Costco Reports In-Line Q4, Discloses Material Weakness In Internal Controls

Costco Wholesale Corporation COST, which is among the earliest retailers to report quarterly results, failed to incite much enthusiasm with its fourth-quarter print Thursday afternoon. 

This is despite an in-line bottom-line result and the top-line narrowly beating the consensus. The warehouse club raised concerns with its disclosure that it will report material weakness in its internal controls.

Costco shares, which have gained roughly 26 percent year-to-date, were slipping 3.11 percent to $224.48 at the time of publication Friday. 

Key Metrics In-Line 

• The warehouse club reported total Q4 revenue of $44.41 billion, up 5 percent from the $41.4 billion reported in the year-ago period. The figure beat a consensus estimate of $44.27 billion.
• Net sales, accounting for roughly 98 percent of total revenue, grew 5 percent, while the remaining revenue is accounted for in membership fees.
• Comps rose 9.5 percent. When excluding the impact of changes in gasoline prices and forex, the increase was 7.2 percent.
• E-commerce comps rose 26.2 percent.
• Costco's earnings per share were $2.36 vs. $2.08 in the fourth quarter of 2017. The result was in-line with the consensus.
• The operating margin contracted from 34.3 percent to 32.6 percent.

Material Weakness In IT Controls

Costco said it is still completing an assessment of its internal controls for financial reporting as of Sept. 2. 

The retailer's upcoming 10-K filing will state a material weakness in internal controls tied to general IT controls in user access and program change-management in IT systems that underpin Costco's financial reporting. 

"As of the date of this release, there have been no misstatements identified in the financial statements as a result of these deficiencies, and the company expects to timely file its Form 10-K," Costco said. 

Remediation efforts have started, the retailer said, and it expects the effort will be complete before the end of fiscal 2019. 

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