4/26/13
Industry: Variety Stores
Sector: Retail
Costco Wholesale Corp.
Investment Thesis
Key Statitisics
52 Week Price Range
81.98
50-Day Moving Average
104.26
Estimated Beta

Costco is the second largest membership discount retailer in the U.S.

Costco’s business segments comprised of Consumer Staples and Consumer
Discretionary make its revenue more robust in a unstable economic
environment

Costco bolsters a significant portion of its income from membership dues,
which it can increase a certain extent every year without significant loss in
membership
109.75
0.68
Dividend Yield
$ 0.28
Market Capitalization (In Millions)
3-Year Revenue CAGR
1.76%
47682
12%
Trading Statistics
Diluted Shares Outstanding (In Millions)
Average Volume (3-Month)
Institutional Ownership
Five-Year Stock Chart
439.53
2.05
120.00
76.97%
45,000,000
40,000,000
100.00
Insider Ownership
1.01%
EV/EBITDA (LTM)
12.12
35,000,000
80.00
30,000,000
25,000,000
Margins and Ratios
60.00
Gross Margin (LTM)
12.42%
EBITDA Margin (LTM)
3.82%
Net Margin (LTM)
1.72%
20,000,000
40.00
15,000,000
10,000,000
20.00
Debt to Enterprise Value
5,000,000
3.11%
2008-05-02
2009-05-01
2010-04-30
Adj Close
Forecast Summary
UOIG Projections
Net Sales ($M)
EBITDA ($M)
Basic EPS ($)
Consensus Estimates
Net Sales ($M)
EBTIDA ($M)
Basic EPS ($)
2011-04-28
50-Day Ave
2012-04-26
200-Day Avg
0.00
2013-04-29
0
Volume
2012A
$99,137.00
$3,667.00
$4.02
11/30/2012A
$23,715.00
$852.00
$0.96
02/28/2013A
$24,871.00
$955.00
$1.26
05/31/2013E
$23,989.30
$899.60
$0.95
08/31/2013E
$34,401.08
$1,376.04
$1.66
2013E
$106,976.38
$4,082.64
$4.82
$99,137.00
$3,667.00
$2.03
$23,715.00
$852.00
$0.08
$24,871.00
$955.00
$0.94
$24,157.00
$936.00
$0.96
$32,945.00
$1,303.00
$1.12
$105,478.00
$4,089.00
$3.88
Covering Analyst: Tony Kim
ddk@uoregon.edu
1
University of Oregon Investment Group
University of Oregon Investment Group
4/26/2013
Business Overview
Company History
Founded by James Sinegal, and Jeffery H. Brotman, Costco first incorporated in
California on Feb. 13, 1976. In October 1993, it reincorporated in Delaware as
Price/Costco In, and in January 1997, it changed names to Costco Companies,
Inc. In August 1999, it reincorporated in Washington as Costco Wholesaler
Corporation.
Business Analysis
% Revenue Business Segments
Sundries
% Change
Hardlines
% Change
Food
% Change
Softlines
% Change
Fresh Food
% Change
Ancillary and Other
% Change
2009A
23
2011A 2012A
22
22
-4.35% 0.00%
17
16
-5.56% -5.88%
21
21
0.00% 0.00%
10
10
0.00% 0.00%
12
13
0.00% 8.33%
18
18
12.50% 0.00%
Costco Wholesale Corporation (Costco) operates membership warehouses that
offer low prices on limited selection of branded and private-label products with
the goal of increasing sales volume and inventory turnover. By focusing on
increasing turnover and increasing supply chain efficiency by prioritizing
volume purchasing, minimal goods handling, and lean warehouses, Costco is
able to operative profitably with lower margins than traditional retailers,
wholesalers, and supercenters. Costco purchases its merchandise directly from
manufactures, which is then routed to cross-docking hubs. Once the
merchandise arrives at the docking stations, it is then routed to individual
warehouses with minimal handing and delay.
Number of Businesses
Food Court and Hot Dog Stands
% Change
One-Hour Photo Centers
% Change
Optical Dispensing Centers
% Change
Pharmacies
% Change
Gas Stations
% Change
Hearing-Aid Centers
% Change
Print Shops and Copy Centers
% Change
Car Washes
% Change
2009A 2010A
2011A 2012A
521
534
586
602
2.96%
2.50% 9.74% 2.73%
518
530
581
591
2.78%
2.32% 9.62% 1.72%
509
523
574
589
2.62%
2.75% 9.75% 2.61%
464
570
529
544
2.88% 22.84% -7.19% 2.84%
323
343
427
469
5.21%
6.19% 24.49% 9.84%
303
357
368
394
10.58% 17.82% 3.08% 7.07%
10
10
10
10
42.86%
0.00% 0.00% 0.00%
2
7
7
7
0.00% 250.00% 0.00% 0.00%
It is normal for Costco to convert inventory to cash before it has to pay its
vendors. Therefore, if inventory turnover increases, the amount of inventory that
is financed through vendor payment terms increases. This is reflected in
Costco’s negative working capital, and is described in further detail in the
Discounted Cash Flow analysis section of this report.
2009 2010 2011 2012
As of the most recent reporting period of March 31, 2013, Costco operates 608
warehouses. 439 of those warehouses are in 40 states and Puerto Rico, 82 in
Canada, 32 in Mexico, 22 in the U.K., 13 in Japan, 9 in Taiwan, 8 in Korea, and
3 in Australia. In addition to their warehouse operations, Costco operates an
online business, and Costco Travel to complement their warehouse operations.
As a part of its main operations, Costco current lines of business include Food
Court and Hot Dog Stands, One-Hour Photo Centers, Optical Dispensing
Centers, Pharmacies, Gas Stations, Hearing-Aid Centers, Print shops and copy
centers, and Car Washes.
Warehouse Count
United States Operations
Warehouses
Canadian Operations
Warehouses
Other International Operations
Warehouses
Consolidated Operations
Warehouses
19
21
10
12
15
2010A
23
0.00%
18
-5.26%
21
0.00%
10
0.00%
12
0.00%
16
6.67%
406
416
429
439
77
79
82
82
44
45
81
87
527
540
592
608
Costco has six merchandise segments, which are divided into sundries,
hardlines, softlines, food, fresh food, and ancillary and other. Sundries include
snack foods, tobacco and beverages. Hardlines include appliances and
electronics; Softlines comprise merchandise such as apparel and home
furnishings. Ancillary and other include gasoline, pharmaceuticals, and other
miscellaneous merchandise that Costco sells.
Business Growth Strategies
Geographic Expansion
Costco has continued to fuel its growth through expanding its geographic reach
by acquiring subsidiaries and building a larger base of its discount warehouse
locations. Costco expands its warehouse count by leasing or purchasing the
warehouses. Management plans to continue building warehouses in the more
mature markets of U.S., Canada, and U.K. However, there is more potential for
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4/26/2013
growth in the International market, which includes Mexico, Australia, Taiwan,
Japan, and Korea. According to management during the most recent earnings
conference, Costco is targeting 25 warehouse locations in Japan and Korea.
Costco is also targeting an entry into China through an online retail business
model.
Acquisitions
Costco has expanded its business organically and through acquisitions and
mergers. Costco has used acquisitions and mergers to expand its presence in the
U.S., domestic, and international markets. However, acquisitions have declined
in the U.S. and domestic markets as Costco’s presence has become more
established. Currently, acquisitions are more common in the international
markets, which include Mexico, U.K., Japan, Korea, Taiwan, and Australia.
Costco has a history of acquiring or partnering with retailers in a target market
or region that it wants to capture. The below section is a list of significant
acquisitions and partnerships Costco made during its lifetime.
“In 1991, Co. formed a 50% joint venture with Controladora Comercial
Mexicana, S.A. de C.V.
On Oct. 21, 1993, the shareholders of both Price and Costco approved the
mergers of Price and Costco into subsidiaries of PriceCostco. Pursuant to the
Merger, Price and Costco became subsidiaries of PriceCostco. Shareholders of
Price received 2.13 shares of PriceCostco common stock for each share of Price
common stock and shareholders of Costco received one share of PriceCostco
common stock for each share of Costco.
On July 28, 1994 Co. entered into an Agreement of Transfer and Plan of
Exchange with Price Enterprises, Inc. Price Enterprises is an indirect whollyowned subsidiary of Co., formed in July 1994.
On May 4, 1998, Co. formed a joint venture in the Republic of Korea with
Shinsegae Department Store Co., Ltd. (Shinsegae) to acquire the membership
warehouse club operation from Shinsegae. The joint venture operation became
effective on June 1, 1998. Initial capitalization of the joint venture totaled
approximately $100,000, with the company being a 93.75% owner and
Shinsegae being a 6.25% owner. Approximately $80,000 of the initial
investment will be used for land and building acquisitions, and the remaining
approximately $20,000 will be used to purchase merchandise inventories and
other assets, and for working capital purposes.
On May 26, 2000, Co. acquired from The Littlewoods Organisation PLC its
20% equity interest in Costco Wholesale UK Limited, increasing Co.'s
ownership in Costco Wholesale UK Limited to 80%. The acquisition was funded
with cash and cash equivalents on hand.
On Oct. 3, 2003, Co. acquired from Carrefour Nederland B.V. its 20% equity
interest in Costco Wholesale UK Limited for cash of approx. $95,000.
On June 30, 2005, Co. acquired the remaining 4% equity interest in CWC
Travel Inc. for cash of $3,961,000, bringing Co.'s ownership in this entity to
100%.
On July 10, 2012, Co. acquired from its former joint venture partner the
remaining 50% equity interest of Costco Mexico (Mexico) for $789,000,000.”
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Industry
Overview
In the retail sector, Costco competes in the Warehouse Clubs and Supercenters
Industry. As of 2013, the Warehouse Clubs and Supercenters industry is one of
the fastest growing industries in retail. Industry revenues are forecasted to
increase by 6.7%, which is in connection to increasing disposable income. (Ibis
World)
Growth in the industry trends with economic growth, growth of disposable
income, and employment. Because Costco sells a large amount of consumer
stables, it is protected to a degree from fluctuations in disposable income. In
addition, the Warehouse Clubs and Supercenters industry was one of the
industries that saw growth during the 2008 recession as customers started to
seek lower prices for goods. With the expected GDP growth of Costco’s
international markets generally higher than the U.S., the outlook is positive for
Costco’s international market. The international market is less saturated than the
U.S. market, and while by no means uncompetitive, Costco’s business model
has more headroom to grow in these markets. There are many factors that affect
growth potential of each different business segment that Costco operates, but
generally have similar effects on each segment.
The Warehouse Clubs and Supercenters industry is a very capital intensive
industry. New players need to make significant investments in capital to
compete with warehouse locations, and there are significant economies of scale
in the industry that makes the current players’ competitive position very stable.
Capital structure varies for each company and within the industry. Costco has a
low debt to equity ratio of .029, compared to Walmart’s .18. Costco’s
management does not see this figure changing significantly, and it maintains that
Costco’s debt financing will continue to have intermediate terms of less than 20
years. Currently, Costco’s longest maturity bonds mature in 2019.
Costco and its international competitors face exchange rate fluctuations.
Because Costco supplies a mix of foreign and national merchandise at its
warehouse locations, exchange rate fluctuations can affect price of goods
respective to different markets. In addition, it can have gains and losses due to
currency conversion.
Macro factors
Economic growth such as GDP trends closely with revenue. This is because
economic growth underpins many of the factors that influence the growth of
sales for companies like Costco. As mentioned before, these factors include the
level of disposable income and employment rates on the consumer side. On the
supplier side, the price of gasoline and other commodities affect prices.
Environmental factors can have a significant effect on Costco’s operations, and
the operations of its suppliers. Adverse weather can affect the availability and
prices of the goods Costco sells. Because Costco carries a large and diverse
number of products, it can be indirectly affected my nearly any macro factors.
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Competition
The industry is highly competitive, and competes in terms of pricing and
volume. There are about 1200 discount warehouses in operation in the U.S.
Supply chain efficiency is a huge part that determines how competitive a player
is in the industry. The supply chain structure is what allows Costco and Walmart
to execute its business strategy of passing down lower costs to consumers.
Supply chain decisions include carrying a low number of branded products and
reducing product handling to reduce overhead costs.
As a company that deals largely with consumer staples, future innovations are
not expected to affect Costco from an operation perspective. However, leverage
of information technology and new developments in the area has and will
continue to prove to be a significant area of competitive advantage. Especially
regarding flow of inventory and supply chain activities, leverage of increasingly
sophisticated ERP systems and inventory management systems may provide
significant cost saving and economies of scale, which will continue to strengthen
Costco’s position as one of the market leaders in the retail sector.
Management and Employee Relations
Year
Salary
Bonus
Other Annual
Compensation/Fees
Stock Awards
Option Awards
2012
356,731
198,820
2011
350,000
198,400
2010
350,000
190,400
N/A
N/A
N/A
3,870,300
N/A
3,120,030
N/A
2,896,030
N/A
Change in Pension Value &
30,483
Non-Qualified Deferred Comp.
5,076
N/A
All Other Compensation
Total Compensation
82,637
4,538,971
83,083
3,756,589
88,948
3,525,378
Year
Salary
Bonus
Other Annual
Compensation/Fees
Stock Awards
Option Awards
2012
662,500
168,233
2011
649,999
99,200
2010
635,000
95,200
N/A
N/A
N/A
3,870,300
N/A
2,496,024
N/A
1,448,015
N/A
Change in Pension Value &
21,226
Non-Qualified Deferred Comp.
811
N/A
All Other Compensation
Total Compensation
88,514
4,810,773
89,831
3,335,865
85,844
2,264,059
Year
Salary
Bonus
Other Annual
Compensation/Fees
Stock Awards
Option Awards
2012
664,922
79,222
2011
644,995
79,360
2010
600,000
76,160
N/A
N/A
N/A
1,935,150
N/A
1,560,015
N/A
1,448,015
N/A
Change in Pension Value &
49,801
Non-Qualified Deferred Comp.
2,066
N/A
All Other Compensation
Total Compensation
96,605
2,825,700
103,575
2,390,011
108,327
2,232,502
Year
Salary
Bonus
Stock Awards
Option Awards
2007
499,029
33,323
361958
824,861
Jeffery Brotman, Chairman
Jeffrey H. Brotman, is the current Chairman of the Board of Costco Wholesale
Corporation. Mr. Brotman is the co-founder of Costco Wholesale Corporation,
and has been Chairman of the Board ever since Costco Wholesale Corporation’s
inception excluding the period from October 1993 to December 1994, when he
acted as a Vice Chairman.
W. Craig Jelinek, Director and President
W. Craig Jelinek, is the current Director and President of Costco Wholesale
Corporation, a role he served since February 2010. In January 1, 2012, he started
his role as Chief Executive Officer. Previously, Mr. Jelinek was President and
Chief Operating Officer from February 2010 until January 2012, and was
Executive Vice President in charge of merchandising, which was a role he
served since 2004.
Richard A. Galanti, Executive Vice President, CFO
Richard A. Galanti, served as a Director of Costco Wholesale Corporation since
January 1995. Since October 1993, he has served as an Executive Vice President
and Chief Financial Officer of Costco Wholesale Corporation.
Paul G. Moulton, Executive Vice President, Info. Sys.
Paul G. Moulton, is the Executive Vice President, Information Systems of
Costco Wholesale Corporation. Mr. Moulton served as the Executive Vice
President of Real Estate Development from 2001 to March 2010.
Change in Pension Value &
97147
Non-Qualified Deferred Comp.
All Other Compensation
Total Compensation
398,501
2,214,819
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Management Guidance
Costco’s management often provides fair estimates regarding their guidance.
The management team shows a historical trend of being close to actual results
and analyst estimates. Generally, Managements’ EPS guidance does not deviate
more than $.05 above or below estimates
Recent News
April 29, 2013 – “Costco set to open in Queensland in 2014 following
government approval”
American bulk-goods chain Costco has received the green light to go ahead with
the opening of its first Queensland store, as the company prepares for further
expansion around Australia. (Smartcompany)
March 26, 2013 - “Customers Flee Wal-Mart Empty Shelves for Target,
Costco”
It’s not as though the merchandise isn’t there. It’s piling up in aisles and in the
back of stores because Wal-Mart doesn’t have enough bodies to restock the
shelves, according to interviews with store workers. In the past five years, the
world’s largest retailer added 455 U.S. Wal-Mart stores, a 13 percent increase,
according to filings and the company’s website. In the same period, its total U.S.
workforce, which includes Sam’s Club employees, dropped by about 20,000, or
1.4 percent. (Reuters)
March 13, 2013 – “Costco gains market share; profit tops Street view”
Costco Wholesale Corp. lured shoppers with low prices on everything from
produce to gasoline in the latest quarter, gaining market share at a time when
other retailers saw shoppers pull back due to higher taxes and rising fuel prices.
(Bloomberg)
Catalysts
Upside

Strengthening economic data will positively influence Costco’s stock price

Efforts to increase presence in China and successful foray into the Chinese
market will increase growth potential
Downside

Negative supply price fluctuation

Devaluation of U.S. currency relative to foreign currency

Increase in commodity prices that affect large suppliers
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Comparable Analysis 30%
Multiple
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
P/E
Price Target
Current Price
Overvalued
Implied Price
Weight
194.41
0.00%
97.57
0.00%
91.69
0.00%
87.94
100.00%
99.43
0.00%
73.23
0.00%
$87.94
109.27
(19.52%)
Comparable companies include Target, Wal-Mart. Price smart, Dollar General,
and Fred’s. These companies were chosen because of their similarity in terms of
operations and business. In addition, I screened for growth rates. However, the
growth rates for the comparable companies do not match well. Costco is
projected to have moderate growth going forward. Its growth is higher than
Target and Wal-Mart. The other comparable companies PSMT, FRED, DG have
a smaller market capitalization than Costco, and generally higher growth
expectations. Target and Wal-Mart are most similar to Costco yet they have
lower projected growth rates. Smaller competitors have higher projected growth
rates, and trade at higher multiples than Costco. Costco has already gone
through this high growth phase. Therefore it would not be reflective of future
growth to include these smaller companies in the comparable analysis other than
to increase the multiples. Because of a lack of good comparable companies, the
comparable analysis is weighed less relative the discounted cash flow model.
Target 50%
“Target Corporation (Target) operates in three segments: U.S. Retail, U.S.
Credit Card and Canadian. As a component of the U.S. Retail Segment, its
online presence is designed to enable guests to purchase products either online
or by locating them in one of its stores with the aid of online research and
location tools. The Company merchandise at discounted prices… It operated 37
distribution centers at January 28, 2012. At January 28, 2012, it had 1,763 stores
in 49 states and the District of Columbia.”
I chose Target Corporation because it has a similar market capitalization with
Costco, and because it shares similarities in terms of supply chain and physical
store footprints. The growth estimates for Target are lower for 2013 while
higher for 2014 compared to Costco.
Walmart 50%
“Wal-Mart Stores, Inc. (Walmart) operates retail stores in various formats
around globally… The Company’s operates in three business segments: the
Walmart U.S. segment, the Walmart International segment, and the Sam’s Club
segment. During the fiscal year ended January 31, 2012 (fiscal 2012), its
Walmart U.S. segment accounted for approximately 60% of its net sales and
operates retail stores in various formats in all 50 states in the United States and
Puerto Rico, as well as Walmart’s online retail operations, walmart.com. Its
Walmart International segment consists of retail operations in 26 countries. Its
Sam’s Club segment consists of membership warehouse clubs operated in 47
states in the United States and Puerto Rico, as well as the segment’s online retail
operations, samsclub.com. During 2012, Sam’s Club accounted for
approximately 12% of its net sales.”
I chose Walmart as a comparable company due to it being the closest competitor
in the Warehouse Clubs and Supercenters industry. With about 60% of the
market share, compared to Costco’s 18% share, Walmart is the biggest player in
the industry. Walmart shares a very similar supply chain strategy as Costco. In
addition, Walmart has the most comparable growth rate with Costco, with a
growth rate of 5.1% and 5.0% in 2013 and 2014 respectively.
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Discounted Cash Flow Analysis 70%
Discounted Free Cash Flow Assumptions
Tax Rate
35.00% Terminal Growth Rate
Risk Free Rate
1.70% Terminal Value
Beta
0.68 PV of Terminal Value
Market Risk Premium
7.00% Sum of PV Free Cash Flows
% Equity
97.20% Firm Value
% Debt
2.80% Total Debt
Cost of Debt
5.70% Cash & Cash Equivalents
CAPM
6.44% Market Capitalization
WACC
6.36% Fully Diluted Shares
Implied Price
120.78
Current Price
109.27
Undervalued
2.50%
62,258
44,342
10,126
54,467
1,382
4,854
53,085
440
10.53%
Considerations
Avg. Industry Debt / Equity
Avg. Industry Tax Rate
Current Reinvestment Rate
Reinvestment Rate in Year 2018E
Implied Return on Capital in Perpetuity
Terminal Value as a % of Total
Implied 2014E EBITDA Multiple
Implied Multiple in Year 2018E
Free Cash Flow Growth Rate in Year 2018E
13.10%
22.58%
46.24%
5.94%
42.07%
81.4%
12.6x
9.2x
3%
The percentage of revenue method is used to calculate the items in the Revenue
model, working capital model, and the discounted cash flow model. However,
when appropriate, some line items are projected as a function of a factor they are
dependent to. These items are specified by name, and the function discussed in
more specific detail in the subsections of the Discounted Cash Flow Analysis.
Revenue model
Costco’s revenue model is broken down into its current geographic reporting
segments. These segments are Costco’s U.S. Canada, and International
operations. The U.S. segment includes all of Costco’s 448 stores in 40 states,
and Puerto Rico. The Canadian segment in includes 85 warehouses in the
provinces of Canada. The international segment includes 32 stores in Mexico,
23 stores in the U.K., 3 stores in Australia, 13 stores in Japan, 10 stores in
Korea, and 8 stores in Taiwan. In each geographic segment, the revenue model
projects warehouse count, revenue, total square footage, revenue per square
footage, and average square footage. Warehouse count is projected based on
management guidance, which is used to predict total square footage. Total
square footage for the consolidated business segment is a function of number of
stores. Total square footage is calculated by taking the product of the historical
average warehouse size of 149000 square feet and the number of warehouses.
Total square footage for each individual business segment is calculated by
taking the weighing of the change in total square footage for the consolidated
business segments by number of stores opened in the region over total stores
opened.
Revenue is projected using a mixture of management guidance, analyst
estimates, and as a trend with warehouse openings. Revenue was projected in a
way that each additional warehouse would provide slightly lower revenue due to
the effect of cannibalization of sales among warehouses.
Revenue per square footage is calculated by dividing revenue by total square
footage for each geographic business segments. Average total square footage is
the square footage divided by number of warehouses. The total square footage is
a function of the warehouse count and an estimate of historical average square
footage of a typical warehouse. Therefore, the change in average square footage
from the actual years to projected years is minimal.
Beta
The Beta calculation includes the weighted average of the 1 year and 3 year
betas regressed against the S&P500. 1 year and 3 year Betas are chosen to
capture the period of transition from a weak economy to a more stable and less
uncertain economy.
COGS
The working capital model projects COGS as percent of revenue. COGS for
Costco historically trended flat and ranged between 86.21% and 86.66%. For the
year 2013, management predicts COGS to remain flat. COGS is projected based
on the percentage of revenue. Any event that increases COGS will negatively
affect Costco’s bottom line and ultimately valuation of the company. Because
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COGS is such a significant portion of revenue, even a slight increase of COGS
as a percentage of revenue will have a negative effect on bottom line.
SG&A
The working capital model projects SG&A as percent of revenue. SG&A for
Costco historically trended flat and ranged between 9.64% and 10.11%. For the
year 2013, management predicts SG&A to remain at historical levels.
SG&A trends slightly higher as a percentage of revenue. This is to take into
account of sales cannibalization with increasing warehouse locations. Revenue
per square footage is projected to decrease, due to revenue per additional store
declining in certain locations due to cannibalization of sales. However, each
warehouse will be staffed in similar levels, increasing SG&A relative to sales.
Even with careful management of staffing levels, as Costco increases its
warehouse footprint and increases overlap of warehouse service area, SG&A
will become a larger portion of Costco’s revenue. Due to the increasing
saturation of the U.S., Canada, and some international markets, this has a greater
chance of becoming reality. Unless Costco penetrates new markets without
cannibalizing sales from other warehouse locations, diminishing returns for each
warehouse that overlaps service area is inevitable.
Depreciation & Amortization
Costco depreciates its assets on a straight-line basis. Depreciable assets include
buildings, equipment, and other capital assets. Depreciation base ranges from 530 years. Depreciation is calculated as a percentage of revenue with
consideration given to capital expenditures. It is projected to increase as a
percentage of revenue over time to capture the effect of decreasing marginal
revenue for each additional store location.
Net Working Capital
The net working capital for Costco is negative, and is projected to be negative
going forward. It is important to note that the working capital situation does not
reflect Costco’s inability to pay its vendors. Costco does not have a cash
shortage, and it has not taken out debt to cover its short cash position. Costco
turns over inventory frequently, which allows the company to converts
inventory into cash before it is required to pay back its suppliers and vendors.
Net working capital includes Accounts Receivable, Inventory for current assets,
and Accounts Payable, Income Tax Payable, and Other Liabilities. The working
capital model excludes Cash, Short-Term Investments, Short-Term Debt, and
Current Maturation of Long-Term Debt. The rational for calculating working
capital excluding these items is because Net Working Capital reflects the
investment required to maintain operations of the business. Inventory,
receivables, payables, is the capital needed to maintain operations. Payables
reflect the liability incurred to fund inventory, and receivables reflect the
payment terms given to customers. Net working capital essentially shows the
minimum amount of cash a company needs have tied up in assets to fund a
business cycle, in most cases a year. Cash and liabilities associated with
financial instruments are not included in the calculation of Net working capital
because they are not required to maintain Costco’s immediate operations.
Respectively, debt should be excluded if cash is also going to be excluded.
UOIG 9
University of Oregon Investment Group
4/26/2013
The working capital model keeps the working capital flat with only minor
deviation as a percent of revenue. This is done to minimize the potential
negative and positive cash flow effects of an increase and decrease, respectively,
in net working capital. The implication for projecting a flat working capital
relative to percentage of revenues is that Costco will continue to be able to
convert receivables into cash before it is required to pay of its payables to its
suppliers and vendors. Ideally, if operating cash was known, it would have been
added back into the net working capital model.
Capital Expenditure
Capital expenditure is projected while considering the increases in warehouse
numbers. The rational for projecting capital expenditures using this method
rather than taking a percentage of revenue is that capital expenditures are broken
down into property purchases and other capital assets needed for operations.
Due to the two components of capital expenditure, it would not well reflect
capital expenditures on building and property if projecting capital expenditures
as a percentage of revenue.
An increase is warehouse building greater than the projected number will
increase capital expenditure as a percentage of revenue over current projection
numbers. Historically, management has been accurate with estimating
warehouse openings.
Tax Rate
Corp. Tax Rates By Countries
United States
Canada
Mexico
United Kingdom
Japan
Korea, Republic of
Taiwan
Australia
2009
40
33
28
28
40.69
24.2
25
30
2010
40
31
30
28
40.69
24.2
17
30
2011
40
28
30
26
40.69
22
17
30
2012
40
26
30
24
38.01
24.2
17
30
2013
40
26
30
23
38.01
24.2
17
30
The tax rate to be 35% based on historical and projected tax rates. In addition I
also considered shifting revenue mix as a potential to change tax rates.
Historically, tax rates in the U.S. have been 40%, Canada 26%, Mexico 30%,
U.K. 23%, Japan 38.01%, Korea 24.2%, Taiwan 17%, and Australia 30%. There
is a slight trend in the tax rate towards the weighted international tax rate as
revenue mix slightly shifts to the international markets. However, because the
U.S. and Canada markets currently make up 87.95% of revenues, the shift of tax
rates towards the international market tax rates is minimal as a percentage and
nominal figure. Therefore, I projected the tax rate to be 35% going forward.
Recommendation
I recommend a Hold for the Tall Firs and Svigals’ portfolio. Based on DCF and
Comparable analysis, Costco is fairly valued. I primarily covered Costco
because its growth rates were higher than its competitors. However, it appears as
if the market has priced in the higher expected growth. I am not pitching Costco
as a defensive play on the market because Walmart has a lower Beta, and has a
higher dividend yield of 2.42% as opposed to Costco’s 1.10%. In addition,
Costco has not outperformed its competitor Wal-Mart during the 2008 recession.
Therefore, even as a defensive play, I believe that Costco as an investment
leaves more to be desired.
There is little doubt that Costco is a good company with a very strong customer
base. However, I believe that the market has fairly priced the company, and
there are other companies that provide a better dividend yield with lower
implied risk.
UOIG 10
University of Oregon Investment Group
4/26/2013
Appendix 1 – Comparable Analysis
Comparables Analysis
($ in millions)
Stock Characteristics
Current Price
Beta
Max
$109.27
1.15
Min
$14.22
0.36
Median
Weight Avg.
$70.52
$74.78
0.48
0.42
COST
PSMT
TGT
WMT
FRED
Costco
Price Smart, Inc
Target
Walmart
Fred's, Inc
$109.27
0.68
0.00%
$89.23
1.15
50.00%
$70.52
0.48
50.00%
$79.04
0.36
0.00%
$14.22
1.15
DG
Dollar General
Corp.
0.00%
$52.83
0.37
Size
Short-Term Debt
Long-Term Debt
Cash and Cash Equivalent
Non-Controlling Interest
Preferred Stock
Diluted Basic Shares
Market Capitalization
Enterprise Value
12,719.00
41,417.00
7,781.00
3,289.83
260,028.24
306,383.24
12.24
8.13
30.19
521.96
527.33
1.26
2,771.34
145.09
327.21
17,286.61
19,913.74
6,359.50
28,035.50
4,282.50
1,965.61
152,629.43
184,238.93
1.00
1,381.00
4,854.00
439.53
47,898.31
44,426.31
7.24
71.42
92.49
30.19
2,693.68
2,679.85
14,654.00
784.00
641.39
45,230.61
62,094.61
12,719.00
41,417.00
7,781.00
3,289.83
260,028.24
306,383.24
1.26
12.24
8.13
36.71
521.96
527.33
0.89
2,771.34
145.09
327.21
17,286.61
19,913.74
Growth Expectations
% Revenue Growth 2013E
% Revenue Growth 2014E
% EBITDA Growth 2013E
% EBITDA Growth 2014E
% EPS Growth 2013E
% EPS Growth 2014E
12.90%
15.20%
16.10%
14.00%
25.00%
19.90%
0.90%
2.90%
0.60%
5.80%
0.80%
9.41%
5.10%
5.85%
10.10%
10.60%
6.50%
16.10%
3.80%
5.85%
3.00%
8.20%
5.80%
14.90%
7.91%
5.69%
11.33%
6.07%
16.60%
9.41%
12.90%
15.20%
16.10%
14.00%
25.00%
16.10%
2.50%
6.70%
0.60%
10.60%
5.10%
19.90%
5.10%
5.00%
5.40%
5.80%
6.50%
9.90%
0.90%
2.90%
13.40%
10.30%
0.80%
16.80%
10.40%
9.9.%
10.10%
11.30%
12.50%
15.60%
Profitability Margins
Gross Margin
EBIT Margin
EBITDA Margin
Net Margin
144.9%
101.8%
12.3%
72.7%
13.5%
2.0%
3.8%
1.5%
31.0%
7.3%
7.6%
4.1%
28.0%
6.7%
8.9%
3.9%
13.5%
3.0%
3.8%
2.0%
144.9%
101.8%
6.4%
72.7%
31.0%
7.3%
10.2%
4.1%
25.0%
6.0%
7.6%
3.8%
26.9%
2.0%
4.0%
1.5%
31.7%
10.4%
12.3%
5.9%
2,064.00
0.24
1.95
142.95
0.55
0.03
0.17
9.32
204.99
0.14
1.41
16.55
1,435.00
0.21
1.77
12.94
93.00
0.03
0.34
43.90
3.93
0.03
0.57
35.37
806.00
0.24
1.95
9.32
2,064.00
0.18
1.58
16.55
0.55
0.03
0.17
142.95
204.99
0.14
1.41
9.58
446,950.00
111,823.00
26,720.00
34,160.00
16,999.00
13,510.00
1,955.00
526.80
39.08
78.62
29.63
48.02
16,022.00
5,085.00
2,198.00
1,964.00
1,570.00
2,988.00
260,125.50
67,278.00
16,045.50
20,836.50
9,999.00
8,393.50
106,976.38
14,406.70
3,198.53
4,082.64
2,118.93
1,354.90
2,160.00
3,130.00
2,198.00
139.00
1,570.00
2,988.00
73,301.00
22,733.00
5,371.00
7,513.00
2,999.00
3,277.00
446,950.00
111,823.00
26,720.00
34,160.00
16,999.00
13,510.00
1,955.00
526.80
39.08
78.62
29.63
48.02
Credit Metrics
Interest Expense
Debt/EV
Leverage Ratio
Interest Coverage Ratio
Operating Results
Revenue
Gross Profit
EBIT
EBITDA
Net Income
Capital Expenditures
Multiples
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
P/E
1.24x
3.92x
13.89x
19.28x
17.23x
22.60x
0.27x
0.86x
1.22x
6.71x
(0.94x)
1.72x
0.85x
2.73x
11.56x
8.97x
14.66x
15.30x
0.77x
2.74x
11.51x
8.62x
14.75x
15.19x
0.42x
3.08x
13.89x
10.88x
16.29x
22.60x
1.24x
0.86x
1.22x
19.28x
(0.94x)
1.72x
0.85x
2.73x
11.56x
8.26x
14.66x
15.08x
0.69x
2.74x
11.47x
8.97x
14.84x
15.30x
0.27x
1.00x
13.49x
6.71x
17.23x
17.62x
16,022.00
5,085.00
1,660.90
1,964.00
952.70
149.36
1
1.24x
3.92x
11.99x
10.14x
10.97x
18.14x
UOIG 11
University of Oregon Investment Group
4/26/2013
Appendix 2 – Discounted Cash Flows Analysis
Discounted Cash Flow Analysis
($ in millions)
Total Revenue
% YoY Growth
COGS
% Revenue
Gross Profit
Gross Margin
Selling General and Administrative Expense
% Revenue
Depreciation and Amortization
% Revenue
Earnings Before Interest & Taxes
% Revenue
Interest Expense
% Revenue
Non-operating expense (income)
% Revenue
Earnings Before Taxes
% Revenue
Less Taxes (Benefits)
Tax Rate
Net Income
Net Margin
Add Back: Depreciation and Amortization
Add Back: Interest Expense*(1-Tax Rate)
Operating Cash Flow
% Revenue
Current Assets
% Revenue
Current Liabilities
% Revenue
Net Working Capital
% Revenue
Change in Working Capital
Capital Expenditures
% Revenue
Acquisitions
% Revenue
Unlevered Free Cash Flow
Discounted Free Cash Flow
2009A
71422
-1.46%
61607
86.26%
9815
13.74%
7218
10.11%
728
1.02%
1819.00
2.55%
108
0.15%
-65
-0.09%
1776
2.49%
628
35.36%
1148.00
1.61%
728
70
1945.81
2.72%
6239
8.74%
9281
12.99%
-3042
-4.26%
1250
1.75%
0
0.00%
696
2010A
77946
9.13%
67200
86.21%
10746
13.79%
7840
10.06%
795
1.02%
2077.00
2.66%
111
0.14%
-88
-0.11%
2054
2.64%
731
35.59%
1323.00
1.70%
795
71
2189.50
2.81%
6522
8.37%
10063
12.91%
-3541
-4.54%
-499
1055
1.35%
0
0.00%
1633
2011A
88915
14.07%
76884
86.47%
12031
13.53%
8682
9.76%
855
0.96%
2448.00
2.75%
116
0.13%
-60
-0.07%
2392
2.69%
841
35.16%
1471.00
1.65%
855
75
2401.22
2.70%
7603
8.55%
12050
13.55%
-4447
-5.00%
-906
1290
1.45%
0
0.00%
2017
Q1
Q2
Q3
Q4
2012A
11/30/2012A 02/28/2013A 05/31/2013E 08/31/2013E
99137
23715
24871
23989
34401
11.50%
9.65%
8.29%
7.46%
6.78%
85915
20513
21549
20751
29757
86.66%
86.50%
86.64%
86.50%
86.50%
13222
3202
3322
3239
4644
13.34%
13.50%
13.36%
13.50%
13.50%
9555
2332
2367
2339
3268
9.64%
9.83%
9.52%
9.75%
9.50%
908
213
217
227
227
0.92%
0.90%
0.87%
0.95%
0.66%
2759.00
639.00
738.00
672.56
1148.97
2.78%
2.69%
2.97%
2.80%
3.34%
95
13
25
31
29
0.10%
0.05%
0.10%
0.00%
0.00%
-103
-20
-25
0
0
-0.10%
-0.08%
-0.10%
0.00%
0.00%
2767
646
738
641
1120
2.79%
2.72%
2.97%
2.67%
3.26%
999
225
185
225
392
36.10%
34.83%
25.07%
35.00%
35.00%
1768.00
421.00
553.00
416.95
727.98
1.78%
1.78%
2.22%
1.74%
2.12%
908
213
217
227
227
61
8
19
20
19
2736.70
642.47
788.73
664.20
973.90
2.76%
2.71%
3.17%
2.77%
2.83%
8122
9327
8882
8696
8635
8.19%
39.33%
35.71%
0.00%
0.00%
12260
14231
13230
13002
13004
12.37%
60.01%
53.19%
54.20%
37.80%
-4138
-4904
-4348
-4306
-4369
-4.17%
-20.68%
-17.48%
-17.95%
-12.70%
309
-766
556
42
-63
1480
488
455
240
172
1.49%
2.06%
1.83%
1.00%
0.50%
0
0
0
0
0
0.00%
0.00%
0.00%
0.00%
0.00%
948
920
-222
382
865
920
-222
377
838
Q1
Q2
Q3
Q4
2013E
11/30/2013E 02/28/2014E 05/31/2014E 08/31/2014E
106976
25247
26318
25257
36241
7.91%
8.00%
8.00%
7.75%
7.50%
92570
21839
22765
21847
31348
86.53%
86.50%
86.50%
86.50%
86.50%
14407
3408
3553
3410
4893
13.47%
13.50%
13.50%
13.50%
13.50%
10306
2462
2566
2463
3443
9.63%
9.75%
9.75%
9.75%
9.50%
884
230
231
232
233
0.83%
0.91%
0.88%
0.92%
0.64%
3198.53
716.45
755.50
715.37
1216.42
2.99%
2.84%
2.87%
2.83%
3.36%
98
0
0
0
0
0.09%
0.00%
0.00%
0.00%
0.00%
-45
0
0
0
0
-0.04%
0.00%
0.00%
0.00%
0.00%
3145
716
755
715
1216
2.94%
2.78%
3.03%
2.73%
3.32%
1027
251
264
250
426
32.63%
35.00%
35.00%
35.00%
35.00%
2118.93
465.69
491.07
464.99
790.67
1.98%
1.84%
1.87%
1.84%
2.18%
884
230
231
232
233
66
0
0
0
0
3069.13
696.02
722.49
696.76
1023.89
2.87%
2.76%
2.75%
2.76%
2.83%
8635
9215
9343
9219
9531
8.07%
0.00%
0.00%
0.00%
0.00%
13004
13482
13764
13816
14061
12.16%
53.40%
52.30%
54.70%
38.80%
-4369
-4267
-4421
-4597
-4530
-4.08%
-16.90%
-16.80%
-18.20%
-12.50%
-231
102
-155
-175
67
1355
252
263
253
362
1.27%
1.00%
1.00%
1.00%
1.00%
0
0
0
0
0
0.00%
0.00%
0.00%
0.00%
0.00%
1945
341
614
620
595
326
577
574
542
2014E
113063
5.69%
97800
86.50%
15264
13.50%
10933
9.67%
927
0.82%
3403.74
3.01%
0
0.00%
0
0.00%
3404
3.01%
1191
35.00%
2212.43
1.96%
927
0
3139.16
2.78%
9531
8.43%
14061
12.44%
-4530
-4.01%
-161
1131
1.00%
0
0.00%
2170
2170
2015E
118502
7.00%
102504
86.50%
15998
13.50%
11495
9.70%
947
0.80%
3556.22
3.00%
0
0.00%
0
0.00%
3556
3.00%
1245
35.00%
2311.55
1.95%
947
0
3258.39
2.75%
10132
0.00%
14896
12.57%
-4764
-4.02%
-234
1185
1.00%
0
0.00%
2307
1977
2016E
123197
6.00%
106565
86.50%
16632
13.50%
12012
9.75%
964
0.78%
3655.78
2.97%
0
0.00%
0
0.00%
3656
2.97%
1280
35.00%
2376.26
1.93%
964
0
3340.35
2.71%
10533
0.00%
15547
12.62%
-5014
-4.07%
-250
1232
1.00%
0
0.00%
2359
1901
2017E
127908
5.00%
110641
86.50%
17268
13.50%
12535
9.80%
981
0.77%
3751.28
2.93%
0
0.00%
0
0.00%
3751
2.93%
1313
35.00%
2438.33
1.91%
981
0
3419.66
2.67%
11000
0.00%
16142
12.62%
-5142
-4.02%
-128
1279
1.00%
0
0.00%
2268
1718
2018E
132429
4.00%
114551
86.50%
17878
13.50%
13044
9.85%
994
0.75%
3839.39
2.90%
0
0.00%
0
0.00%
3839
2.90%
1344
35.00%
2495.60
1.88%
994
0
3489.86
2.64%
11389
0.00%
16713
12.62%
-5324
-4.02%
-182
1324
1.00%
0
0.00%
2347
1672
UOIG 12
University of Oregon Investment Group
4/26/2013
Appendix 3 – Revenue Model
Revenue Model (Geographic)
($ in millions)
United States Operations
Warehouses
% Growth
Average Store Square Footage
% Growth
Total Square Footage
% Growth
Revenue / Square Foot
% Growth
Revenue
% of Total Revenue
% Growth
Canadian Operations
Warehouses
% Growth
Average Store Square Footage
% Growth
Total Square Footage
% Growth
Revenue / Square Foot
% Growth
Revenue
% of Total Revenue
% Growth
Other International Operations
Warehouses
% Growth
Average Store Square Footage
% Growth
Total Square Footage
% Growth
Revenue / Square Foot
% Growth
Revenue
% of Total Revenue
% Growth
Consolidated Operations
Warehouses
% Growth
Average Store Square Footage
% Growth
Total Square Footage
% Growth
Revenue / Square Foot
% Growth
Revenue
% Growth
2009A
2010A
2011A
Q1
11/30/2012A
2012A
Q2
02/28/2013A
Q3
05/31/2013E
Q4
08/31/2013E
Q1
11/30/2013E
2013E
Q2
02/28/2014E
Q3
05/31/2014E
Q4
08/31/2014E
2014E
2015E
2016E
2017E
2018E
406
2.01%
0.14
0.43%
58.60
2.45%
964.98
-3.00%
56548
79.17%
-0.62%
416
2.46%
0.14
0.26%
60.20
2.73%
990.43
2.64%
59624
76.49%
5.44%
429
3.13%
0.14
0.03%
62.10
3.16%
1045.15
5.52%
64904
73.00%
8.86%
439
2.33%
0.15
0.24%
63.70
2.58%
1126.78
7.81%
71776
72.40%
10.59%
447
3.23%
0.15
0.22%
64.91
3.46%
260.65
4.73%
16918
71.34%
8.35%
448
3.46%
0.15
0.22%
65.05
3.69%
273.53
3.31%
17794
71.55%
7.12%
450
3.45%
0.15
0.18%
65.35
3.63%
264.05
2.77%
17256
71.93%
6.50%
452
2.96%
0.15
0.10%
65.65
3.06%
376.99
2.85%
24749
71.94%
6.00%
452
2.96%
0.15
0.10%
65.65
3.06%
1168.59
209.98%
76717
71.71%
6.88%
460
3.00%
0.15
0.07%
66.90
3.07%
266.78
-77.17%
17848
70.69%
5.50%
461
3.00%
0.15
0.08%
67.06
3.08%
278.63
4.44%
18684
70.99%
5.00%
461
2.50%
0.15
0.06%
67.03
2.56%
269.03
-3.44%
18033
71.40%
4.50%
463
2.50%
0.15
0.06%
67.33
2.56%
385.94
43.45%
25986
71.70%
5.00%
463
2.50%
0.15
0.06%
67.33
2.56%
1196.31
209.98%
80551
71.24%
5.00%
475
2.50%
0.15
0.08%
69.06
3.22%
1218.90
1.89%
84176
71.03%
4.50%
486
2.25%
0.15
0.13%
70.65
5.36%
1233.14
1.17%
87122
70.72%
3.50%
495
2.00%
0.15
0.17%
72.10
7.56%
1250.68
1.42%
90171
70.50%
3.50%
505
2.00%
0.15
0.21%
73.57
9.27%
1265.18
1.16%
93084
70.29%
3.23%
77
2.67%
0.14
0.27%
10.50
2.94%
927.3
-10.16%
9737
13.63%
-7.51%
79
2.60%
0.14
0.25%
10.80
2.86%
1115.8
20.33%
12051
15.46%
23.77%
82
3.80%
0.14
-0.09%
11.20
3.70%
1251.8
12.18%
14020
15.77%
16.34%
82
85
3.66%
0.14
0.0
11.64
3.94%
343.8
8.09%
4002
16.09%
12.35%
85
3.66%
0.14
0.0
11.64
3.94%
486.1
3.90%
5659
16.45%
8.00%
85
3.66%
0.14
0.0
11.64
3.94%
1492.2
6.33%
17372
16.24%
10.53%
85
2.41%
0.14
0.0
11.64
2.56%
360.8
5.30%
4200
16.64%
8.00%
86
1.18%
0.14
0.0
11.79
1.28%
363.2
5.65%
4282
16.27%
7.00%
86
1.18%
0.14
0.0
11.79
1.28%
343.5
4.66%
4051
16.04%
6.00%
87
2.35%
0.14
0.0
11.94
2.56%
497.7
2.38%
5942
16.40%
5.00%
88
3.53%
0.14
88
2.33%
0.14
89
3.49%
0.14
89
2.30%
0.14
11.94
2.56%
1547.4
3.70%
18475
16.34%
6.35%
12.09
3.84%
1597.1
342.67%
19306
16.29%
4.50%
12.09
2.53%
1660.9
357.34%
20079
16.30%
4.00%
12.24
3.79%
1698.1
394.30%
20781
16.25%
3.50%
12.24
2.50%
1753.3
252.30%
21457
16.20%
3.25%
44
12.82%
0.14
2.02%
6.10
15.09%
842.1
-11.65%
5137
7.19%
1.68%
45
2.27%
0.14
0.98%
6.30
3.28%
995.4
18.20%
6271
8.05%
22.08%
81
80.00%
0.14
-2.12%
11.10
76.19%
900.1
-9.57%
9991
11.24%
59.32%
87
7.41%
0.14
0.65%
12.00
8.11%
970.3
7.80%
11644
11.75%
16.54%
87
7.41%
0.14
0.65%
12.00
8.11%
242.3
4.54%
2908
12.26%
13.02%
89
7.23%
0.14
0.55%
12.29
7.81%
250.2
2.08%
3075
12.36%
10.06%
85
3.66%
0.14
0.0
11.64
3.94%
328.2
5.83%
3821
15.93%
10.00%
2
91
7.06%
0.14
0.50%
12.59
7.60%
231.3
2.23%
2912
12.14%
10.00%
87
2.35%
0.14
1403.3
12.10%
15717
15.85%
12.10%
83
1.22%
0.14
0.0
11.35
1.35%
342.6
11.52%
3889
16.40%
13.02%
91
4.60%
0.14
0.30%
12.59
4.91%
317.2
4.86%
3993
11.61%
10.00%
91
4.60%
0.14
0.30%
12.59
4.91%
1023.7
5.50%
12888
12.05%
10.68%
92
5.75%
0.14
0.38%
12.74
6.15%
251.1
3.63%
3199
12.67%
10.00%
93
4.49%
0.14
0.34%
12.89
4.85%
260.1
3.96%
3352
12.74%
9.00%
94
3.30%
0.14
0.25%
13.04
3.55%
243.5
5.26%
3174
12.57%
9.00%
95
4.40%
0.14
0.32%
13.18
4.73%
327.1
3.12%
4312
11.90%
8.00%
95
4.40%
0.14
0.32%
13.18
4.73%
1064.6
3.99%
14037
12.41%
8.92%
99
7.61%
0.14
0.54%
13.78
8.19%
1089.9
333.99%
15019
12.67%
7.00%
103
10.75%
0.14
0.73%
14.38
11.56%
1112.6
327.77%
15996
12.98%
6.50%
107
13.83%
0.14
0.90%
14.97
14.86%
1132.4
365.12%
16955
13.26%
6.00%
110
15.79%
0.14
1.00%
15.42
16.95%
1160.1
254.67%
17888
13.51%
5.50%
527
2.93%
0.14
0.49%
75.20
3.44%
949.8
-4.74%
71422
-1.46%
540
2.47%
0.14
0.32%
77.30
2.79%
1008.4
6.17%
77946
9.13%
592
9.63%
0.14
-0.41%
84.40
9.18%
1053.5
4.48%
88915
14.07%
608
2.70%
0.14
0.25%
86.90
2.96%
1140.8
8.29%
99137
11.50%
617
3.52%
0.14
0.08%
88.26
1.56%
268.7
5.65%
23715
9.65%
622
4.01%
0.14
0.01%
88.99
0.82%
279.5
3.85%
24871
8.29%
626
3.99%
0.14
0.03%
89.58
0.67%
267.8
3.11%
23989
7.46%
628
3.29%
0.14
0.01%
89.88
0.33%
382.7
3.24%
34401
6.78%
628
637
1.50%
0.14
0.06%
91.28
1.56%
276.6
2.94%
25247
6.46%
640
0.48%
0.14
0.02%
91.73
0.49%
286.9
2.65%
26318
5.82%
641
0.13%
0.14
0.01%
91.85
0.13%
275.0
2.68%
25257
5.29%
645
0.63%
0.14
0.03%
92.46
0.66%
392.0
2.41%
36241
5.35%
645
662
2.57%
0.14
0.10%
94.93
2.67%
1248.3
2.08%
118502
4.81%
677
2.22%
0.14
0.08%
97.12
2.30%
1268.5
1.62%
123197
3.96%
691
2.17%
0.14
0.08%
99.31
2.26%
1288.0
1.53%
127908
3.82%
704
1.87%
0.14
0.07%
101.23
1.94%
1308.2
1.57%
132429
3.53%
0.14
11.20
0.14
89.88
1190.2
210.97%
106976
7.91%
0.14
92.46
1222.9
211.98%
113063
5.69%
UOIG 13
University of Oregon Investment Group
4/26/2013
Appendix 4 – Working Capital Mode
Working Capital Model
($ in millions)
Total Revenue
Current Assets
Accounts Receivable
Days Sales Outstanding A/R
% of Revenue
Inventory
Days Inventory Outstanding
% of Revenue
Total Current Assets
% of Revenue
Long Term Assets
Net PP&E Beginning
Capital Expenditures
Acquisitions
Depreciation and Amortization
Net PP&E Ending
Total Current Assets & Net PP&E
% of Revenue
Current Liabilities
Accounts Payable
Days Payable Outstanding
% of Revenue
Short Term Debt
Days Charges Outstanding
% of Revenue
Income Taxes Payable
Days Taxes Outstanding
% of Revenue
Accrued Payroll
% of Revenue
Current Portion of Long Term Debt
% of Revenue
Other Liabilities
% of Revenue
Total Current Liabilities
% of Revenue
2009A
2010A
2011A
2012A
Q1
Q2
Q3
Q4
11/30/2012A
02/28/2013A
05/31/2013E
08/31/2013E
2013E
Q1
Q2
Q3
Q4
11/30/2013E
02/28/2014E
05/31/2014E
08/31/2014E
2014E
2015E
2016E
2017E
2018E
$71,422.00
$77,946.00
$88,915.00
$99,137.00
$23,715.00
$24,871.00
$23,989.30
$34,401.08
$106,976.38
$25,247.41
$26,317.59
$25,257.16
$36,240.92
$113,063.08
$118,501.84
$123,196.52
$127,908.29
$132,428.77
834.00
4.26
1.17%
5405.00
32.02
7.57%
6239.00
9%
884.00
4.14
1.13%
5638.00
30.62
7.23%
6522.00
8%
965.00
3.96
1.09%
6638.00
31.51
7.47%
7603.00
9%
1026.00
3.79
1.03%
7096.00
30.23
7.16%
8122.00
8%
1175.00
4.51
4.95%
8152.00
36.16
34.37%
9327.00
39%
1300.00
4.70
5.23%
7582.00
31.67
30.49%
8882.00
36%
1259.44
4.83
5.25%
7436.68
32.97
31.00%
8696.12
36%
1066.43
2.85
3.10%
7568.24
23.40
22.00%
8634.67
25%
1066.43
3.64
1.00%
7568.24
29.84
7.07%
8634.67
8%
1136.13
4.10
4.50%
8079.17
36.89
32.00%
9215.30
37%
1315.88
4.50
5.00%
8026.86
32.30
30.50%
9342.74
36%
1136.57
4.14
4.50%
8082.29
33.63
32.00%
9218.86
37%
1195.95
3.04
3.30%
8335.41
25.74
23.00%
9531.36
26%
1195.95
3.86
1.06%
8335.41
31.11
7.37%
9531.36
8%
1303.52
4.03
1.10%
8828.39
36.71
7.45%
10131.91
9%
1355.16
4.02
1.10%
9178.14
36.71
7.45%
10533.30
9%
1406.99
4.02
1.10%
9593.12
36.71
7.50%
11000.11
9%
1456.72
4.02
1.10%
9932.16
36.71
7.50%
11388.87
9%
10355.00
1250.00
0.00
728.00
10877.00
17116
15%
10900.00
1055.00
0.00
795.00
11160.00
17682
14%
11314.00
1290.00
0.00
855.00
11749.00
19352
13%
12432.00
1480.00
0.00
908.00
13004.00
21126
13%
12916.00
488.00
0.00
213.00
13191.00
22518
56%
13251.00
455.00
0.00
217.00
13489.00
22371
54%
13489.00
239.89
0.00
227.04
13501.85
22197.97252
56%
13501.85
172.01
0.00
227.07
13446.79
22081.4568
39%
12916.00
1354.90
0.00
884.11
13386.79
22021.4568
13%
13386.79
252.47
0.00
230.33
13408.93
22624.23748
53%
13408.93
263.18
0.00
231.41
13440.70
22783.44145
51%
13440.70
252.57
0.00
231.77
13461.50
22680.35898
53%
13461.50
362.41
0.00
233.22
13590.68
23122.04791
38%
13386.79
1130.63
0.00
926.73
13590.68
23122.04791
12%
13590.68
1185.02
0.00
946.85
13828.86
23960.76405
12%
13828.86
1231.97
0.00
964.09
14096.73
24630.03577
11%
14096.73
1279.08
0.00
981.33
14394.49
25394.59907
11%
14394.49
1324.29
0.00
994.26
14724.51
26113.38699
11%
5450.00
27.85
7.63%
16.00
0.08
0.02%
302.00
1.54
0.42%
1418.00
1.99%
81.00
0.11%
2014.00
2.82%
9281.00
13%
5947.00
27.85
7.63%
26.00
0.12
0.03%
322.00
1.51
0.41%
1571.00
2.02%
0.00
0.00%
2197.00
2.82%
10063.00
13%
6544.00
26.86
7.36%
0.00
0.00
0.00%
335.00
1.38
0.38%
1758.00
1.98%
900.00
1.01%
2513.00
2.83%
12050.00
14%
7303.00
26.96
7.37%
0.00
0.00
0.00%
397.00
1.47
0.40%
1832.00
1.85%
1.00
0.00%
2727.00
2.75%
12260.00
12%
8825.00
33.86
37.21%
12.00
0.05
0.05%
94.86
0.36
0.40%
1945.00
8.20%
1.00
0.00%
3353.00
14.14%
14230.86
60%
7441.00
26.93
29.92%
64.00
0.23
0.26%
185.00
0.67
0.80%
2077.00
8.35%
1.00
0.00%
3462.00
13.92%
13230.00
53%
7196.79
27.60
30.00%
0.00
0.00
0.00%
287.87
0.90
1.20%
1919.14
8.00%
0.00
0.00%
3598.39
15.00%
13002.20
54%
7740.24
20.70
22.50%
0.00
0.00
0.00%
447.21
1.20
1.30%
2064.06
6.00%
0.00
0.00%
2752.09
8.00%
13003.61
38%
7740.24
26.41
7.24%
0.00
0.00
0.00%
447.21
1.53
0.42%
2064.06
1.93%
0.00
0.00%
2752.09
2.57%
13003.61
12%
7826.70
28.21
31.00%
0.00
0.00
0.00%
100.99
0.36
0.40%
2019.79
8.00%
0.00
0.00%
3534.64
14.00%
13482.12
53%
7895.28
27.00
30.00%
0.00
0.00
0.00%
210.54
0.67
0.80%
2105.41
8.00%
0.00
0.00%
3552.87
13.50%
13764.10
52%
8082.29
29.44
32.00%
0.00
0.00
0.00%
303.09
0.90
1.20%
2020.57
8.00%
0.00
0.00%
3409.72
13.50%
13815.67
55%
8335.41
21.16
23.00%
0.00
0.00
0.00%
471.13
1.20
1.30%
2174.46
6.00%
0.00
0.00%
3080.48
8.50%
14061.48
39%
8335.41
26.91
7.37%
0.00
0.00
0.00%
471.13
1.52
0.42%
2174.46
1.92%
0.00
0.00%
3080.48
2.72%
14061.48
12%
8769.14
27.08
7.40%
0.00
0.00
0.00%
497.71
1.51
0.42%
2370.04
2.00%
0.00
0.00%
3258.80
2.75%
14895.68
13%
9116.54
27.01
7.40%
0.00
0.00
0.00%
517.43
1.52
0.42%
2463.93
2.00%
0.00
0.00%
3449.50
2.80%
15547.40
13%
9465.21
27.01
7.40%
0.00
0.00
0.00%
537.21
1.53
0.42%
2558.17
2.00%
0.00
0.00%
3581.43
2.80%
16142.03
13%
9799.73
27.01
7.40%
0.00
0.00
0.00%
556.20
1.53
0.42%
2648.58
2.00%
0.00
0.00%
3708.01
2.80%
16712.51
13%
UOIG 14
University of Oregon Investment Group
4/26/2013
Appendix 5 – Discounted Cash Flows Analysis Assumptions
1 Year Daily
1 Year Daily
Hamada Beta
Company
Beta
Weighting
SD
Variance
Price Smart, Inc
1.15
0%
0.125
Target
0.48
50%
Walmart
0.36
Fred's, Inc
1.15
Dollar General Corp.
Beta
Beta
SD
Weighting
Company
Beta
Weighting
D/E
Tax Rate
Unlevered Beta
1 Year Daily
0.71
0.10
50.00%
1.57%
Price Smart, Inc
1.15
0%
0.03
11.31%
1.12
3 Year Daily
0.64
0.05
50.00%
0.071
0.51%
Target
0.48
50%
0.28
21.97%
0.39
Costco Beta
50%
0.070
0.50%
Walmart
0.36
50%
0.18
20.50%
0.32
0%
0.119
1.42%
Fred's, Inc
1.15
0%
0.03
36.15%
1.13
0.37
0%
0.118
1.40%
Dollar General Corp.
0.37
0%
0.14
22.95%
0.34
Industry
Costco
0.42
0.71
Variance
0.50%
1.04%
Weight
67%
33%
Vasicek Beta
0.51
Weight Avgerage Unlevered Beta
1.243820231 0.13212512
0.35
Costco
0.03
17.78%
Levered Costco Beta
3 Year Daily
0.68
0.36
3 Year Daily
Hamada Beta
Company
Beta
Weighting
SD
Variance
Company
Beta
Weighting
Price Smart, Inc
1.15
0%
0.060
D/E
Tax Rate
Unlevered Beta
0.36%
Price Smart, Inc
1.15
0%
0.03
11.31%
Target
0.63
50%
1.12
0.033
0.11%
Target
0.63
50%
0.28
21.97%
Walmart
0.44
0.52
50%
0.027
0.07%
Walmart
0.44
50%
0.18
20.50%
Fred's, Inc
0.39
1.08
0%
0.049
0.24%
Fred's, Inc
1.08
0%
0.03
36.15%
Dollar General Corp.
1.06
0.47
0%
0.049
0.24%
Dollar General Corp.
0.47
0%
0.14
22.95%
0.43
Industry
Costco
0.54
0.64
0.03
17.78%
Variance
0.09%
0.25%
Weight
74%
26%
Vasicek Beta
0.56
Beta
Weight Avgerage Unlevered Beta
Costco
Levered Costco Beta
Discounted Free Cash Flow Assumptions
Tax Rate
35.00% Terminal Growth Rate
Risk Free Rate
1.70% Terminal Value
Beta
0.68 PV of Terminal Value
Market Risk Premium
7.00% Sum of PV Free Cash Flows
% Equity
97.20% Firm Value
% Debt
2.80% Total Debt
Cost of Debt
5.70% Cash & Cash Equivalents
CAPM
6.44% Market Capitalization
WACC
6.36% Fully Diluted Shares
Implied Price
120.78
Current Price
109.27
Undervalued
0.45
0.46
Considerations
2.50%
62,258
44,342
10,126
54,467
1,382
4,854
53,085
440
Avg. Industry Debt / Equity
Avg. Industry Tax Rate
Current Reinvestment Rate
Reinvestment Rate in Year 2018E
Implied Return on Capital in Perpetuity
Terminal Value as a % of Total
Implied 2014E EBITDA Multiple
Implied Multiple in Year 2018E
Free Cash Flow Growth Rate in Year 2018E
13.10%
22.58%
46.24%
5.94%
42.07%
81.4%
12.6x
9.2x
3%
Method
Comparable
DCF
Price Target
Current Price
Undervalued
Implied Price
87.94
120.78
110.93
109.27
1.52%
Weight
30.00%
70.00%
10.53%
UOIG 15
University of Oregon Investment Group
4/26/2013
WACC
Adjusted Beta
Appendix 6 –Sensitivity Analysis
121
0.78
0.73
0.68
0.63
0.58
121
7.36%
6.86%
6.36%
5.86%
5.36%
2.00%
93.70
100.69
108.78
118.24
129.45
Implied Price
Terminal Growth Rate
2.25%
2.50%
97.76
102.27
105.45
110.77
114.42
120.78
125.00
132.71
137.67
147.19
2.0%
87.9
97.3
108.8
123.3
142.0
Implied Price
Terminal Growth Rate
2.3%
2.5%
91.5
95.4
101.7
106.6
114.4
120.8
130.7
139.1
152.1
163.9
Undervalued/(Overvalued)
Terminal Growth Rate
2.75%
107.30
116.77
128.02
141.60
158.34
3.00%
112.96
123.57
136.33
151.96
171.56
Undervalued/(Overvalued)
Terminal Growth Rate
2.8%
99.7
112.1
128.0
149.0
178.0
3.0%
104.5
118.4
136.3
160.6
195.1
UOIG 16
University of Oregon Investment Group
4/26/2013
Appendix 7 – Sources
SEC Filings
Costco Wholesale Corporation Investor Relations
Costco Presentations
Earnings call transcripts
IBIS World
S&P Net Advantage
S&P Capital IQ
ONEsearch
Mergent Online
Factset
Prospectuses
Press releases
UOIG 17