Effective for FY22, Costco (COST) now allocates stock based compensation (SBC) expense to its geographic segments. The change, disclosed in new language in its latest annual report, is aimed at better evaluating the financial performance of each of the segments inclusive of this expense.

DuDil has recently tracked companies reallocating expenses or reclassifying revenues to make segment financial performance appear stronger than it is. The Costco disclosure— adding an expense to more accurately reflect segment performance— affirmed our long-held trust in Costco’s management.

Since two thirds of Costco’s employees are based in the U.S, (66.6% in 2021 and 66.3% in 2020) we expected U.S. operating income in 2021 and 2020— the company recast prior year periods— to decline by $442.8 and $410.3 million respectively (based on 2021 and 2020 SBC expense of $665 and $619 million respectively).

So we were surprised to discover that— after adding the expense— Costco’s U.S. segment operating income actually increased. When we compared the recast with the prior year’s 10-K, we discovered Costco’s U.S. operating income:

— Increased $208 million in 2021, or 4.8%
— Increased $189 million in 2020, or 5.2%

There’s no change to consolidated operating income— the Canadian and Other International segment operating incomes declined equivalently to offset the rise in the U.S.

If we use the midpoint the change had on 2021 and 2020 U.S. operating income, the new segment accounting increased Costco’s 2022 U.S. operating income by approximately $263.4 million.

It’s not clear to us how adding an expense resulted in an increase in U.S. operating income. We’ve asked Costco for clarification— specifically if all SBC was previously allocated to its U.S. segment. In response, Costco confirmed that previously, all SBC had been allocated to its U.S. segment.