The Henry Fund
Henry B. Tippie School of Management
Jarom Dilworth [jarom-dilworth@uiowa.edu]
September 22, 2014
Costco Wholesale Corporation (COST)
Investment Thesis
We recommend a Sell for Costco Wholesale Corporation. The expected growth
to justify the current price does not seem reasonable, especially given the
competitive operating environment.
Drivers of Thesis
 Costco has opened its first club warehouse in continental Europe in Seville,
Spain in May. This growth will help to diversify geographic revenue streams
and open growth opportunities.
 Costco has announced they will open a marketplace on Alibaba’s T-Mall.
This will open a lot of opportunity for them to enter the Chinese
marketplace.
Risks to Thesis
 To justify the current price, Costco would need to build more stores than
they have historically, while improving margins and same store sales
growth. This scenario seems quite unlikely given current market saturation
with Costco warehouses and competitors’ stores.
 Costco operates on very small margins, with maximum markups of 14% &
15% for branded & private label goods. These numbers are maximums and
some of their goods have an even smaller markup. This limits the
improvements that can be expected in their operating margin.
Target Price
Henry Fund DCF
Henry Fund DDM
Relative Multiple
Price Data
Current Price
52wk Range
Key Statistics
Market Cap (B)
Shares Outstanding (M)
Institutional Ownership
Five Year Beta
Dividend Yield
Est. 5yr Growth
Price/Earnings (TTM)
Price/Earnings (FY2)
Price/Sales (TTM)f
Price/Book (mrq)f
Profitability
Operating Margin
Profit Margin
Return on Assets (TTM)
Return on Equity (TTM)
COST
30
Earnings Estimates
10
2012
$4.63
18.9%
2013
$4.47
-3.4%
2014E
$4.34
-2.9%
2015E
$4.68
7.8%
2016E
$5.76
23.1%
12 Month Performance
COST
40%
$128.50
$109.50 – 127.32
Industry
$55.44
438.30
75.1%
0.53
1.1%
10.1%
28.20
24.60
0.50
4.50
2.9%
1.9%
6.2%
17.6%
Sector
20
31.4
24.6
18.1
2011
$3.89
17.4%
$116-119
$118
$117
$83
40
 The rising competition in consumer shopping experiences will decrease
frequency of shoppers at Costco because of convenience in using smaller,
closer stores or delivery services.
Year
EPS
growth
SELL
Stock Rating
Consumer Discretionary - Retail
17.6 17.6 18.3
1.9
3.3
6.0
0
P/E
ROE
Net Profit Margin
Company Description
S&P 500
Costco Wholesale Corporation is one of the
largest Club Retailers in the United States. It
operates in nine countries both through jointventure
operations
and
wholly-owned
subsidiaries. They charge annual membership
fees to shop at the warehouse, and provide a
limited number of product offerings in bulk at
discounted, warehouse prices.
30%
20%
10%
0%
-10%
S
O
N
D
J
F
M
A
M
J
J
A
Important disclosures appear on the last page of this report.
Comparison of size and number of stores in United States.
EXECUTIVE SUMMARY
We recommend a Sell for Costco.
Costco has implemented some good growth strategies
recently, including opening stores in continental Europe.
Costco has a good management team in place to execute
their strategy, but to justify their current stock price,
Costco would need to improve New Stores, COGS as a
percent of Sales, or Same Store Sales CAGR by more than
historical average. There is not a catalyst to justify a strong
combination of these changes.
Scenario 1
Scenario 2
Scenario 3
Historical
New Stores COGS
annually
percent
Sales
25
86.38%
35
86.34%
46
86.54%
25-30
86.54%
as CAGR Same
of Store Sales
3.46%
2.02%
2.02%
2.02%
Costco already operates on a small margin. Because of
their corporate policy regarding markups, branded goods
cannot have a markup greater than 14% and private label
goods cannot have a markup greater than 15%. We do not
expect their COGS as a percent of Sales to decrease below
86.3%. Although their maximum markup is 14% for
branded goods, they do not always markup their goods the
maximum 14%, which keeps the average markup below
14%.
Company Description
Costco Wholesale Corporation is a wholesale retailer
headquartered in Issaquah, WA. As of Aug 31, 2014,
Costco operated 653 warehouses in eight countries
(United States, Canada, Mexico, United Kingdom, Japan,
Korea, Taiwan, & Australia). The company operates an
online e-commerce website (www.costco.com) and also
receives revenue from membership fees. Approximately
3% of its revenue is generated from online sales, another
1.5-2% is generated through membership fees, and the
remaining 95% is generated from in-store sales.
The below map illustrates Costco’s locations in the United
States. Of total Costco warehouses, 16.7% are located in
the state of California, while those same stores provide
over 23% of Costco’s revenue. This indicates that the
stores in California increase the average revenue per
warehouse. Relying on such a concentrated area is a large
risk for a big box retailer. Costco is very dependant on the
economic and natural environments in California.
Costco Locations in Continental United States.
COMPANY DESCRIPTION
Competitive Landscape
Costco is the second largest club warehouse/supercenter
in the United States with 17% market share compared with
Walmart’s 64%i. Although Walmart has a large market
share, Costco has positioned itself to compete in the
middle class market. BJ’s is the next largest club
warehouse, but it operates exclusively in states located on
the Atlantic seaboard. The below table illustrates Costco’s
position in the United States compared to its competitors
in both number of locations and the average size of
warehouses. Sam’s Club has 40% more stores than Costco
in the United States. Based on Sales/Sq. Ft., Costco is the
category leader. They are able to generate over twice as
many sales per square foot as BJ’s Warehouse and nearly
twice as many sales per square foot as Sam’s Club.
Simplymap.com
Products
Costco offers a diversified group of products including
food, appliances, and electronics among other items. This
diversified product list offers its customers an opportunity
to streamline their shopping and complete it in one stop.
They offer many products from food & grocery to
Page 2
appliances & home furnishings. The below chart illustrates
their product mix in sales.
In fiscal end 2013, the US & Canada represented 88% of
net sales. The international expansion will help to diversify
revenue streams, especially as 23% of total revenue came
from stores in California. This is a risk that we expect to
decrease especially as international expansion projects are
implemented. The Seattle Times reported that 14,000 new
members had signed up for Costco memberships as of May
10.
Alibaba T-Mall
Data taken from 10-k.
With a pretty even distribution between the product lines,
Costco has a well-diversified product portfolio amongst its
product categories. It also changes products frequently
enough to keep customers engaged and returning often to
Costco warehouses.
Warehouse
Costco has a physical retail footprint that is much smaller
than that of some competitors. It sells goods in a
warehouse format that averages 143,000 square feet in
each warehouse. Sam’s Club operates 632 club stores in
the United Statesii; whereas, Costco only operates 451 club
stores in the United States. Costco still has a strong market
share and limits the use of debt in financing its expansion.
Costco’s long-term debt is less than 9% of its capital
structure, which is comparable to its peer group.
RECENT DEVELOPMENTS
European Expansion
Costco opened its first store in Spain earlier this yeariii. This
represents its first footprint on mainland Europe and its
plans for a broader global expansion. Half of its expected
new stores in 2014 are expected to be outside the United
States. We expect this to add more volume to its existing
user base in addition to the revenue generated from the
new store locations. With Spain still near 25%
unemploymentiv and a population that is below
replacement ratev, there is a concern about Costco’s
growth opportunities as a new entrant as domestic stores
such as Zara are closingvi.
Costco recently announced it would be entering the
Chinese marketplace via Alibaba’s T-Mall.vii In the 30 days
since the announcement, COST stock has increased
approximately 10% in value from $126 to $139. For Costco
to beat the market expectation, they will need to grow
their Alibaba to become over 10% of their revenues. We
do not feel that they have the potential to reach these
numbers.
INDUSTRY TRENDS
Cybersecurity
Given the number of recent cyber attacks, many
companies are looking to increase security for data and
credit cards. The number of retailers continues to grow;
the largest and most publicized was the Target security
breach. Other recent attacks include Home Depot,
Supervalu, & P.F. Chang’s. This is a growing concern among
retailers that they need to provide better data security for
their customers.
The largest risk for a retailer is reputational risk. As was
seen with Target, they lost a lot of faith from consumers
due to the credit card breach.viii This has translated into
lower revenue for Target as they have lowered guidance
twice in the last three months.ix Target revealed the data
breach has cost them $148 million, 25% of which was
insured.x Excluding the direct costs, they are lowering
forward guidance as shoppers are less inclined to shop at
Target.
Canadian Expansion
Ernst & Young has identified Canada as a potential area for
expansion for many retailers.xi This may increase the
competitive landscape in Canada as American retailers
expand into the Canadian marketplace. Chico’s &
Nordstrom are among those considering expansion into
Page 3
Canada. Canadian expansion is difficult and requires a
different strategy than that employed in domestic
markets. Target is the most recent American company to
have trouble expanding into the Canadian marketplace.xii
The Ernst & Young report details some of the different
shopping habits that include a lower percentage using
coupons, but a higher use of dollar stores and deepdiscount grocery. The report accentuates that Canadians
are really looking for a bargain in their shopping.
Evolving Shopping Experience
The evolving shopping experience is greatly changing the
way consumers shop for goods, especially groceries and
consumer durables. Two recent developments include
Amazon Fresh and Walmart Neighborhood Market.
Amazon Fresh is a grocery delivery business that
Amazon.com engages in, leveraging its strength in
delivering goods. It provides same-day delivery including
early morning delivery of groceries.xiii Pilot programs exist
in three metropolitan areas: Seattle, Los Angeles, & San
Francisco, with an expected expansion to New York City
this fall. These metropolitan areas pose the greatest risk to
Costco as nearly 25% of its operating revenue is generated
from stores in California alone. Because the convenience
of having groceries delivered is greater than the
convenience of traveling to a club warehouse, this type of
shopping poses a risk to Costco as it may encourage
shoppers to use the delivery service for many items and
reduce the frequency of traveling to a club warehouse.
Costco could compete with these type of retailers through
an increased web presence and stronger delivery system.
Walmart Neighborhood Market is Walmart’s response to
the increase in dollar store shopping. This allows Walmart
to decrease the square footage in its stores and compete
in areas that do not have available real estate for big box
retailers. Walmart is expected to add 270-300
Neighborhood Market’s to its footprint this year.xiv After
piloting two programs (Neighborhood Market & Walmart
Express), Walmart decided to use the Neighborhood
Market as its small store brand.xv
larger club warehouse locations. Costco mitigates this
through the low prices it offers.
Consumer Disposable Income
The more disposable income that consumers have, the
better this industry performs.xvi The trend for the past five
years illustrates that consumer disposable income has
been steadily increasing. The forecast is for per capita
disposable income to continue to increase, which will in
turn increase spending at club warehouses like Costco. The
below report from IBISWorld illustrates Per capita
disposable income change side-by-side with corporate
profits for the Club Warehouse industry.
Source: Ibisworld.com
The below chart from the St. Louis Federal Reserve
Database (FRED) illustrates the growth in real disposable
personal income on a per capita basis chained in 2009 US
dollars. The chart shows the long period of growth during
the 1990’s and 2000’s. The growth in real disposable
income reversed for a short period during the recent
recession, but seems to have started to improve and we
expect that real disposable personal income will continue
on a sustained growth rate of approximately 2% over the
forecast period.
The small-store footprint is a risk to Costco as the
neighborhood markets will be in areas that may not
accommodate a 140,000 square foot club warehouse. This
may encourage shoppers to shop in their neighborhoods
more regularly and make less frequent shopping trips to
Page 4
MARKETS AND COMPETITION
Barriers to Entry
The club/warehouse retail industry requires moderate
capital investment. The size of a warehouse is large and
the investment would also require a distribution network
and a supplier network that is willing to sell club size
products. The broader retail industry does not require as
much capital investment and competition is still quite high.
Given the recent economic recession, people have been
focusing on finding the highest quality at the lowest costxx.
These “deal hunters” have found coupons and other ways
to save money. Dollar stores have increased their presence
significantly over the last five years and have started to
take more market share.
Source: St. Louis Federal Reserve
Gross Margin
Gross margin is an area where Costco can significantly
affect its net income. Costco has publicly stated that it will
not markup private label products by more than 15% of
costs and will not markup branded products by more than
14%.xvii This is a relatively low margin as other retailers look
to raise prices as often as possible; Costco has strict
limitations on its markups. Because of the low markups on
its products, Costco’s COGS has averaged between 86-87%
as a percent of Sales. At that level, an increase in gross
margin by 10 basis points can increase net income by 383
basis points.
Recently, the price of poultry has increased and nearly all
of Costco’s competitors have raised prices accordingly.
However, Costco has maintained its price of rotisserie
chicken at $4.99. This has helped to drive volume, but they
have been taking very little margin on that product. This is
an example of products in which Costco maintains a lower
price to help drive volume.xviii The sales are less than
.0003% of total revenue, but this shows why Costco will
never reach its maximum operating margin and why small
improvements are difficult to make.
European Retail Environment
Retail in Spain was a difficult market in 2013. Much of this
was due to rising unemployment and austerity measures
by the government to stabilize the economy. In reviewing
supermarkets
and
hypermarkets,
Euromonitor
International found that supermarkets performed much
better than hypermarkets (such as Carrefour) as people
wanted to shop closer to home and the smaller
supermarkets were seen as more affordable.xix
Supplier Power
Supplier power in this industry is low. Because of the
limited number of products offered at a club warehouse,
the club must ensure that they are receiving the best
prices on that particular product. Costco is very aggressive
on pricing and warns suppilers to not give Costco’s
competitors better prices. When one supplier accidentally
sent its Walmart invoice to Costco, they saw Walmart was
receiving a better price and have not brought that supplier
back to Costco.xxi Because Costco only maintains 4,000
SKU’s compared to 100,000 SKU’s at a Walmart, it helps to
keep the supplier power low. Toothpaste is a relatively
easily replaceable product, so if one supplier does not give
the best price, Costco can turn to a different supplier.
Peer Comparisons
The below chart illustrates the P/E ratio for Costco and
some of its competitors. Costco trades at a relatively high
P/E ratio compared to its competitors. Although Costco’s
P/E ratio decreases in future years, compared to its peer
group, it still remains relatively high. Amazon was included
as an online retailer, but because it has a negative P/E, we
chose to exclude it from any averaging within the peer
group. Walmart, Target, & Kroger seemed to be natural
peers in their respective spaces. Because Costco has a
global footprint and especially because it has entered the
continental European market, we felt Carrefour should be
included in any peer analysis. Because of Costco’s
pharmacy and healthcare related sales, we felt CVS would
be a natural inclusion to incorporate data from a
drugstore/pharmacy. Excluding Walmart & Amazon, many
Page 5
of the peer in the analysis represent a similar market cap
to Costco.
Costco has a very high P/E ratio compared to its peer
group. Its outlook for 2014 is to trade at 28x P/E; whereas,
the rest of the peer group is expected to trade a much
lower P/E ratios.
Company Price
WMT
$
76.84
TGT
$
63.81
AMZN
$ 331.32
CRRFY
$
6.64
KR
$
52.15
CVS
$
81.37
COST
$ 126.50
Source: MSN Money
P/E 14
15.2
19.9
(2,208.8)
16.2
15.9
18.1
28.1
Market Cap
(billions)
247.618
40.438
153.082
23.827
25.497
94.237
55.444
ECONOMIC OUTLOOK
Minimum Wage
There has been a lot of regulatory discussion around
raising the federal minimum wage. Some states have taken
action to increase state minimum wages. Instead of trying
to compensate employees through competitive pricing
models, Costco compensates employees at a higher rate
than competitors. Costco’s hourly employees are
compensated on average $20.89/hour.xxii Currently, the
federal minimum wage is $7.25/hour. Because Costco
compensates its employees at a much higher wage than
the laws require, we expect Costco to be more insulated
from minimum wage increases than its competitors. A
benefit of the higher wages include higher employee
retention. Costco has benefited from its investment in its
employees by having a lower turnover rate from its
competitors.xxiii This lower turnover rate translates into a
more productive workforce because less time and money
is spent on training and the candidate search process.
We do expect if the minimum wage is raised significantly
and its competitors react by increasing wages, that Costco
may be affected by the increase, which will have an
adverse affect on Net Income, the extent would be
determined by the wage increase.
Sales Per Square Foot
Costco is an industry leader in Sales per square foot. They
currently have about twice as many sales per square foot
as their competitors Sam’s Club & BJ’s Warehouse. For this
reason, we do not expect Costco to grow Sales/Sq. Ft. at a
greater rate than their historical average. We do expect
Costco to continue to grow sales per square foot as their
brand awareness improves and more people buy
memberships and disposable income increases.
CATALYSTS FOR GROWTH
Costco’s growth will principally come from new geographic
areas. These will most likely include its expansion into
Europe. Costco customers typically have a larger
disposable incomes, which requires more stable
economies.
Costco has a lot of opportunities to expand its online
presence and increase online sales. Online sales are only
3% of total revenues. Costco will need to invest more in its
online infrastructure and marketing to its customers to
expand and grow this revenue stream. Online retailing has
grown in recent years, especially with retailers such as
Amazon Fresh. An increased online presence/delivery
system could help Costco to better compete in an online
environment.
INVESTMENT POSITIVES
• Costco has had great success thus far in its international
expansion, which includes Canada, Taiwan, and South
Korea. These expansions have illustrated its capabilities in
understanding the retail environment in a new culture and
changes needed to succeed in those different
environments. We would expect Costco to continue their
successful international expansion as they move into
continental Europe.
• Costco has continued to perform well and grow through
the economic recession, which was something that many
peers in the discretionary sector were unable to
accomplish.
• Costco has begun its expansion project into mainland
Europe. Management is pleased with the initial results and
expect to increase their footprint in mainland Europe. As
European expansion increases, this will diversify their
revenue base from the high exposure to the Californian
economy.
Page 6
INVESTMENT NEGATIVES
• To justify the current stock price, Costco would need to
improve on two of three variables (Store Growth rate,
Operating Margin, or Sales/Sq. Ft.) by more than historical
average.
• Although Costco does not have major competitors in the
club warehouse area, as shopping continues to evolve,
Costco will need to develop a stronger online presence and
evolving formats to compete with same-day delivery
shopping. The smaller-store formats introduced by
Walmart may have a negative impact on Costco’s earnings
as customers shop at the warehouse less frequently.
• Costco is entering Europe, which has a declining
population and smaller families. It will be harder to sell
warehouse size goods for fewer people in the household;
therefore, Costco will need to adjust package sizing to
adapt to local preferences.
VALUATION
Sales growth – In the revenue decomposition, we
calculated the revenue per square foot and were able to
use a historical average for that growth. We made some
assumptions about warehouse growth, that Costco would
continue to add approximately 25 stores each year and
each warehouse would average to 140,000 square feet.
Although Walmart has entered into smaller store formats
for some of its urban areas, this strategy does not make
sense for Costco to pursue, and we do not feel it will
change its format in the near future.
COGS – This was a sensitive metric in the Income
Statement. Because Costco does not engage in greater
than 14% markup on branded products and no larger than
15% for private label goods, as a percentage of sales, this
metric could only be less than 86% if Costco began to sell
more private label goods than branded goods. The mix
becomes important when determining the gross margin.
We chose to keep the margin above 86%, assuming that
Costco would continue to sell more branded goods than
private label goods, and that they would not always be
able to secure the maximum markup they expected. There
is a strong sensitivity to this number. Small changes in the
margin can make drastic changes in the valuation. As was
noted above, a 10 basis point change in this metric can
change net income by 383 basis points.
Beta – For the beta, we used a three-year weekly return
taken from Bloomberg. We felt three years would give a
better reflection of expected growth during the next five
years. A sensitivity analysis on the beta does not change
the recommendation to sell this security.
Dividend Payout – Costco has a strong history of raising its
dividend annually. We expect this trend to continue
through the next five years, especially as Costco expands
its international footprint. We do expect Costco to raise
dividends by approximately 9% annually, given historical
trends.
Capital Expenditure – We included Costco’s average costs
in growing their number of stores by 30 stores each year
because this was the assumption we made in the revenue
decomposition. Although we expect Costco’s global mix to
change going forward as they increase their European
footprint, we do not expect that to significantly change the
cost structure for new store construction/leases compared
to their current mix.
Results of models – The different valuation models
provided different price targets, but were relatively close
to each other. The DCF & DDM provided target prices that
were within $2.00 of each other. The DCF & DDM provide
the best target prices. Costco currently trades at a higher
P/E than its peer group. Part of this higher valuation is due
to its ability to continue to grow during the recent
economic turmoil. Their growth provided investors with an
increased confidence in management to continue to grow
their business as they have been able to execute this
strategy profitably even during a recession.
KEYS TO MONITOR
Key considerations include monitoring Costco’s European
expansion to evaluate its success. If the European
expansion proves to be more successful than domestic
stores, the rating on this stock may change.
Another consideration is the expected changes in
shoppers’ habits. We expect shoppers to migrate to more
online delivery systems and less frequent trips to club
warehouses due to increased smaller stores in their
neighborhoods. If Costco is able to produce a same-day
food delivery service or a stronger online presence, they
would be more competitive and the rating on this stock
may change.
Page 7
IMPORTANT DISCLAIMER
Henry Fund reports are created by student enrolled in the
Applied Securities Management (Henry Fund) program at
the University of Iowa’s Tippie School of Management.
These reports are intended to provide potential employers
and other interested parties an example of the analytical
skills, investment knowledge, and communication abilities
of Henry Fund students. Henry Fund analysts are not
registered investment advisors, brokers or officially
xii
REFERENCES
i
Lerman, Sally. 2014. Warehouse Clubs & Supercenters.
Ibisworld.
ii
Walmart 2013 10-k report.
iii
Gonzalez, A. May 2014.
http://seattletimes.com/html/businesstechnology/2023580206
_costcosevillexml.html
iv
licensed financial professionals. The investment opinion
contained in this report does not represent an offer or
solicitation to buy or sell any of the aforementioned
securities. Unless otherwise noted, facts and figures
included in this report are from publicly available sources.
This report is not a complete compilation of data, and its
accuracy is not guaranteed. From time to time, the
University of Iowa, its faculty, staff, students, or the Henry
Fund may hold a financial interest in the companies
mentioned in this report.
International Monetary Fund. 2014.
http://www.imf.org/external/pubs/ft/weo/2014/01/pdf/c2.pdf
v
The Economist. 2012.
http://www.economist.com/node/21557774
vi
Mallen, P. 2014. International Business Times.
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vii
Wang, Y. October 14, 2014. Forbes. Costco Makes China Debut
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http://www.forbes.com/sites/ywang/2014/10/14/costcomakes-china-debut-through-alibaba/
viii
Notte, J. 2014. TheStreet.com
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ix
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xi
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xiii
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xiv
http://news.walmart.com/newsarchive/2014/02/20/walmart-us-accelerates-small-storegrowth
xv
Silva, T. 2014. San Antonio Business Journal.
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xvi
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xvii
Greenhouse, S. 2005. New York Times.
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costco.html?pagewanted=all&_r=0
xviii
http://seekingalpha.com/article/1737282-costcowholesales-management-discusses-f4q-2013-results-earningscall-transcript
xix
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xx
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75053413229901660
xxi
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/costco-wages-walmart-federal-minimum-wageobama/5029211/
Page 8
COSTCO WHOLESALE CORP
Key Assumptions of Valuation Model
Ticker Symbol
Current Share Price
Fiscal Year End
COST
140.01
Aug. 31
Pre-Tax Cost of Debt
Beta
Risk-Free Rate
Market Risk-Premium
Effective Tax Rate
Operating Cash
CV Growth
CV ROIC
WACC
4.22%
0.71
3.14%
4.64%
34.60%
20%
3.20%
10.75%
6.02%
COSTCO WHOLESALE CORP
Revenue Decomposition
Fiscal Years Ending Aug. 31
Membership
Membership Growth
Membership Revenues
Gold Star Growth
Gold Star
Business Membership Growth
Business Membership
Business Add-On
Additional Cardholders
Additional Cardholders Growth
Membership Revenues
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
11.1%
2,075
11.1%
25.00
8.6%
6.3
4.0
28.7
8.7%
2,145
10.2%
2,286
6.8%
26.70
1.6%
6.4
3.8
30.1
4.9%
2,217
8.8%
2,487
8.2%
28.9
3.1%
6.6
3.5
32.2
7.0%
2,327
10.2%
2,739
7.4%
31.05
3.4%
6.82
3.5
32.2
5.8%
2,339
10.1%
3,017
7.6%
33.43
3.7%
7.07
3.5
32.2
6.1%
2,353
10.1%
3,321
8.2%
36.19
4.1%
7.36
3.5
32.2
6.5%
2,368
9.9%
3,648
7.7%
38.96
3.2%
7.60
3.5
32.2
6.0%
2,381
9.8%
4,006
7.9%
42.02
3.5%
7.86
3.5
32.2
6.3%
2,396
31.3
33.1
592
82,880
1.17
97,062
11.5%
608
85,120
1.21
102,870
6.0%
634
88,760
1.12
99,381
-3.4%
663
92,820
1.12
104,025
4.7%
688
96,320
1.15
110,286
6.0%
713
99,820
1.17
117,089
6.2%
738
103,320
1.20
124,087
6.0%
763
106,820
1.23
131,282
5.8%
52,871.6
0.9%
3,101.0
0.8%
54,440.8
3.0%
3,107.9
0.2%
55,993.7
2.9%
2,799.5
-9.9%
57,126.8
2.0%
2,746.5
-1.9%
58,869.8
3.1%
2,723.0
-0.9%
61,078.2
3.8%
2,688.7
-1.3%
63,090.0
3.3%
2,665.1
-0.9%
65,380.3
3.6%
2,631.7
-1.3%
3.1%
3,154.68
3.3%
3,288.12
3.2%
3,315.93
3.5%
3,846.38
3.8%
4,434.89
4.1%
5,072.23
4.4%
5,760.16
108,311
9.3%
105,156
-2.9%
110,080
4.7%
117,150
6.4%
124,845
6.6%
132,808
6.4%
141,048
6.2%
Total Members Excluding add-ons (millions)
Number of open Warehouses
# Sq. Feet (thousands) (1)
Revenue per Sq. Ft.
Total Warehouse Revenue
Total Warehouse Revenue Growth
Members/Warehouse
Members/Warehouse Growth
Revenue/Membership
Revenue/Membership Growth
Online % of Warehouse Sales
Online Sales
Total Revenue
Revenue Growth Rate
99,137
11.5%
(1) Assuming 140,000 sq. ft. per warehouse location
35.5 37.8750591 40.5024537 43.5487755 46.5604168 49.8851947
COSTCO WHOLESALE CORP
Income Statement
(in millions)
Fiscal Years Ending Aug. 31
Sales
COGS
Depreciation & Amortization Expense
Gross Income
SG&A Expense
EBIT (Operating Income)
Nonoperating Income - Net
Interest Expense
Unusual Expense - Net
Pretax Income
Income Taxes
Consolidated Net Income
Minority Interest
Net Income
Net Income available to Common
EPS (recurring)
Total Shares Outstanding
Dividends per Share
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
88,915.0
76,884.0
855.0
11,176.0
8,728.0
2,448.0
60.0
116.0
9.0
2,383.0
841.0
1,542.0
80.0
1,462.0
99,137.0
85,915.0
908.0
12,314.0
9,555.0
2,759.0
103.0
95.0
0.0
2,767.0
1,000.0
1,767.0
58.0
1,709.0
105,156.0
91,002.0
946.0
13,208.0
10,155.0
3,053.0
97.0
99.0
0.0
3,051.0
990.0
2,061.0
22.0
2,039.0
110,080.2
95,087.3
1,060.4
13,932.6
10,620.1
3,312.4
86.7
99.0
0.0
3,300.1
1,141.8
2,158.3
22.0
2,136.3
117,149.6
101,193.8
1,115.3
14,840.4
11,067.9
3,772.6
95.6
99.0
0.0
3,769.1
1,304.1
2,465.0
22.0
2,443.0
124,844.5
107,715.8
1,171.7
15,957.0
11,919.7
4,037.3
93.1
99.0
0.0
4,031.4
1,394.9
2,636.5
22.0
2,614.5
132,807.8
114,586.6
1,240.3
16,981.0
12,680.0
4,301.0
91.8
99.0
0.0
4,293.8
1,485.6
2,808.1
22.0
2,786.1
141,047.8
121,696.0
1,322.3
18,029.5
13,466.7
4,562.8
93.5
99.0
0.0
4,557.2
1,576.8
2,980.4
22.0
2,958.4
1,462.0
3.89
432.35
1.03
1,709.0
4.63
436.84
1.17
2,039.0
4.47
438.58
1.29
2,136.3
4.86
439.99
1.33
2,443.0
5.53
441.40
1.42
2,614.5
5.90
442.81
1.56
2,786.1
6.27
444.22
1.70
2,958.4
6.64
445.63
1.84
COSTCO WHOLESALE CORP
Balance Sheet
(in millions)
Fiscal Years Ending Aug. 31
Assets
Cash & Short-Term Investments
Short-Term Receivables
Inventories
Other Current Assets
Total Current Assets
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
5,613.00
965.00
6,638.00
490.00
13,706.00
4,854.00
1,026.00
7,096.00
550.00
13,526.00
6,124.00
1,201.00
7,894.00
621.00
15,840.00
8,943.76
1,225.01
8,130.78
611.28
18,910.83
12,384.16
1,290.83
8,610.43
658.94
22,944.36
13,193.88
1,367.56
9,205.15
702.68
24,469.26
17,576.31
1,457.47
9,767.80
750.62
29,552.20
18,075.38
1,565.53
10,429.43
800.13
30,870.46
Property, Plant & Equipment - Gross
Accumulated Depreciation
Net Property, Plant & Equipment
18,368.00
5,936.00
12,432.00
19,546.00
6,585.00
12,961.00
21,022.00
7,141.00
13,881.00
22,360.56
8,201.37
14,159.19
23,768.07
9,316.71
14,451.36
25,249.68
10,488.36
14,761.32
26,626.02
11,728.61
14,897.41
28,042.02
13,050.88
14,991.14
Total Investments and Advances
Long-Term Note Receivable
Intangible Assets
Deferred Tax Assets
Other Assets
Total Assets
0.00
0.00
74.00
232.00
317.00
26,761.00
0.00
225.00
66.00
58.00
304.00
27,140.00
0.00
128.00
63.00
62.00
309.00
30,283.00
109.28
60.00
88.29
383.88
33,711.46
121.19
57.00
110.45
396.41
38,080.77
137.68
54.00
138.05
410.52
39,970.83
175.75
51.00
106.92
429.35
45,212.63
159.97
48.00
119.76
460.68
46,650.01
Liabilities & Shareholders' Equity
ST Debt & Curr. Portion LT Debt
Accounts Payable
Income Tax Payable
Other Current Liabilities
Total Current Liabilities
900.00
6,544.00
335.00
4,271.00
12,050.00
1.00
7,303.00
397.00
4,559.00
12,260.00
4.00
7,872.00
382.00
4,999.00
13,257.00
8,250.02
435.13
5,238.81
13,923.96
1,199.00
8,747.94
456.62
5,564.43
15,967.99
9,282.02
480.79
5,908.88
15,671.69
2,198.00
9,894.01
513.67
6,267.07
18,872.75
10,531.37
541.69
6,689.81
17,762.87
Long-Term Debt
Deferred Tax Liabilities
Other Liabilities
Total Liabilities
1,253.00
387.00
498.00
14,188.00
1,381.00
412.00
569.00
14,622.00
5,190.00
450.00
374.00
19,271.00
5,190.00
404.09
517.37
20,035.42
5,190.00
458.97
590.51
22,207.47
5,190.00
508.77
615.17
21,985.64
5,190.00
533.86
636.53
25,233.14
5,190.00
563.15
649.32
24,165.34
Common Stock & Additional Paid-In Capital4,518.00
Retained Earnings
7,111.00
Other
373.00
Total Shareholders' Equity
12,002.00
Accumulated Minority Interest
571.00
Total Equity
12,573.00
Total Liabilities & Shareholders' Equity 26,761.00
4,371.00
7,834.00
156.00
12,361.00
157.00
12,518.00
27,140.00
4,672.00
6,283.00
-122.00
10,833.00
179.00
11,012.00
30,283.00
5,405.23
7,834.07
167.98
13,407.28
268.76
13,676.04
33,711.46
5,727.59
9,650.29
180.40
15,558.28
315.02
15,873.30
38,080.77
5,849.04
11,574.04
191.62
17,614.69
370.50
17,985.19
39,970.83
5,938.95
13,604.97
133.18
19,677.10
302.38
19,979.48
45,212.63
6,275.20
15,743.43
125.35
22,143.98
340.69
22,484.67
46,650.01
COSTCO WHOLESALE CORP
Cash Flow Statement
Fiscal Years Ending Aug. 31
Cash from Operating Activities
Net Income (loss)
Depreciation & Amortization Expense
Change in Short-Term Receivables
Change in Inventories
Change in Other Current Assets
Change in ST Debt & Curr. Portion LT Debt
Change in Accounts Payable
Change in Income Tax Payable
Change in Long-Term Notes Receivable
Change in Other Current Liabilities
Net Cash from Operating Activities
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
1,462
890
(81)
(1,000)
(53)
874
597
13
54
503
3,259
1,709
649
(61)
(458)
(60)
(899)
759
62
(225)
288
1,764
2,039
556
(175)
(798)
(71)
3
569
(15)
97
440
2,645
2,136
1,060
(24)
(237)
10
(4)
378
53
19
240
3,631
2,443
1,115
(66)
(480)
(48)
1,199
498
21
(12)
326
4,997
2,615
1,172
(77)
(595)
(44)
(1,199)
534
24
(16)
344
2,758
2,786
1,240
(90)
(563)
(48)
2,198
612
33
(38)
358
6,489
2,958
1,322
(108)
(662)
(50)
(2,198)
637
28
16
423
2,367
Cash from Investing Activities
(Increase) Decrease in Gross PP&E
(Increase) Decrease in Total Investments & Advances
(Increase) Decrease in Intangible Assets
(Increase) Decrease in Deferred Tax Assets
(Increase) Decrease in Other Assets
Net Cash from Investing Activities
(2,008)
357
(3)
(222)
(16)
(1,892)
(1,178)
8
174
13
(983)
(1,476)
3
(4)
(5)
(1,482)
(1,339)
3
(26)
(75)
(1,437)
(1,408)
3
(22)
(13)
(1,439)
(1,482)
3
(28)
(14)
(1,520)
(1,376)
3
31
(19)
(1,361)
(1,416)
3
(13)
(31)
(1,457)
(888)
143
61
470
251
(941)
(904)
128
25
71
(414)
(217)
(986)
(1,393)
3,809
38
(195)
22
(278)
(3,590)
(194)
(46)
143
90
290
(585)
(108)
55
73
46
12
(627)
(440)
50
25
55
11
(691)
(550)
25
21
(68)
(58)
(755)
(835)
29
13
38
(8)
(820)
(747)
5,613
(759)
4,854
4,854
1,270
6,124
Cash from Financing Activities
Change in Long-Term Debt
Change in Deferred Tax Liabilities
Change in Other Liabilities
Change in Accumulated Minority Interest
Change in Other
Payment of Dividends
Net Cash from Financing Activities
Beg Cash
Change in Cash
End Cash
4,749
864
5,613
6,124
2,820
8,944
8,944
3,440
12,384
12,384
810
13,194
13,194
4,382
17,576
17,576
499
18,075
COSTCO WHOLESALE CORP
Common Size Income Statement
Fiscal Years Ending Aug. 31
Sales
COGS
Depreciation & Amortization Expense
Gross Income
SG&A Expense
EBIT (Operating Income)
Nonoperating Income - Net
Interest Expense
Unusual Expense - Net
Pretax Income
Income Taxes
Consolidated Net Income
Minority Interest
Net Income
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
100.00%
86.47%
0.96%
12.57%
9.82%
2.75%
0.07%
0.13%
0.01%
2.68%
0.95%
1.73%
0.09%
1.64%
100.00%
86.66%
0.92%
12.42%
9.64%
2.78%
0.10%
0.10%
0.00%
2.79%
1.01%
1.78%
0.06%
1.72%
100.00%
86.54%
0.90%
12.56%
9.66%
2.90%
0.09%
0.09%
0.00%
2.90%
0.94%
1.96%
0.02%
1.94%
100.00%
86.38%
0.96%
12.66%
9.65%
3.01%
0.08%
0.12%
0.00%
3.00%
1.04%
1.96%
0.02%
1.94%
100.00%
86.38%
0.95%
12.67%
9.45%
3.22%
0.08%
0.12%
0.00%
3.22%
1.11%
2.10%
0.02%
2.09%
100.00%
86.28%
0.94%
12.78%
9.55%
3.23%
0.07%
0.11%
0.00%
3.23%
1.12%
2.11%
0.02%
2.09%
100.00%
86.28%
0.93%
12.79%
9.55%
3.24%
0.07%
0.11%
0.00%
3.23%
1.12%
2.11%
0.02%
2.10%
100.00%
86.28%
0.94%
12.78%
9.55%
3.23%
0.07%
0.11%
0.00%
3.23%
1.12%
2.11%
0.02%
2.10%
COSTCO WHOLESALE CORP
Common Size Balance Sheet
Fiscal Years Ending Aug. 31
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
Assets
Cash & Short-Term Investments
Short-Term Receivables
Inventories
Other Current Assets
Total Current Assets
6.31%
1.09%
7.47%
0.55%
15.41%
4.90%
1.03%
7.16%
0.55%
13.64%
5.82%
1.14%
7.51%
0.59%
15.06%
8.12%
1.11%
7.39%
0.56%
17.18%
10.57%
1.10%
7.35%
0.56%
19.59%
10.57%
1.10%
7.37%
0.56%
19.60%
13.23%
1.10%
7.35%
0.57%
22.25%
12.82%
1.11%
7.39%
0.57%
21.89%
Property, Plant & Equipment - Gross
Accumulated Depreciation
Net Property, Plant & Equipment
20.66%
6.68%
13.98%
19.72%
6.64%
13.07%
19.99%
6.79%
13.20%
20.31%
7.45%
12.86%
20.29%
7.95%
12.34%
20.22%
8.40%
11.82%
20.05%
8.83%
11.22%
19.88%
9.25%
10.63%
Total Investments and Advances
Long-Term Note Receivable
Intangible Assets
Deferred Tax Assets
Other Assets
Total Assets
0.00%
0.00%
0.08%
0.26%
0.36%
30.10%
0.00%
0.23%
0.07%
0.06%
0.31%
27.38%
0.00%
0.12%
0.06%
0.06%
0.29%
28.80%
0.18%
0.10%
0.05%
0.08%
0.35%
30.62%
0.13%
0.10%
0.05%
0.09%
0.34%
32.51%
0.06%
0.11%
0.04%
0.11%
0.33%
32.02%
0.07%
0.13%
0.04%
0.08%
0.32%
34.04%
0.09%
0.11%
0.03%
0.08%
0.33%
33.07%
Liabilities & Shareholders' Equity
ST Debt & Curr. Portion LT Debt
Accounts Payable
Income Tax Payable
Other Current Liabilities
Total Current Liabilities
1.01%
7.36%
0.38%
4.80%
13.55%
0.00%
7.37%
0.40%
4.60%
12.37%
0.00%
7.49%
0.36%
4.75%
12.61%
0.00%
7.49%
0.40%
4.76%
12.65%
1.02%
7.47%
0.39%
4.75%
13.63%
0.00%
7.43%
0.39%
4.73%
12.55%
1.66%
7.45%
0.39%
4.72%
14.21%
0.00%
7.47%
0.38%
4.74%
12.59%
Long-Term Debt
Deferred Tax Liabilities
Other Liabilities
Total Liabilities
1.41%
0.44%
0.56%
15.96%
1.39%
0.42%
0.57%
14.75%
4.94%
0.43%
0.36%
18.33%
0.00%
0.37%
0.47%
18.20%
0.00%
0.39%
0.50%
18.96%
0.00%
0.41%
0.49%
17.61%
0.00%
0.40%
0.48%
19.00%
0.00%
0.40%
0.46%
17.13%
5.08%
Common Stock Par/Carry Value
8.00%
Retained Earnings
0.42%
Other
13.50%
Total Shareholders' Equity
0.64%
Accumulated Minority Interest
14.14%
Total Equity
Total Liabilities & Shareholders' Equity 30.10%
4.41%
7.90%
0.16%
12.47%
0.16%
12.63%
27.38%
4.44%
5.97%
-0.12%
10.30%
0.17%
10.47%
28.80%
12.65%
4.71%
0.15%
12.18%
0.24%
12.42%
30.62%
13.63%
4.43%
0.15%
13.28%
0.27%
13.55%
32.51%
12.55%
4.16%
0.15%
14.11%
0.30%
14.41%
32.02%
14.21%
3.91%
0.10%
14.82%
0.23%
15.04%
34.04%
12.59%
3.68%
0.09%
15.70%
0.24%
15.94%
33.07%
COSTCO WHOLESALE CORP
Value Driver Estimation
Fiscal Years Ending Aug. 31
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
88,915
76,884
8,728
855
81
2,529
99,137
85,915
9,555
908
82
2,841
105,156
91,002
10,155
946
79
3,132
110,080
95,087
10,620
1,060
84
3,396
117,150
101,194
11,068
1,115
89
3,861
124,845
107,716
11,920
1,172
94
4,132
132,808
114,587
12,680
1,240
100
4,401
141,048
121,696
13,467
1,322
105
4,668
Less: Adjusted Taxes:
Provision for Income Taxes
+ Tax Shield on Interest Expense
+ Tax Shield on other pre-Tax income
+ Tax Shield on Implied Lease Interest
Adjusted Taxes
841
40
18
28
927
1,000
33
36
28
1,097
990
34
34
27
1,085
1,142
34
30
29
1,235
1,304
34
33
31
1,402
1,395
34
32
33
1,494
1,486
34
32
34
1,586
1,577
34
32
36
1,680
Plus: Change in Deferred Tax (DT) Liabilites
Current year DT Liabilities
- Current year DT Long-Term Assets
Net DT Liabilites for Current year
387
232
155
412
58
354
450
62
388
404
88
316
459
110
349
509
138
371
534
107
427
563
120
443
Prior year DT Liabilities
- Prior year DT Long-Term Assets
Net DT Liabilites for Prior year
244
10
234
387
232
155
412
58
354
450
62
388
404
88
316
459
110
349
509
138
371
534
107
427
Net Change in DT Liab (current - prior)
(79)
199
34
(72)
33
22
56
16
NOPLAT Computation:
EBITA:
Net Sales
- Cost of Products Sold
- Operating Expenses
- Depreciation & Amortization
+ Implied Interest on Operating Leases
EBITA
NOPLAT: EBITA - Adjusted Taxes + Change$in DT 1,523.35
$
1,943.29
$
2,080.60
$
2,088.84
$
2,491.99
$
2,659.97
$
2,870.68
$
3,004.40
Invested Capital Computation
Operating Current Assets:
Normal Cash (lesser of actual or %)
Accounts Receivable, Net
Inventory
Other Current Assets
Operating Current Assets
5,613
965
6,638
490
13,706
4,854
1,026
7,096
550
13,526
6,124
1,201
7,894
621
15,840
8,944
1,225
8,131
611
18,911
12,384
1,291
8,610
659
22,944
13,194
1,368
9,205
703
24,469
17,576
1,457
9,768
751
29,552
18,075
1,566
10,429
800
30,870
Operating Current Liabilities:
ST Debt & Curr. Portion LT Debt
Accounts Payable
Income Taxes Payable
Other Current Liabilities
Operating Current Liabilities
900
6,544
335
4,271
12,050
1
7,303
397
4,559
12,260
4
7,872
382
4,999
13,257
8,250
435
5,239
13,924
1,199
8,748
457
5,564
15,968
9,282
481
5,909
15,672
2,198
9,894
514
6,267
18,873
10,531
542
6,690
17,763
1,656
1,266
2,583
4,987
6,976
8,798
10,679
13,108
12,432
12,961
13,881
14,159
14,451
14,761
14,897
14,991
1,924
1,948
1,862
1,981
2,105
2,237
2,358
2,484
16,012
16,175
18,326
21,127
23,533
25,795
27,935
30,583
Net Operating Working Capital
Plus: Net PPE
Plus: PV of Operating Leases
Invested Capital:
ROIC (NOPLAT/Beg IC)
EP (Beg IC * (ROIC - WACC))
FCF (NOPLAT - (End IC - Beg IC))
10.4%
642
134
12.1%
979
1,780
12.9%
1,106
(70)
11.4%
985
(712)
11.8%
1,219
86
11.3%
1,242
398
11.1%
1,317
731
10.8%
1,321
357
COSTCO WHOLESALE CORP
Weighted Average Cost of Capital (WACC) Estimation
Yield on publicly traded debt (Kd)
Tax Rate
After tax Kd
Risk Free Rate
Market Risk Premium
Beta
Cost of Equity (KE)
Market Value of Debt
Market Value of Equity
Debt/(Debt+Equity)
Equity/(Debt+Equity)
WACC
4.22% Taken from FINRA market data (Used WMT as comp for 30 year)
34.60%
2.76%
3.14%
4.64% 1928-2013 geometric average risk premium
0.71 Taken from Bloomberg on Sept 5, 2014
6.44%
7,056
55,668
11.2%
88.8%
6.02%
COSTCO WHOLESALE CORP
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth
CV ROIC
WACC
Cost of Equity
Beta
COGS Margin
New Stores Opened
Sales/Square Ft.
Fiscal Years Ending Aug. 31
3.20%
10.75%
6.02%
6.44%
0.71
86.38%
25
1.15
2014E
2015E
2016E
2017E
2018E
2,089
(712)
2,492
86
2,660
398
2,871
731
3,004
(671)
59,442
493
Plus: Other Non-operating assets
59,935
Vfirm
Less: Non-Operating Liabilities & LT Debt 6,111
1,862
Less: PV Operating Leases
Less: ESOP
194
Vequity
51,767
# Shares
440
P0
$ 117.66
Partial-year adjustment
$ 119.17
76
334
578
23,533
11.8%
1,219
25,795
11.3%
1,242
27,935
11.1%
1,317
1,085
1,042
1,042
DCF Model
NOPLAT
FCF
CV
DCF
Voper
74,714
59,125
EP Model
Invested Capital
ROIC
EP
CV
PV of EP discounted by WACC
Sum of PV (EP)
Plus: Beginning Invested Capital
Voper
21,127
11.4%
985
929
41,116
18,326
59,442
Plus: Other Non-operating assets
493
Vfirm
59,935
Less: Non-Operating Liabilities & LT Debt 6,111
Less: PV Operating Leases
1,862
Less: ESOP
194
Vequity
51,767
# Shares
440
P0
$ 117.66
Partial-year adjustment
$ 119.17
30,583
10.8%
46,779
37,019
Sensitivity Tables
WACC
$ 119.17
5.00%
5.25%
5.50%
5.75%
6.00%
6.25%
6.50%
6.75%
CV Growth
2.00%
126.41
116.36
107.88
100.62
94.34
88.86
84.03
79.74
2.25%
135.62
123.75
113.86
105.52
98.38
92.20
86.81
82.06
2.50%
146.67
132.48
120.85
111.17
102.99
95.99
89.94
84.65
2.75%
160.17
142.95
129.11
117.76
108.31
100.32
93.49
87.58
3.00%
177.05
155.75
139.02
125.56
114.52
105.32
97.54
90.89
3.25%
198.75
171.75
151.13
134.91
121.86
111.15
102.22
94.67
3.50%
227.69
192.33
166.27
146.34
130.67
118.05
107.68
99.04
3.75%
268.20
219.76
185.73
160.63
141.43
126.32
114.13
104.13
0.70
95.08
99.16
103.84
109.24
115.54
122.99
131.95
142.91
0.75
88.77
92.27
96.25
100.80
106.06
112.22
119.52
128.33
0.80
83.07
86.07
89.46
93.32
97.74
102.86
108.87
116.02
0.85
77.87
80.46
83.36
86.64
90.37
94.66
99.64
105.50
0.90
73.13
75.36
77.85
80.65
83.81
87.41
91.57
96.40
0.95
68.78
70.71
72.85
75.24
77.92
80.97
84.44
88.45
1.00
64.78
66.44
68.28
70.33
72.61
75.19
78.11
81.45
Beta
$ 119.17
2.00%
CV Growth
2.25%
2.50%
2.75%
3.00%
3.25%
3.50%
3.75%
COGS Margin
COGS Margin
0.65
102.07
106.87
112.39
118.83
126.43
135.53
146.62
160.46
$ 119.17
85.8%
86.0%
86.2%
86.4%
86.6%
86.8%
87.0%
87.2%
Cost of Equity
6.00%
179.28
166.82
154.37
141.92
129.47
117.01
104.56
92.11
6.25%
161.46
150.13
138.81
127.49
116.16
104.84
93.52
82.19
6.50%
146.39
136.02
125.66
115.29
104.92
94.55
84.18
73.81
6.75%
133.49
123.94
114.39
104.84
95.29
85.74
76.19
66.64
7.00%
122.32
113.48
104.64
95.79
86.95
78.11
69.26
60.42
7.25%
112.56
104.34
96.11
87.89
79.66
71.44
63.21
54.99
$ 119.17
85.8%
86.0%
86.2%
86.4%
86.6%
86.8%
87.0%
87.2%
Sales per Square Foot
1.03
1.09
130.51
140.20
120.95
130.12
111.39
120.05
101.83
109.97
92.26
99.89
82.70
89.82
73.14
79.74
63.58
69.67
1.15
149.88
139.29
128.70
118.11
107.53
96.94
86.35
75.76
1.21
159.57
148.47
137.36
126.26
115.16
104.05
92.95
81.85
1.27
169.26
157.64
146.02
134.40
122.79
111.17
99.55
87.93
1.33
178.94
166.81
154.68
142.55
130.42
118.29
106.15
94.02
COSTCO WHOLESALE CORP
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
1
2014E
Fiscal Years Ending Aug. 31
EPS
$
Key Assumptions
CV growth
CV ROE
Cost of Equity
Intrinsic Value
Partial-year adjustment
5.53 $
3
2016E
5.90 $
4
2017E
2018E
6.27 $
6.64
3.20%
13.16%
6.44%
Future Cash Flows
P/E Multiple (CV Year)
EPS (CV Year)
Future Stock Price
Dividends Per Share
Future Cash Flows
Discounted Cash Flows
Discounted CF Stock Price
4.86 $
2
2015E
23.37
$
6.64
$ 155.14
1.33
$
1.25 $
$ 126.00
$ 127.62
1.42
1.25 $
1.56
1.7
1.29 $
1.32
$ 120.87
COSTCO WHOLESALE CORP
Relative Valuation Models
Ticker
WMT
TGT
AMZN
CRRFY
KR
CVS
Company
WAL-MART STORES Inc
TARGET CORPORATION
AMAZON.COM INC
Carrefour S.A.
KROGER COMPANY
CVS HEALTH CORPORATION
$
$
$
$
$
$
Price
84.99
72.50
326.54
6.17
58.49
89.59
COST
COSTCO WHOLESALE CORP
$
140.01
Implied Value:
Relative P/E (EPS14)
Relative P/E (EPS15)
PEG Ratio (EPS14)
PEG Ratio (EPS15)
$
$
$
$
EPS
2014E
$5.04
$3.20
($0.15)
$0.41
$3.28
$4.49
EPS
2015E
$5.47
$3.78
$1.82
$0.48
$3.64
$5.08
Average
$4.86
$5.53
89.68
89.97
234.23
236.26
P/E 14
16.9
22.7
(2,176.9)
15.0
17.8
20.0
18.5
28.8
P/E 15
15.5
19.2
179.4
12.9
16.1
17.6
16.3
25.3
Est.
5yr Gr.
7.6
10.7
45.4
16.1
9.6
13.8
28.1
PEG 14
2.22
2.12
(47.95)
0.93
1.86
1.45
1.7
1.0
PEG 15
2.04
1.79
3.95
0.80
1.67
1.28
1.5
0.9
COSTCO WHOLESALE CORP
Key Management Ratios
Fiscal Years Ending Aug. 31
2011
2012
2013
Liquidity Ratios
Current Ratio (CA/CL)
Cash Ratio ((Cash+ST Inv.)/CL)
Quick Ratio ((CA-Cash)/CL)
1.14
0.47
0.67
1.10
0.40
0.71
96.18
3.52
14.49
0.06
Activity or Asset-Management Ratios
Receivables turnover (Sales/Avg. A/R)
Asset turnover (Sales/Avg. TA)
Inventory turnover (Sales/Avg. Inventory)
Working Capital/Total Assets [(CA-CL)/TA]
Financial Leverage Ratios
Leverage (Assets/Equity)
Financial Leverage (ROE/ROA)
Profitability Ratios
Return on Equity (Net Income/Equity)
Return on Assets (Net Income/Assets)
Gross Margin (Gross Profit/Sales)
Net Profit Margin (Net Income/Sales)
Payout Policy Ratios
Payout Ratio (Div per share/EPS)
2014E
2015E
2016E
2017E
2018E
1.19
0.46
0.73
1.36
0.64
0.72
1.44
0.78
0.66
1.56
0.84
0.72
1.57
0.93
0.63
1.74
1.02
0.72
99.59
3.68
14.44
0.05
94.44
3.66
14.03
0.09
90.75
3.44
13.74
0.15
93.13
3.26
14.00
0.18
93.93
3.20
14.02
0.22
94.02
3.12
14.00
0.24
93.32
3.07
13.97
0.28
2.13
2.13
2.17
2.17
2.75
2.75
2.47
2.47
2.40
2.40
2.22
2.22
2.26
2.26
2.07
2.07
11.6%
5.5%
12.6%
1.6%
13.7%
6.3%
12.4%
1.7%
18.5%
6.7%
12.6%
1.9%
15.6%
6.3%
12.7%
1.9%
15.4%
6.4%
12.7%
2.1%
14.5%
6.5%
12.8%
2.1%
13.9%
6.2%
12.8%
2.1%
13.2%
6.3%
12.8%
2.1%
0.26
0.25
0.29
0.27
0.26
0.26
0.27
0.28