Final Project Extra Credit FI504
Instructor: Dr. Herman Suryoutomo
Costco Wholesale Corporation
Group: Carl from Cincinnati
Group Members:
Diodany (Tony) Delcourt
Carol Niewiarowski
Joseph Escobar
Presentation Date: 08/24/11
1. Costco Wholesale Corporation portfolio of information
Costco Wholesale Corporation (Costco) headquartered in Issaquah Washington
operates a membership wholesale chain of stores principally in the United States, Canada,
the United Kingdom, Japan, and Australia with subsidiary business in Taiwan and Korea,
and a joint venture in Mexico. This international chain of membership warehouses sells a
diverse offering of products consisting of: sundries, hardlines, food, softlines, fresh food,
and ancillary services and products. “Additionally, Costco Wholesale Industries, a division
of the company, operates manufacturing businesses, including special food packaging,
optical laboratories, meat processing and jewelry distribution… In addition to offering all of
the usual benefits, it (the Executive membership) allows members to purchase a variety of
discounted consumer services, including auto and homeowner insurance, auto buying,
mortgage, refinancing, boat and RV loans, event tickets, high-yield savings accounts &
CD’s, identity protection, personal check printing, online investing, defensive driving, and
business services, including business phone services, merchant credit card processing,
health and dental insurance, payroll services, business check and forms printing, smallbusiness 401(k) plans, small-business web sites at substantially reduced rates” (Wall
Street Journal; http://quotes.wsj.com/COST/company-people)
Costco Wholesale Corporation has approximately 147,000 employees and is
segmented in the Broadline Retailers sector in the Consumer Services industry with
reported sales revenue of $77.95 billion in 2010. Among Costco Wholesale Corporation’s
largest investors are Davis New York Venture Fund, Selected American Shares Fund,
Davis Selected Advisers LP, and Bill & Melinda Gates Foundation combining 17.3%
ownership in a company of $32.56 billion market capitalization. Costco Wholesale
Corporation is traded under the symbol “COST” on the NASDAQ.
2. Background Information, Business model, and description
Costco operates under the conception that providing member services at “low
prices on a limited selection of nationally branded and selected private-label products in a
wide range of merchandise categories will produce high sales volumes and rapid inventory
turnover.” (Costco 10-K pg3) The high turnover and Costco’s core competencies, efficient
volume purchasing, and distribution allows Costco to operate profitably with low gross
margin. Costco purchases directly from manufactures as a member of their integrated
supply chain. For the large majority of products Costco pays merchandise vendors after
goods have been sold “financed through payment terms provided by suppliers.” (Costco
10-K pg3)
Marketing costs for Costco are relatively low in comparison to other retailers as the
company focuses marketing in low cost methods such as direct mailing and direct contact
with business owners whom Costco believes may benefit from membership. Additionally,
Costco does market new store openings but focuses on providing customers with a broad
range of high quality merchandise at prices consistently lower than competitors. Costco’s
focused selection (3,900 active SKUs versus 45,000 to 140,000 SKUs at a discount
retailer or supermarket, etc.) demonstrates their deliberate resale of only fast-selling
models, sizes, and colors. (Paraphrased; Costco 10-K pg4)
Costco’s planed expansion and growth in recent years has been through ancillary
businesses and international joint ventures such as Costco Mexico numbering 32
warehouses as of August 29, 2010. Costco’s leverage of close relationships with vendors
and partners such as American Express also drives their profitability while discovering
alternative sources of revenue through online “vehicles.”
3. Horizontal analysis
An extreme change occurred during 2010 & 2009 at Costco Wholesale
Corporation. Costco’s performance in 2009 was down from 2008, then in 2010 Costco
recovered greater than what would have been expected had they kept in line after 2008.
Across the board each figure in the horizontal analysis dictates a complete decrease in
profitability to a complete increase in 2010. Assets increased significantly in 2010 with the
exception of property and equipment. This information is consistent with Costco’s more
selective expansion in warehouses are more comprehensive expansion in ancillary and
other lines of business.
4. Vertical analysis
Two major aspects of the income statement and balance sheet stand out when completing
a vertical analysis of Costco. 1) On the income statement the percentage of cost of good sold
or as listed on Costco’s 10-K merchandise costs is a very high percentage of net sales (which
would be even higher with out membership fees) at approximately 87%. Comparing this
number to other industry participants and competitors might provide some usual information.
The lower this number is, the higher the gross profit margin will be, a very important figure in
this industry. Secondly, the fact that net property & equipment and current assets are both
approximately 50% of total assets does stand out. In 2010 net property & equipment has
decreased. A 50% net property & equipment ratio in this industry maybe considered above
average, and it is a good reflection on Costco that this number has decreased in 2010 with
increased profit numbers none of which were grossly impacted by comprehensive income
figures.
5. Conclusions from ratio analysis
Working capital
Current ratio
This ratio measures the ability of Company to continue his operations, so 2010 has
the advantage on this liquidity ratio.
The Company has for 2010 $1.16 in current assets for every $1 dollar in current
liabilities, in 2009 has $1.11, 2008 has $1.07.
Debt to total
assets
cash debt
coverage
free cash flow
profit margin
asset turnover
return on assets
return on equity
Costco in 2010 and 2009 liquidated 54% of its assets at their book value to pay off
all of its debts, while in 2008 liquidated more than of 2009 and 2010. So 2010 and
2010 has the advantage for this solvency ratio.
In 2020 the company has 17 cents in cash provided by operating activities for every
$1 dollar in average total liabilities, 2009 only 15 cents, while 2008 has 18 cents of
cash provided by operating activities for every $1 dollar in average total liabilities.
So 2008 has the advantage for this solvency ratio.
2009 has the advantage for this solvency ratio, based on these results, but for all
those years the company has been negative.
For all those years the company earns 1 cent for every 1 dollar in sales
This ratio measure how quick the company converts its receivables to cash, based
on this statement, 2010 has the advantage compared with 2009 and 2008.
In 2008 made 6.3 cents for every dollar of assets, in 2009 earns 5 cents, whereas in
2010 earns 5.8 cents for every dollar of assets. 2008 has the advantage on this
profitability ratio.
For 2010 the company earns 30 cents in net income for every dollar invested by the
common stockholders, for 2009 earns 25 cents, for 2008 29 cents for every dollar
invested , so 2010 has the advantage for this profitability ratio.
additional ratios that are relevant to Costco
Inventory
turnover
Days in
inventory
This ratio measure the ability of the company to sell quick the inventory, so 2008
was the best year for Costco
This ratio measures the average number of days inventory is held. So the best year
for this ratio was 2010, followed for 2009.
6. Cash flow
Costco Wholesale Corporation’s cash generated is most appropriately demonstrated by
merchandise categories. Costco has six different categories:
Sundries: candy, snack foods, tobacco, alcoholic and nonalcoholic beverages and cleaning and
institutional supplies accounting for approximately 23% of net sales.
Hardlines: major appliances, electronics, health and beauty aids, hardware, office supplies,
garden and patio, sporting goods, toys, seasonal items and automotive supplies accounting for
approximately 18% of net sales.
Food: dry and institutionally packaged foods accounting for approximately 21% of net sales
Softlines: apparel, domestics, jewelry, housewares, media, home furnishings, cameras and small
appliances accounting for approximately 10% of net sales.
Fresh Food: meat, bakery, deli and produce accounting for approximately 12% of net sales.
Ancillary and Other: gas stations, pharmacy, food court, optical, one-hour photo, hearing aid and
travel accounting for approximately 16% of net sales.
7. Stock price
In a 10 week span leading up to Costco Wholesale Corporation’s 10-K reporting (COST) stock
price ranged from a low of $55.04 beginning August 18, 2010 to a high of $65.05 on September 27,
2010 ending at $63.21 on October 18, 2010. Currently COST is trading $74.92 on August 23,
2011.
8. Total Cardholders
Costco Wholesale Corporation’s total cardholders have increased in number from year to year.
In 2008 Costco maintained 53,500,000 cardholders, in 2009 56,000,000, and in 2010 58,000,000.
From 2008 to 2009 Costco’s total cardholders increased by 2,500,000. From 2009 to 2010 there
was an increase of 2,000,000 cardholders.
9. Warehouses
Costco Wholesale Corporation has locations across the world. As stated in Risk Factors,
Costco’s primary sources of revenue are in Canada, and the United States. Even more specifically
26% of net sales were generated in California alone. (Costco 10-K, Pg 10) Included in the numbers
below is Costco’s joint venture Costco Mexico.
10. Warehouse Openings
Below is a chart of locations where Costco has been expanding to.
11. Three-year Forecast
Given Costco Wholesale Corporation’s strengthened recovery in 2010 Costco is in
position to capitalize on a renewed membership core which has increased in loyalty and
disposal of income in wholesale goods. As of Costco’s most recent 10-Q the corporation
has reported a net sales on average greater than $20 billion. Using a growth rate of 6.5 for
2011 and 2012, and 4.5 for 2013 Costco Wholesale Corporation’s forecasted net sales
looks to be $90,382 million in 2013, $86,490 million in 2012, and $81,211 million in 2011.
Conservative growth numbers for membership fees have been applied even though
through Q3 Costco is currently boasting 62,000,000 members! A substantial increase the
58,000,000 years end in 2010 and a separation from the normal growth rate approximately
2 million annually to about 7 million new members. These two figures provided additional
confidence in Costco’s forecast for the next three years as listed below: (in millions)
12. Forecasting for Revenues [Sales]
Prior to 2010 a decrease net sales, membership fees and total revenue might
result in a decrease in stock price; however, given the current market climate Costco has
performed admirably. Below are the percentage changes and forecasting chart for net
sales, membership fees, and total revenue.
13. Forecasting for Operating Expenses & Income
Merchandise costs, selling, general and administrative expenses, and operating
income are listed below in percentage increases.
14. Relevant News events
From the onset of 2010 Costco Wholesale Corporation has exceeded stockholder
and customer expectations. In quarter 1, 2010 Richard Galanti stated that Costco planned
to open 566 warehouses worldwide, with 413 remaining in the United States. As of the
completion of fiscal year 2010 Costco had a reported 540 warehouses not included the
joint venture of Costco Mexico operating 32 in the country of Mexico. 416 warehouses
remain in the United States demonstrating Costco’s capacity for expansion both
internationally and domestically.
As listed in their 10-K and noted otherwise Costco saves at least two percent a
year on advertising primarily focusing on word of mouth communications and direct mail.
For instance Coupon Book a customer run website in the United States provides blogs and
customer run forums in regards to various money saving ideas and products showcased at
Costco. This resource has added value for Costco because it is proprietary, and provides
millions of dollars in advertising without cost.
Not only is Costco efficient, and thrifty in advertising it is also in expansion. Costco
only extends growth in appropriate marketplaces that fit their strategy. Costco turned down
the opportunity to operate a warehouse in Atlanta. This opportunity was declined because
of the costs incurred for the land and other expenses would not be in line with Costco’s
gross profit margin requirements.
Appendix
Financial Statements