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, small-business 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 This ratio measures the ability of Company to continue his operations, so 2010 has

the advantage on this liquidity ratio.

Current 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

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.

cash debt coverage

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.

free cash flow 2009 has the advantage for this solvency ratio, based on these results, but for all

those years the company has been negative.

profit margin For all those years the company earns 1 cent for every 1 dollar in sales

asset turnover 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.

return on assets

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.

return on equity

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

This ratio measure the ability of the company to sell quick the inventory, so 2008

was the best year for Costco

Days in inventory

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