Having helped Costco Wholesale raise Series A funding in 1985, former investment banker Richard Galanti was asked to become the CFO of the discount big box retailer, which numbered just six warehouse stores at the time. Today, Costco is a multi-billion-dollar business with more than 800 stores worldwide.
Few CFOs have amassed the knowledge and experience that Galanti has accumulated during his 35-year-plus tenure leading finance at the public company. The son of a grocery store manager, he has pretty much seen it all—a handful of stock market crashes, technology disruptions, a formidable competitor in Amazon and now a pandemic rife with business uncertainties, among other crises.
Senior writer Russ Banham, who has interviewed Galanti more than a dozen times over the past two decades, sat down with the veteran CFO in late-November to discuss the business impact of the pandemic on Costco. The following is a condensed version of their conversation.
Well, here we go again, another time, another crisis.
It’s certainly something we’ve never experienced before but wasn’t completely off the radar screen. Pandemics happen. We know that. I guess the biggest surprise was the remote work. Eighty percent-plus of our employees are still working from home. We’re hoping to bring them back soon into the office, but surging Covid rates continue to complicate our plans.
Aside from the remote work implications, what else worried you back in the early days of the pandemic?
If we’d have enough capital on hand to pay suppliers. We had seasonal things like lawn and garden equipment and summer apparel set to come into the stores and wanted to honor our financial commitments. … No one really knew how this would play out back in February and March. Would the economy worsen? Would demand fall off a cliff? To be safe, we raised $4 billion of capital (in April), using $1.5 billion of it to pay off two tranches of debt that were coming up, giving us $2.5 billion in new debt.
You were exercising caution for the possibility of a worst-case scenario.
Experts were saying it would last maybe 6 to 8 weeks, but what if it continued into the summer and beyond? People were losing jobs and we weren’t sure if and when there’d be a federal stimulus bill. We were concerned about sales of seasonal equipment like patio furniture and live house plants and shrubs. If we sold less than 50 percent and had to hold the rest in inventory, which we’ve never done before, it might impinge our cash flow to honor our supplier commitments.
And that explains raising the $4 billion as a failsafe.
Well, that and the fact we could get it at a fixed 1.6 percent interest rate on a weighted average of 7 to 12 years.
In hindsight, did you actually need the money?
No, but we didn’t know that at the time. We were still scurrying to procure items that people were hoarding. I remember seeing the signage outside the stores with a list of 20 items we’d run out of, like sanitizing wipes and toilet paper. We’d get a shipment and two hours later they were gone.
Did you experience difficulty having enough products like beef, pork and chicken on the shelves? Several processing plants closed because workers contracted Covid-19. I recall that Costco operates four processing facilities.
They continued to operate but we had other issues. People were hoarding protein, forcing the stores to limit our members to (buying) three items at a time. But then things gradually got back to normal, or a version of normal.
What do you mean?
Parts of the business actually grew, quite a bit in fact. For example, when local governments forced restaurants to shut down, grocery items took off. Home-related products also shot up, since people weren’t eating out, going on vacations or spending money on airfare, cruises and hotels. Stuck at home, they focused on their houses and gardens. Sales of items like juicers, MixMasters, small electric appliances, exercise equipment, patio furniture and house plants increased. Overall, our same-store sales increased from a pre-Covid range of 6 to 8 percent to the low to mid-teens in September, a near doubling.
Just the opposite of what worried you initially—that seasonal items would gather dust on shelves and the floor.
For the most part, but the biggest sellers were food and health and beauty aids, for some reason.
Wondering if the health and beauty product sales were driven by the temporary closure of chain stores like Sephora and Ulta Beauty specializing in these products.
That’s possible. But bear in mind we were considered an essential business, since we sell food and pharmaceutical products. That got people into the stores, where other products they needed were available.
I would imagine that many members nonetheless stayed home and ordered online. Did your ecommerce business pick up the slack?
In a big way. They shot up 50 percent, year-over-year, in our fiscal year (ending August 30), with some weeks up more than 100 percent. Groceries were a bit part of the increase. In 2017, we launched same-day delivery of fresh food through Instacart, what we call `one-day fresh.’ Added up, what was an $8 billion business for us last year went up 50 percent-ish (during the fiscal year), and more than that on an annualized basis.
Looking back at the past year, were there decisions made during or before the pandemic that contributed to the company’s resilience?
The big one is omnichannel. We had heard for years that everyone buys online and doesn’t go into stores anymore, but we were reluctant to get into it at first with a big investment. Our position changed gradually and then substantially during Covid. We’ve invested and continue to invest in building the ecommerce platform and improving the functionality of our fulfillment and distribution. We’re looking to accommodate what we expect will be a doubling in our ecommerce and third-party deliveries in the near future.
Tell us about the investments in this regard.
The big one was our decision in March to acquire (for $1 billion) Innovel Solutions, a logistics company that provides so-called `last-mile delivery’ of big and bulky products like major appliances, furniture, large TVs, fitness equipment and such. They operate 11 fulfillment and distribution centers, comprising more than 15 million square feet of warehouse space altogether. They can meet a one-to-two day delivery timeframe in 85 percent of continental time zones. It’s our biggest acquisition in more than a quarter-century.
You’ve been Costco’s CFO a long time, Rich. You’ve pretty much seen it all, including a once-in-a-century pandemic and the biggest recession since the Great Depression. Any advice you can pass on to CFOs of more recent vintage?
I’ve learned there are two things that can seriously change your future earnings and cash flows. The first is not having liquidity and the second is not preparing for worst-case scenarios. We were fortunate to have a very strong balance sheet and relatively predictable cash flow to get money when we needed it. At the outset of the pandemic, when we had no sense of what might happen six or eight months ahead, we knew we could access capital to weather the worst.
What about preparing for worst-case scenarios?
Our founders said from day one you have to be ready to confront adversity head on. If you don’t take the time to imagine the worst, you won’t be prepared when the disaster strikes. Bad things happen. The challenge is they come in different shapes and sizes. Others can stick their heads in the sand and not worry about the future. Not the CFO.