less merchandise costs) than most other retailers.
We believe that the most important driver of our profitability is increasing net sales, particularly comparable sales growth. Net sales includes our core merchandise categories (foods and sundries, hardlines, softlines, and fresh foods), warehouse ancillary and other businesses. We define comparable sales as net sales from warehouses open for more than one year, including remodels, relocations and expansions, and sales-related to e-commerce websites operating for more than one year. Comparable sales growth is achieved through increasing shopping frequency from new and existing members and the amount they spend on each visit (average ticket). Sales comparisons can also be particularly influenced
by certain factors that are beyond our control: fluctuations in currency exchange rates (with respect to the consolidation of the results of our international operations); and changes in the cost of gasoline and associated competitive conditions. The higher our comparable sales exclusive of these items, the more we can leverage certain of our selling, general and administrative (SG&A) expenses, reducing them as a percentage of sales and enhancing profitability. Generating comparable sales growth is foremost a question of making available to our members the right merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long-term. Another substantial factor in net sales growth is the health of the economies in which we do business, including the effects of inflation or deflation, especially the United States. Net sales growth and gross margins are also impacted by our competition, which is vigorous and widespread, across a wide range of global, national and regional wholesalers and retailers, including those with e-commerce operations. While we cannot control or reliably predict general economic health or changes in competition, we believe that we have been successful historically in adapting our business to these changes, such as through adjustments to our pricing and merchandise mix, including increasing the penetration of our private-label items and through online offerings.
Our philosophy is to provide our members with quality goods and services at competitive prices. We do not focus in the short-term on maximizing prices charged, but instead seek to maintain what we believe is a perception among our members of our “pricing authority” on quality goods – consistently providing the most competitive values. Our investments in merchandise pricing may include reducing prices on merchandise to drive sales or meet competition and holding prices steady despite cost increases instead of passing the increases on to our members, all negatively impacting gross margin as a percentage of net sales (gross margin percentage). We believe our gasoline business draws members, but it generally has a lower gross margin percentage relative to our non-gasoline business. It also has lower SG&A expenses as a percent of net sales compared to our non-gasoline business. A higher penetration of gasoline sales will generally lower our gross margin percentage. Rapidly changing gasoline prices may significantly impact our near-term net sales growth. Generally, rising gasoline prices benefit net sales growth which, given the higher sales base, negatively impacts our gross margin percentage but decreases our SG&A expenses as a percentage of net sales. A decline in gasoline prices has the inverse effect. Additionally, actions in various countries, particularly China, the United States and the United Kingdom, have created uncertainty with respect to how tariffs will affect the costs of some of our merchandise. The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs. The impact to our net sales and gross margin will be influenced in part by our merchandising and pricing strategies in response to cost increases. While these potential impacts are uncertain, they could have an adverse impact on our results.
We also achieve net sales growth by opening new warehouses. As our warehouse base grows, available and desirable sites become more difficult to secure, and square footage growth becomes a comparatively less substantial component of growth. The negative aspects of such growth, however, including lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouses when openings occur in existing markets, are continuing to decline in significance as they relate to the results of our total operations. Our rate of operating floor space square footage growth is generally higher in foreign markets, due to the smaller base in those markets, and we expect that to continue. Our e-commerce business growth, domestically and internationally, has also increased our sales but it generally has a lower gross margin percentage relative to our warehouse business.
The membership format is an integral part of our business and has a significant effect on our profitability. This format is designed to reinforce member loyalty and provide continuing fee revenue. The extent to which we achieve growth in our membership base, increase the penetration of our Executive members, and sustain high renewal rates materially influences our profitability. Our paid membership growth rate may be adversely impacted when warehouse openings occur in existing markets as compared to new markets.
Our financial performance depends heavily on controlling costs. While we believe that we have achieved successes in this area, some significant costs are partially outside our control, particularly health care and utility expenses. With respect to the compensation of our employees, our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that achieving our longer-term objectives of reducing employee turnover and enhancing employee satisfaction requires maintaining compensation levels that are better than the industry average for much of our workforce. This may cause us, for example, to absorb costs that other employers might seek to pass through to their workforces. Because our business operates on very low margins, modest changes in various items in the consolidated statements of income, particularly merchandise costs and selling, general and administrative expenses, can have substantial impacts on net income.
Our operating model is generally the same across our U.S., Canada, and Other International operating segments (see Note 11 to the condensed consolidated financial statements included in Part I, Item 1, of this Report). Certain countries in the Other International segment have relatively higher rates of square footage growth, lower wage and benefit costs as a percentage of country sales, less or no direct membership warehouse competition, or lack an e-commerce business.
In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies relative to the U.S. dollar, which are references to the differences between the foreign-exchange rates we use to convert the financial results of our international operations from local currencies into U.S. dollars for financial reporting purposes. This impact of foreign-exchange rate changes is calculated based on the difference between the current period's currency exchange rates and that of the comparable prior period. The impact of changes in gasoline prices on net sales is calculated based on the difference between the current period's average price per gallon sold and that of the comparable prior period.
Our fiscal year ends on the Sunday closest to August 31. References to the second quarter of 2021 and 2020 relate to the 12-week fiscal quarters ended February 14, 2021, and February 16, 2020, respectively. References to the first half of 2021 and 2020 relate to the 24 weeks ended February 14, 2021, and February 16, 2020, respectively. Certain percentages presented are calculated using actual results prior to rounding. Unless otherwise noted, references to net income relate to net income attributable to Costco.
Highlights for the second quarter of 2021 as compared to the second quarter of 2020 include:
•Net sales increased 15% to $43,888, driven by an increase in comparable sales of 13% and sales at 18 net new warehouses opened since the end of the second quarter of 2020;
•Membership fee revenue increased 8% to $881, driven by signups at warehouses and online and by upgrades to Executive Membership;
•Gross margin percentage decreased two basis points, driven by certain ancillary and other businesses and incremental wages due to COVID-19, partially offset by increases in our core merchandise categories;
•SG&A expenses as a percentage of net sales increased 11 basis points, primarily due to incremental wages as a result of COVID-19, partially offset by leveraging increased sales;
•On January 21, 2021, our Board declared a quarterly cash dividend of $0.70 per share, which was paid on February 19, 2021. The special cash dividend of $10.00 per share declared on November 16, 2020, was paid on December 11, 2020; and
•Net income was $951, or $2.14 per diluted share, compared to $931, or $2.10 per diluted share in 2020.
COVID-19
As the COVID-19 pandemic persists we continue to operate as an essential business. We remain focused on our strategy while prioritizing the health and safety of our members and employees. We have taken a variety of measures, as described in Item 1A Risk Factors of our fiscal 2020 Annual Report on Form 10-K, which have impacted us across all reportable segments to varying degrees. We have recorded strong sales and profitability in our fresh foods, foods and sundries, and our e-commerce business. Conversely, we have experienced decreases in sales and profitability in certain of our ancillary and other businesses, primarily in our gasoline and travel businesses. COVID-related supply constraints have adversely affected some merchandise categories and are expected to do so for the foreseeable future.
We paid $246 and $458 in incremental wages during the second quarter and first half of 2021, respectively, related to COVID-19. The incremental wage and benefit costs associated with COVID-19, which began on March 1, 2020 and ended on February 28, 2021, totaled approximately $825.
Effective March 1, 2021, we implemented permanent wage increases for hourly and most salaried warehouse employees. The estimated annualized pre-tax cost of these permanent wage increases is approximately $400. Additionally, in certain areas where we do business in the United States, governments have mandated, or are considering mandating extra pay for classes of employees that include our employees, which will result in higher costs.
RESULTS OF OPERATIONS
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
24 Weeks Ended
|
|
February 14,
2021
|
|
February 16,
2020
|
|
February 14,
2021
|
|
February 16,
2020
|
Net Sales
|
$
|
43,888
|
|
|
$
|
38,256
|
|
|
$
|
86,235
|
|
|
$
|
74,492
|
|
Increases in net sales:
|
|
|
|
|
|
|
|
U.S
|
13
|
%
|
|
10
|
%
|
|
14
|
%
|
|
8
|
%
|
Canada
|
15
|
%
|
|
9
|
%
|
|
16
|
%
|
|
6
|
%
|
Other International
|
25
|
%
|
|
12
|
%
|
|
24
|
%
|
|
9
|
%
|
Total Company
|
15
|
%
|
|
10
|
%
|
|
16
|
%
|
|
8
|
%
|
Increases in comparable sales:
|
|
|
|
|
|
|
|
U.S
|
11
|
%
|
|
9
|
%
|
|
13
|
%
|
|
7
|
%
|
Canada
|
13
|
%
|
|
9
|
%
|
|
15
|
%
|
|
6
|
%
|
Other International
|
22
|
%
|
|
8
|
%
|
|
20
|
%
|
|
6
|
%
|
Total Company
|
13
|
%
|
|
9
|
%
|
|
14
|
%
|
|
7
|
%
|
Increases in comparable sales excluding the impact of changes in foreign currency and gasoline prices:
|
|
|
|
|
|
|
|
U.S
|
13
|
%
|
|
8
|
%
|
|
15
|
%
|
|
7
|
%
|
Canada
|
11
|
%
|
|
7
|
%
|
|
14
|
%
|
|
6
|
%
|
Other International
|
18
|
%
|
|
7
|
%
|
|
18
|
%
|
|
6
|
%
|
Total Company
|
13
|
%
|
|
8
|
%
|
|
15
|
%
|
|
6
|
%
|
Net Sales
Net sales increased $5,632 or 15%, and $11,743 or 16% during the second quarter and first half of 2021, respectively, compared to the second quarter and first half of 2020. This improvement was attributable to an increase in comparable sales of 13% and 14% in the second quarter and first half of 2021, respectively, and sales at the 18 net new warehouses opened since the end of the second quarter of 2020. During the second quarter and first half of 2021, we experienced increased sales in our core merchandise categories, both in our warehouses and online due in part to COVID-19. Sales in certain ancillary and other businesses weakened compared to the second quarter and first half of 2020, largely driven by our gasoline and travel businesses.
During the second quarter of 2021, changes in gasoline prices negatively impacted net sales by $367, or 96 basis points, compared to 2020, due to a 10% decrease in the average price per gallon. The volume of gasoline sold decreased approximately 9%, negatively impacting net sales by $341, or 89 basis points. Changes in foreign currencies relative to the U.S. dollar positively impacted net sales by approximately $423, or 110 basis points, compared to the second quarter of 2020, attributable to our Canadian and Other International operations.
During the first half of 2021, changes in gasoline prices negatively impacted net sales by $1,094, or 147 basis points, compared to 2020, due to a 15% decrease in the average price per gallon. The volume of gasoline sold decreased approximately 9%, negatively impacting net sales by $740, or 99 basis points. Changes in foreign currencies relative to the U.S. dollar positively impacted net sales by approximately $527, or 71 basis points, compared to the first half of 2020, attributable to our Canadian and Other International operations.
Comparable Sales
Comparable sales increased 13% and 14% in the second quarter and first half of 2021, respectively, and were positively impacted by increases in average ticket and shopping frequency. There was an increase of 76% and 80% in e-commerce comparable sales in the second quarter and first half of 2021, respectively.
Membership Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
24 Weeks Ended
|
|
February 14,
2021
|
|
February 16,
2020
|
|
February 14,
2021
|
|
February 16,
2020
|
Membership fees
|
$
|
881
|
|
|
$
|
816
|
|
|
$
|
1,742
|
|
|
$
|
1,620
|
|
Membership fees as a percentage of net sales
|
2.01
|
%
|
|
2.13
|
%
|
|
2.02
|
%
|
|
2.17
|
%
|
Total paid members (000s)
|
59,700
|
|
|
55,300
|
|
|
—
|
|
|
—
|
|
Total cardholders (000s)
|
108,300
|
|
|
100,900
|
|
|
—
|
|
|
—
|
|
Membership fees increased 8% in both the second quarter and first half of 2021, driven by signups at warehouses and online and by upgrades to Executive Membership. At the end of the second quarter of 2021, our member renewal rates were 91% in the U.S. and Canada and 88% worldwide. Our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date.
We account for membership fee revenue on a deferred basis, recognized ratably over the one-year membership period. Our membership counts include active memberships as well as memberships that have not renewed within the 12 months prior to the reporting date. In the fourth quarter of 2020, we standardized our membership count methodology globally to be consistent with the U.S. and Canada. If this standardization would have been done at the end of the second quarter of 2020, it would have resulted in an addition to the count of approximately 2.2 million total cardholders, of which 1.4 million were paid members. Membership fee income and the renewal rate calculations were not affected.
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
24 Weeks Ended
|
|
February 14,
2021
|
|
February 16,
2020
|
|
February 14,
2021
|
|
February 16,
2020
|
Net sales
|
$
|
43,888
|
|
|
$
|
38,256
|
|
|
$
|
86,235
|
|
|
$
|
74,492
|
|
Less merchandise costs
|
39,078
|
|
|
34,056
|
|
|
76,536
|
|
|
66,289
|
|
Gross margin
|
$
|
4,810
|
|
|
$
|
4,200
|
|
|
$
|
9,699
|
|
|
$
|
8,203
|
|
Gross margin percentage
|
10.96
|
%
|
|
10.98
|
%
|
|
11.25
|
%
|
|
11.01
|
%
|
Quarterly Results
The gross margin of core merchandise categories, when expressed as a percentage of core merchandise sales (rather than total net sales), increased 71 basis points. This increase was across all categories, most significantly in fresh foods, primarily as a result of efficiencies from increased sales. This measure eliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses.
Total gross margin percentage decreased two basis points compared to the second quarter of 2020. Excluding the impact of gasoline price deflation on net sales, gross margin percentage was 10.87%, a decrease of 11 basis points. This was primarily due to a 55 basis point decrease in warehouse ancillary and other businesses, certain of which were negatively impacted by lower sales due to COVID-19, predominantly in our gasoline and travel businesses. The decreases in warehouse ancillary and other business were partially offset by e-commerce. Gross margin was also negatively impacted by incremental wages related to COVID-19 of 14 basis points and increased spending by members under the Executive Membership 2% reward program of five basis points. These decreases were partially offset by an increase of 63 basis points in our core merchandise categories, predominantly fresh foods.
Gross margin on a segment basis, when expressed as a percentage of the segment's own sales and excluding the impact of changes in gasoline prices on net sales (segment gross margin percentage), performed similarly to the consolidated results above for our U.S. segment. The segment gross margin percentage increased in our Canadian and Other International segments, primarily due to increases in fresh foods and foods and sundries partially offset by incremental wages related to COVID-19 and increased spending by members under the Executive Membership 2% reward program.
Year-to-date Results
The gross margin of core merchandise categories, when expressed as a percentage of core merchandise sales, increased 72 basis points. This increase was across all categories, most significantly in fresh foods where gross margins increased primarily as a result of efficiencies from increased sales.
Total gross margin percentage increased 24 basis points compared to the first half of 2020. Excluding the impact of gasoline price deflation on net sales, gross margin percentage was 11.11%, an increase of ten basis points. This was primarily due to an increase of 68 basis points in our core merchandise categories, predominantly fresh foods and foods and sundries. These increases were partially offset by a 41 basis point decrease in warehouse ancillary and other businesses, certain of which were negatively impacted by lower sales due to COVID-19, predominantly our gasoline and travel businesses. The decreases in warehouse ancillary and other businesses were partially offset by e-commerce. Gross margin was also negatively impacted by incremental wages related to COVID-19 of 13 basis points and increased spending by members under the Executive Membership 2% reward program of four basis points.
The segment gross margin percentage decreased in our U.S. segment primarily due to warehouse ancillary and other businesses and incremental wages related to COVID-19, partially offset by increases in our core merchandise categories. Our Canada and Other International segments increased primarily due to certain of our core merchandise categories and warehouse ancillary and other businesses. These increases were partially offset by the incremental wages and increased spending by executive members discussed above.
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
24 Weeks Ended
|
|
February 14,
2021
|
|
February 16,
2020
|
|
February 14,
2021
|
|
February 16,
2020
|
SG&A expenses
|
$
|
4,342
|
|
|
$
|
3,743
|
|
|
$
|
8,640
|
|
|
$
|
7,475
|
|
SG&A expenses as a percentage of net sales
|
9.89
|
%
|
|
9.78
|
%
|
|
10.02
|
%
|
|
10.03
|
%
|
Quarterly Results
SG&A expenses as a percentage of net sales increased 11 basis points compared to the second quarter of 2020. SG&A expenses as a percentage of net sales excluding the impact of gasoline price deflation was 9.81%, an increase of three basis points compared to the prior year. SG&A expenses were negatively impacted by 42 basis points due to incremental wages as a result of COVID-19. Central operating costs were also higher by two basis points, largely in our U.S. segment. These increases were partially offset by a decrease of 38 basis points due to warehouse operations and other businesses, largely attributable to payroll and benefits, primarily due to leveraging increased sales. Stock compensation expense was lower by three basis points.
Year-to-date Results
SG&A expenses as a percentage of net sales decreased one basis point compared to the first half of 2020. SG&A expenses as a percentage of net sales excluding the impact of gasoline price deflation was 9.89%, a decrease of 14 basis points compared to the prior year. Warehouse operations and other businesses were lower by 50 basis points, largely attributable to payroll and benefits, primarily due to leveraging increased sales. Stock compensation expense was also lower by three basis points. SG&A expenses were negatively impacted by 39 basis points due to incremental wages as a result of COVID-19.
Preopening Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
24 Weeks Ended
|
|
February 14,
2021
|
|
February 16,
2020
|
|
February 14,
2021
|
|
February 16,
2020
|
Preopening expenses
|
$
|
9
|
|
|
$
|
7
|
|
|
$
|
31
|
|
|
$
|
21
|
|
Warehouse openings, including relocations
|
|
|
|
|
|
|
|
United States
|
0
|
|
|
0
|
|
|
7
|
|
|
3
|
|
Canada
|
0
|
|
|
0
|
|
|
2
|
|
|
1
|
|
Other International
|
0
|
|
|
0
|
|
|
1
|
|
|
0
|
|
Total warehouse openings, including relocations
|
0
|
|
|
0
|
|
|
10
|
|
|
4
|
|
Preopening expenses include startup costs related to new warehouses and relocations, developments in new international markets, new manufacturing and distribution facilities, and expansions at existing warehouses. Preopening expenses vary due to the number of warehouse openings, the timing of the openings relative to our quarter-end, whether the warehouse is owned or leased, and whether the opening is in an existing, new or international market. For the remainder of fiscal 2021, we expect to open 13 warehouses.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
24 Weeks Ended
|
|
February 14,
2021
|
|
February 16,
2020
|
|
February 14,
2021
|
|
February 16,
2020
|
Interest expense
|
$
|
40
|
|
|
$
|
34
|
|
|
$
|
79
|
|
|
$
|
72
|
|
Interest expense is primarily related to Senior Notes. Interest expense increased in the second quarter and first half of 2021 due to higher long-term debt balances.
Interest Income and Other, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
24 Weeks Ended
|
|
February 14,
2021
|
|
February 16,
2020
|
|
February 14,
2021
|
|
February 16,
2020
|
Interest income
|
$
|
11
|
|
|
$
|
30
|
|
|
$
|
21
|
|
|
$
|
62
|
|
Foreign-currency transaction gains (losses), net
|
(1)
|
|
|
8
|
|
|
7
|
|
|
4
|
|
Other, net
|
9
|
|
|
7
|
|
|
20
|
|
|
14
|
|
Interest income and other, net
|
$
|
19
|
|
|
$
|
45
|
|
|
$
|
48
|
|
|
$
|
80
|
|
Interest income decreased in the second quarter and first half of 2021 due to lower interest rates, partially offset by higher average cash and investment balances. Foreign-currency transaction gains (losses), net include the revaluation or settlement of monetary assets and liabilities by our Canadian and Other International operations and mark-to-market adjustments for forward foreign-exchange contracts. See Derivatives and Foreign Currency sections in Item 8, Note 1 of our Annual Report on Form 10-K, for the fiscal year ended August 30, 2020.
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
24 Weeks Ended
|
|
February 14,
2021
|
|
February 16,
2020
|
|
February 14,
2021
|
|
February 16,
2020
|
Provision for income taxes
|
$
|
348
|
|
|
$
|
330
|
|
|
$
|
587
|
|
|
$
|
532
|
|
Effective tax rate
|
26.4
|
%
|
|
25.9
|
%
|
|
21.5
|
%
|
|
22.8
|
%
|
The effective tax rate for the first half of 2021 was favorably impacted by net discrete tax benefits of $136, which primarily related to the first quarter. This included $75 of excess tax benefits related to stock compensation and $70 related to the portion of the special cash dividend payable through our 401(k) plan. The effective tax rate for the first half of 2020 was favorably impacted by net discrete tax benefits of $79, primarily related to excess tax benefits from stock compensation. Excluding the discrete net tax benefits, the tax rate was 26.4% and 26.2% for the first half of 2021 and 2020, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our significant sources and uses of cash and cash equivalents:
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|
|
|
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|
|
|
|
|
|
|
|
24 Weeks Ended
|
|
February 14,
2021
|
|
February 16,
2020
|
Net cash provided by operating activities
|
$
|
2,685
|
|
|
$
|
2,721
|
|
Net cash used in investing activities
|
(1,037)
|
|
|
(1,100)
|
|
Net cash used in financing activities
|
(5,350)
|
|
|
(2,228)
|
|
|
|
|
|
Our primary sources of liquidity are cash flows generated from our operations, cash and cash equivalents, and short-term investments. Cash and cash equivalents and short-term investments were $9,254 and $13,305 at February 14, 2021, and August 30, 2020, respectively. Of these balances, unsettled credit and debit card receivables represented approximately $1,659 and $1,636 at February 14, 2021, and August 30, 2020, respectively. These receivables generally settle within four days. Management believes that our cash position and operating cash flows will be sufficient to meet our liquidity and capital requirements for the foreseeable future.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $2,685 in the first half of 2021, compared to $2,721 in the first half of 2020. Our cash flow provided by operations is primarily derived from net sales and membership fees. Cash flow used in operations generally consists of payments to merchandise suppliers, warehouse operating costs, including payroll and employee benefits, utilities, and credit and debit card processing fees. Cash used in operations also includes payments for income taxes. Changes in our net investment in merchandise inventories (the difference between merchandise inventories and accounts payable) is impacted by several factors, including how fast inventory is sold, the strategic forward deployment of inventory to accelerate delivery times to our members, payment terms with our suppliers, and the amount of payables paid early to obtain discounts from our suppliers.
Cash Flows from Investing Activities
Net cash used in investing activities totaled $1,037 in the first half of 2021, compared to $1,100 in the first half of 2020, and is primarily related to capital expenditures. Net cash from investing activities also includes purchases and maturities of short-term investments.
Capital Expenditure Plans
Our primary requirements for capital are acquiring land, buildings, and equipment for new and remodeled warehouses. Capital is also required for information systems, manufacturing and distribution facilities, initial warehouse operations, and working capital. In the first half of 2021, we spent $1,466 on capital expenditures. While COVID-19 has delayed certain construction projects, it is our current intention to spend between $3,000 and $3,200 during fiscal 2021. We opened 10 new warehouses, including two relocations, in the first half of 2021 and plan to open 13 additional new warehouses in the remainder of fiscal 2021. There can be no assurance that current expectations will be realized; plans are subject to change upon further review of our capital expenditure needs.
Cash Flows from Financing Activities
Net cash used in financing activities totaled $5,350 in the first half of 2021, compared to $2,228 in the first half of 2020. Cash flow used in financing activities was primarily related to the payment of dividends, withholding taxes on stock-based awards, and repurchases of common stock.
Dividends
On January 21, 2021, our Board declared a quarterly cash dividend of $0.70 per share payable to shareholders of record on February 5, 2021, which was paid on February 19, 2021. On December 11, 2020, an aggregate payment of approximately $4,430 was made in connection with the special cash dividend of $10.00 per share, declared on November 16, 2020.
Stock Repurchase Program
During the first half of 2021 and 2020, we repurchased 521,000 and 262,000 shares of common stock, at an average price per share of $361.52 and $299.40, respectively, totaling approximately $189 and $79, respectively. These amounts may differ from the stock repurchase balances in the accompanying condensed consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of a quarter. Purchases are made from time to time, as conditions warrant, in the open market or in block purchases, pursuant to plans under SEC Rule 10b5-1. Repurchased shares are retired, in accordance with the Washington Business Corporation Act.
Bank Credit Facilities and Commercial Paper Programs
We maintain bank credit facilities for working capital and general corporate purposes. At February 14, 2021, we had borrowing capacity under these facilities of $1,051. Our international operations maintain $575 of the borrowing capacity under bank credit facilities, of which $207 is guaranteed by the Company. There were no short-term borrowings outstanding under the bank credit facilities at the end of the second quarter of 2021 or at the end of 2020.
The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $215. The outstanding commitments under these facilities at the end of the second quarter of 2021 totaled $181, most of which were standby letters of credit which do not expire or have expiration dates within one year. The bank credit facilities have various expiration dates, most of which are within one year, and we generally intend to renew these facilities. The amount of borrowings available at any time under our bank credit facilities is reduced by the amount of standby and commercial letters of credit outstanding.
Contractual Obligations
As of the date of this Report, there were no material changes to our contractual obligations outside the ordinary course of business since the end of our last fiscal year.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with U.S. GAAP requires that we make estimates and judgments. We base these on historical experience and on assumptions that we believe to be reasonable. Our critical accounting policies are discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K, for the fiscal year ended August 30, 2020. There have been no material changes to the critical accounting policies previously disclosed in that Report.
Recent Accounting Pronouncements
There have been no material changes in recently issued or adopted accounting standards from those disclosed in our Annual Report on Form 10-K, for the fiscal year ended August 30, 2020.
Item 3—Quantitative and Qualitative Disclosures about Market Risk
Our direct exposure to financial market risk results from fluctuations in foreign-currency exchange rates and interest rates. There have been no material changes to our market risks as disclosed in our Annual Report on Form 10-K, for the fiscal year ended August 30, 2020.