Costco Wholesale
Corporation
Zichen Wang
Annul Report Project
http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-reportsannual
Introduction
 Name
of CEO: Craig Jelinek
 Corporate Office
999 Lake Drive
Issaquah, WA 98027
 Latest fiscal year ended: September 2nd 2012
Introduction
Costco is mainly engaged in the operation of
membership warehouses in the United States and other
countries. It provides customers various and a wide
range of retail products.
 Main locations: 622 warehouses in 41 states and Puerto
Rico
(448 locations), nine Canadian provinces (85 locations),
Mexico (32 locations), the United Kingdom (23
locations), Japan (13 locations), Korea (nine locations),
Taiwan (nine locations, through a 55%-owned
subsidiary) and Australia (three locations)

Audit Report
 Auditor:
 The
auditor started by claiming that their audits
are following the standards of Public Company
Accounting Oversight Board (United States).
Then he stated that the company’s financial
statements referred to the standards. He also
verified that the internal control of the company
over its financial statements is well achieved.
Stock Market Information
 Stock
price: 109.63 May 31 4:00pm ET
 $77.99 – $98.59
 Dividend rate is $1.03 per share
 October 5, 2012
 Hold it! The stock price has been going up since
2011. From the stock chart, no selling signals are
seen. Be cautious buying it because no Golden
Crossover points are found since 2011.
Income Statement
(Multi-step)
53 weeks ended September 2, 52 weeks ended August 28,
2012
2011
REVENUE
Net sales
$ 97,062
87,048
Membership fees
2,075
1,867
Total revenue
99,137
88,915
Merchandise costs
86,823
77,739
Selling, general and administrative
9,518
8,691
Preopening expenses
37
46
2,759
2,439
Interest expense
(95)
(115)
Interest income and other, net
103
60
2,767
2,383
OPERATING EXPENSES
Operating income
OTHER INCOME (EXPENSE)
INCOME BEFORE INCOME
TAXES
Income Statement
 Comparing
the Income Statements of
2012 and 2011 fiscal year, we notice that
the revenue went up by a significant
amount. Although this increased account
of sales has resulted in several increased
expenses, the overall net income before
taxes is still higher than the previous fiscal
year.
ASSETS
2012
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,528
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,326
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,026
Merchandise inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,096
Deferred income taxes and other current assets . . . . . . . . . . . . . . . . . . . .
550
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,526
PROPERTY AND EQUIPMENT
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,032
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,879
Equipment and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,261
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 374
19,546
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . .
(6,585)
Net property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,961
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 653
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$27,140
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,303
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Accrued salaries and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,832
Accrued member rewards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 661
Accrued sales and other taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 965
Deferred membership fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,101
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,260
LONG-TERM DEBT, excluding current portion . . . . . . . . . . . . . . . . . . . . . . . 1,381
DEFERRED INCOME TAXES AND OTHER LIABILITIES . . . . . . . . . . . . . . . 981
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,622
COMMITMENTS AND CONTINGENCIES
EQUITY
Preferred stock $.005 par value; 100,000,000 shares authorized; no
shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Common stock $.005 par value; 900,000,000 shares authorized;
432,350,000 and 434,266,000 shares issued and outstanding . . . . . . . 2
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,369
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . 156
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,834
Total Costco stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,361
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,518
TOTAL LIABILITIES AND EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . $27,140
2011
$ 4,009
1,604
965
6,638
490
13,706
3,819
10,278
4,002
269
18,368
(5,936)
12,432
623
$26,761
$ 6,544
900
1,758
602
335
938
973
12,050
1,253
885
14,188
0
2
4,516
373
7,111
12,002
571
12,573
$26,761
Balance Sheet
 In
general, the total assets increased in
2012 fiscal year comparing to 2011 fiscal
year. The current portion of long-term
debt changed the most, from 900 to 1.
Plants and equipment accounts also
increased in 2012.
Statement of Cash Flows
2012
2011
Cash flow from
operating activities
3057
3198
Cash flow from
investing activities
(1236)
(1180)
Cash flow from
financing activities
(2281)
(1277)
Cash and cash
equivalents
3528
4009
Cash flows from operating activities are higher than net
income from the past two years.
Statement of Cash Flows
 The
“Additions to property and equipment”
accounts for 2012 and 2011 are (1480) and (1290)
respectively, meaning that the company is
growing through investing activities
 The primary source of financing is long-term debt
in 2012 and common stock in 2011
 Overall, cash has decreased over the past two
years
Accounting Policies
 Revenue
Recognition:
The Company generally recognizes sales,
which include shipping fees where
applicable, net of estimated returns, at the
time the member takes possession of
merchandise or receives services.
Accounting Policies
 Cash
and Cash Equivalents:
The Company considers as cash and cash
equivalents all highly liquid investments
with a maturity of three months or less at
the date of purchase and proceeds due
from credit and debit card transactions
with settlement terms of up to one week.
Accounting Policies
 Accounts
Receivable
Vendor receivables include payments from vendors in the
form of volume rebates or other purchase discounts that
are evidenced by signed agreements and are reflected in
the carrying value of the inventory when earned or as the
Company progresses towards earning the rebate or
discount and as a component of merchandise costs as
the merchandise is sold.
Reinsurance receivables are held by the Company’s whollyowned captive insurance subsidiary.
Receivables are recorded net of an allowance for doubtful
accounts.
Accounting Policies
 Inventories:
Merchandise inventories are valued at the
lower of cost or market, as determined
primarily by the retail inventory method,
and are stated using the last-in, first-out
(LIFO) method for substantially all U.S.
merchandise inventories.
Accounting Policies
Investments:
In general, short-term investments have a maturity at
the date of purchase of three months to five years.
Short-term investments classified as available-for-sale
are recorded at fair value using the specific
identification method with the unrealized gains and
losses reflected in accumulated other
comprehensive income until realized.
The Company periodically evaluates unrealized losses
in its investment securities for other-thantemporary
impairment, using both qualitative and quantitative
criteria.

Accounting Policies
 Property
and Equipment
Property and equipment are stated at cost.
Repair and maintenance costs are
expensed when incurred.
Topics of the Notes
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Summary of Significant Accounting Policies
Investments
Fair Value Measurement
Debt
Leases
Stockholders’ Equity
Stock-Based Compensation Plans
Retirement Plans
Income Taxes
Net Income per Common and Common Equivalent Share
Commitments and Contingencies
Segment Reporting
Quarterly Financial Data (Unaudited)
Financial Analysis Liquidity Ratios
Working Capital
2012
2011
Current Assets
13526
13706
Current Liabilities
12260
12050
Working Capital
1266
1656
The working capital has decreased in 2012 comparing to
2011 due to the decreased CA and increased CL during 2012.
Current Ratio
2012
2011
Current Assets
13526
13706
Current Liabilities
12260
12050
Working Capital
1.103
1.137
The current ratio has decreased because
CA is smaller and CL is bigger
Receivable Turnover
2012
2011
Net Sales
97062
87048
Average Receivable
995.5
924.5
Receivable Turnover
98
94
Net sales have increased significantly during 2012,
resulting in increased receivable turnover.
Average Days’ Sales Uncollected
Average Days’ Sales
Uncollected
2012
2011
3.7
3.9
Fewer days in 2012 because there are more times of
receivable going to sales in 2012 than 2011. But since
receivable turnovers are close, days sales are also close.
Inventory Turnover
2012
2011
COGS
86823
77739
Average Inventory
6867
6138
Inventory Turnover
12.6
12.7
The change is not significant because of increased COGS
and average inventory during 2012.
Average Days’ Inventory on Hand
Average Days’
Inventory on Hand
2012
2011
29.0
28.7
Quite the same because inventory turnovers are almost
identical.
Operating Cycle
2012
2011
Days Sales
3.7
3.9
Days Inventory
29.0
28.7
Operating Cycle
32.7
32.6
Since days sales and days inventory for 2012 and 2011 are
pretty close, the operating cycles for the past two years are
also quite close.
Payables Turnover
2012
2011
COGS
86823
77739
Average Accounts
Payable
6923.5
6245.5
Payables Turnover
12.5
12.4
Average Days’ Payables
Average Days’
Payables
2012
2011
29.2
29.4
Quite the same because payables turnovers are almost
identical.
Financial Analysis
Profitability Ratios
2012
2011
Net Income
1709
1462
Revenue
99137
88915
Profit Margin
1.7%
1.6%
The net income accounts in the past two years were
relatively small comparing to revenue accounts, resulting
in small profit margins.
Asset Turnover
Revenue
2012
2011
99137
87048
Average Total Assets 26950.5
25288
Asset Turnover
3.7
3.4
2012
2011
1709
1462
Return on Assets
Net Income
Average Total Assets 26950.5
25288
Return on Assets
0.063
0.058
2012
2011
Net Income
1709
1462
Average Total SHE
12545.5
11751.5
Return on Equity
0.136
0.124
Return on Equity
 The
company is pretty efficient in using its
assets to generate profit.
 The return on assets ratio tells how
profitable the company’s assets are in
generating income. With a pretty low
profit margin multiplied by a high asset
turnover, we get a relatively normal return
on assets as retailers.
 With pretty high return on equity ratios for
the past two years, we can say that the
company is efficient in generating profit
using the money of the share holders.
Financial Analysis
Market Strength Ratios
2012
2011
Net Income
1709000000
1462000000
Average
outstanding shares
434266000
433510000
Earnings per share
3.9
3.4
EPS ratio has increased during 2012, because more
income has been earned.
2012
2011
Dividend per share
1.03
0.89
Price per share
90.605
77.125
Dividend Yield
0.011
0.012
Dividend yield is relatively small comparing to the avergae
price per share.
Financial Analysis
Solvency Ratio
2012
2011
Total Liabilities
14622
14188
Total Equity
12518
12573
Debt to Equity
1.168
1.128
Total liabilities exceed total equity is the past two years, meaning that the creditors’
money plays a more important role than share holders.
2012
2011
Days Payable
29.2
29.4
Days Inventory
29.0
28.7
Days AR
3.7
3.9
Financing Gap
-3.5
-3.2
Yes, there were financing gaps in 2012 and 2011. However, since the interest
rates are so low, it is reasonable to borrow more money.
Industry Situation &
Company Plans

Not only maintaining, but also booming its performance
during the financial crisis, Costco has been thriving, and
its price per share has also doubled since 2009. Now,
Costco is one of the largest retailers in the U.S, and the
7th biggest in the world, according to the 2012 Annual
Report. Costco is one of the fastest growing industries
during the period of the financial crisis. As we can see in
the data shown in its 2012 annual report, net income
has increased significantly. In fact, they had “the best
results in Costco’s 29-year history” (Brotman, Jelinek).
One of the goals in 2012 fiscal year was to decrease
expenses, which was also achieved “by 17 basis points”.
The stock price has been rising since 2009, and there is
no sign that it will come down recently. So what sets
Costco apart from its competitors in this especially
difficult economical situation?
Industry Situation &
Company Plans


The unique business philosophy is one of the most important
factors that are driving Costco on a high way for the past 5
years. According to the article titled Costco CEO Craig Jelinek
Leads the Cheapest, Happiest Company in the World, Costco
sets the per hour salary for its employees way above the
standard of other retailers in the U.S. With an average of
$20.89 comparing to Walmart’s $12.67, Costco dedicates to
incentive its employees with higher salaries to encourage
them to work harder and hence make more profit.
Any other spot light for Costco is its “bulk sale”. Article named
How A Trip To Costco Can Work As An Investment Strategy
points out that customers can just save a lot of money by
coming to the warehouse once and get everything they need
and save all the transaction fees if they go to the store
regularly. Also with inflation, it is always good to get real stuff
as early as possible, even save some for the future.
Industry Situation &
Company Plans



So, what’s the future plan for Costco? From the letter to
shareholders in its 2012 annual report, the CEO states that
customer loyalty and the locations for the warehouses has
increased in 2012. Since Costco is a membership based retailer,
the customer loyalty and very important in terms of its financial
performances. Therefore, it looks like Costco will continue working
on enhancing the customer loyalty around the globe.
Costco opened 17 new locations in 2012, says in the annual
report, and planed to “open approximately 30 new warehouses
in fiscal 2013”. It is certain that expanding the locations in
Costco’s one of the biggest financial plans in the coming years.
Since highly salary-encouraged employees have brought the
company huge success, it is clear that the company will
continue this policy. The CEO wrote a letter the president Obama
about raising the minimum salary around the country. Although
the congress declined his proposal, we can clearly see that this is
Costco way in the next few years.
Executive Summary


Great company to invest! The financial crisis since late 2008
has been a disaster for most of the retail industries. People’s
willing to purchase has been at its lowest since a few
decades. However, if you look at Costco’s financial
performance in the past 5 years, you will find it certainly
stands out from its competitors. As the data in the previous
slides show the booming performance of the company, such
as increasing net income, average price per share, and
decreasing expenses, Costco is really on the right track. If we
take a look into its annual reports from the previous years, we
will find the same positive changes throughout a relatively
long period.
As my conclusion, this is a great company to invest. With its
increasingly better reputation build-up among customers
these years, investing in Costco is also more reliable and a
wise decision.
Sources Used


http://www.businessweek.com/articles/2013-0606/costco-ceo-craig-jelinek-leads-the-cheapesthappiest-company-in-the-world#p1
http://www.npr.org/2013/05/30/186450423/how-a-tripto-costco-can-work-as-an-investment-strategy