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Annul Report Project

Costco Wholesale

Corporation

Zichen Wang

Introduction Name of CEO: Craig Jelinek

Corporate Office

999 Lake Drive

Issaquah, WA 98027

Latest fiscal year ended: September 2nd 2012

Introduction Costco is mainly engaged in the operation of

membership warehouses in the United States and other

countries. It provides customers various and a wide

range of retail products.

Main locations: 622 warehouses in 41 states and Puerto

Rico

(448 locations), nine Canadian provinces (85 locations),

Mexico (32 locations), the United Kingdom (23

locations), Japan (13 locations), Korea (nine locations),

Taiwan (nine locations, through a 55%-owned

subsidiary) and Australia (three locations)

Audit Report

Auditor:

The auditor started by claiming that their audits

are following the standards of Public Company

Accounting Oversight Board (United States).

Then he stated that the company’s financial

statements referred to the standards. He also

verified that the internal control of the company

over its financial statements is well achieved.

Stock Market Information Stock price: 109.63 May 31 4:00pm ET

$77.99 – $98.59

Dividend rate is $1.03 per share

October 5, 2012

Hold it! The stock price has been going up since

2011. From the stock chart, no selling signals are

seen. Be cautious buying it because no Golden

Crossover points are found since 2011.

Income Statement

(Multi-step) 53 weeks ended September 2,

2012

52 weeks ended August 28,

2011

REVENUE

Net sales $ 97,062 87,048

Membership fees 2,075 1,867

Total revenue 99,137 88,915

OPERATING EXPENSES

Merchandise costs 86,823 77,739

Selling, general and administrative 9,518 8,691

Preopening expenses 37 46

Operating income 2,759 2,439

OTHER INCOME (EXPENSE)

Interest expense (95) (115)

Interest income and other, net 103 60

INCOME BEFORE INCOME

TAXES

2,767 2,383

Income Statement

Comparing the Income Statements of

2012 and 2011 fiscal year, we notice that

the revenue went up by a significant

amount. Although this increased account

of sales has resulted in several increased

expenses, the overall net income before

taxes is still higher than the previous fiscal

year.

ASSETS 2012 2011

CURRENT ASSETS

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,528 $ 4,009

Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,326 1,604

Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,026 965

Merchandise inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,096 6,638

Deferred income taxes and other current assets . . . . . . . . . . . . . . . . . . . . 550 490

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,526 13,706

PROPERTY AND EQUIPMENT

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,032 3,819

Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,879 10,278

Equipment and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,261 4,002

Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 374 269

19,546 18,368

Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . (6,585) (5,936)

Net property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,961 12,432

OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 653 623

TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,140 $26,761

LIABILITIES AND EQUITY

CURRENT LIABILITIES

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,303 $ 6,544

Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 900

Accrued salaries and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,832 1,758

Accrued member rewards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 661 602

Accrued sales and other taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397 335

Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 965 938

Deferred membership fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,101 973

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,260 12,050

LONG-TERM DEBT, excluding current portion . . . . . . . . . . . . . . . . . . . . . . . 1,381 1,253

DEFERRED INCOME TAXES AND OTHER LIABILITIES . . . . . . . . . . . . . . . 981 885

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,622 14,188

COMMITMENTS AND CONTINGENCIES

EQUITY

Preferred stock $.005 par value; 100,000,000 shares authorized; no

shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0

Common stock $.005 par value; 900,000,000 shares authorized;

432,350,000 and 434,266,000 shares issued and outstanding . . . . . . . 2 2

Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,369 4,516

Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . 156 373

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,834 7,111

Total Costco stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,361 12,002

Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 571

Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,518 12,573

TOTAL LIABILITIES AND EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . $27,140 $26,761

Balance Sheet

In general, the total assets increased in

2012 fiscal year comparing to 2011 fiscal

year. The current portion of long-term

debt changed the most, from 900 to 1.

Plants and equipment accounts also

increased in 2012.

Statement of Cash Flows 2012 2011

Cash flow from

operating activities

3057 3198

Cash flow from

investing activities

(1236) (1180)

Cash flow from

financing activities

(2281) (1277)

Cash and cash

equivalents

3528 4009

Cash flows from operating activities are higher than net

income from the past two years.

Statement of Cash Flows The “Additions to property and equipment”

accounts for 2012 and 2011 are (1480) and (1290)

respectively, meaning that the company is

growing through investing activities

The primary source of financing is long-term debt

in 2012 and common stock in 2011

Overall, cash has decreased over the past two

years

Accounting Policies

Revenue Recognition:

The Company generally recognizes sales,

which include shipping fees where

applicable, net of estimated returns, at the

time the member takes possession of

merchandise or receives services.

Accounting Policies

Cash and Cash Equivalents:

The Company considers as cash and cash

equivalents all highly liquid investments

with a maturity of three months or less at

the date of purchase and proceeds due

from credit and debit card transactions

with settlement terms of up to one week.

Accounting Policies Accounts Receivable

Vendor receivables include payments from vendors in the

form of volume rebates or other purchase discounts that

are evidenced by signed agreements and are reflected in

the carrying value of the inventory when earned or as the

Company progresses towards earning the rebate or

discount and as a component of merchandise costs as

the merchandise is sold.

Reinsurance receivables are held by the Company’s wholly-

owned captive insurance subsidiary.

Receivables are recorded net of an allowance for doubtful

accounts.

Accounting Policies

Inventories:

Merchandise inventories are valued at the

lower of cost or market, as determined

primarily by the retail inventory method,

and are stated using the last-in, first-out

(LIFO) method for substantially all U.S.

merchandise inventories.

Accounting Policies

Investments:

In general, short-term investments have a maturity at the date of purchase of three months to five years.

Short-term investments classified as available-for-sale are recorded at fair value using the specific identification method with the unrealized gains and losses reflected in accumulated other comprehensive income until realized.

The Company periodically evaluates unrealized losses in its investment securities for other-thantemporary impairment, using both qualitative and quantitative criteria.

Accounting Policies

Property and Equipment

Property and equipment are stated at cost.

Repair and maintenance costs are

expensed when incurred.

Topics of the Notes Summary of Significant Accounting Policies

Investments

Fair Value Measurement

Debt

Leases

Stockholders’ Equity

Stock-Based Compensation Plans

Retirement Plans Income Taxes

Net Income per Common and Common Equivalent Share

Commitments and Contingencies

Segment Reporting Quarterly Financial Data (Unaudited)

Financial Analysis Liquidity Ratios

2012 2011

Current Assets 13526 13706

Current Liabilities 12260 12050

Working Capital 1266 1656

The working capital has decreased in 2012 comparing to

2011 due to the decreased CA and increased CL during 2012.

Working Capital

Current Ratio

2012 2011

Current Assets 13526 13706

Current Liabilities 12260 12050

Working Capital 1.103 1.137

The current ratio has decreased because

CA is smaller and CL is bigger

Receivable Turnover

2012 2011

Net Sales 97062 87048

Average Receivable 995.5 924.5

Receivable Turnover 98 94

Net sales have increased significantly during 2012,

resulting in increased receivable turnover.

Average Days’ Sales Uncollected

2012 2011

Average Days’ Sales

Uncollected

3.7 3.9

Fewer days in 2012 because there are more times of

receivable going to sales in 2012 than 2011. But since

receivable turnovers are close, days sales are also close.

Inventory Turnover

2012 2011

COGS 86823 77739

Average Inventory 6867 6138

Inventory Turnover 12.6 12.7

The change is not significant because of increased COGS

and average inventory during 2012.

Average Days’ Inventory on Hand

2012 2011

Average Days’

Inventory on Hand

29.0 28.7

Quite the same because inventory turnovers are almost

identical.

Operating Cycle

2012 2011

Days Sales 3.7 3.9

Days Inventory 29.0 28.7

Operating Cycle 32.7 32.6

Since days sales and days inventory for 2012 and 2011 are

pretty close, the operating cycles for the past two years are

also quite close.

Payables Turnover

2012 2011

COGS 86823 77739

Average Accounts

Payable

6923.5 6245.5

Payables Turnover 12.5 12.4

Average Days’ Payables

2012 2011

Average Days’

Payables

29.2 29.4

Quite the same because payables turnovers are almost

identical.

Financial Analysis

Profitability Ratios

2012 2011

Net Income 1709 1462

Revenue 99137 88915

Profit Margin 1.7% 1.6%

The net income accounts in the past two years were

relatively small comparing to revenue accounts, resulting

in small profit margins.

2012 2011

Revenue 99137 87048

Average Total Assets 26950.5 25288

Asset Turnover 3.7 3.4

Asset Turnover

Return on Assets

2012 2011

Net Income 1709 1462

Average Total Assets 26950.5 25288

Return on Assets 0.063 0.058

Return on Equity

2012 2011

Net Income 1709 1462

Average Total SHE 12545.5 11751.5

Return on Equity 0.136 0.124

The company is pretty efficient in using its

assets to generate profit.

The return on assets ratio tells how

profitable the company’s assets are in

generating income. With a pretty low

profit margin multiplied by a high asset

turnover, we get a relatively normal return

on assets as retailers.

With pretty high return on equity ratios for

the past two years, we can say that the

company is efficient in generating profit

using the money of the share holders.

Financial Analysis

Market Strength Ratios 2012 2011

Net Income 1709000000 1462000000

Average

outstanding shares

434266000 433510000

Earnings per share 3.9 3.4

EPS ratio has increased during 2012, because more

income has been earned.

2012 2011

Dividend per share 1.03 0.89

Price per share 90.605 77.125

Dividend Yield 0.011 0.012

Dividend yield is relatively small comparing to the avergae

price per share.

Financial Analysis

Solvency Ratio 2012 2011

Total Liabilities 14622 14188

Total Equity 12518 12573

Debt to Equity 1.168 1.128

Total liabilities exceed total equity is the past two years, meaning that the creditors’

money plays a more important role than share holders.

2012 2011

Days Payable 29.2 29.4

Days Inventory 29.0 28.7

Days AR 3.7 3.9

Financing Gap -3.5 -3.2

Yes, there were financing gaps in 2012 and 2011. However, since the interest

rates are so low, it is reasonable to borrow more money.

Industry Situation &

Company Plans Not only maintaining, but also booming its performance

during the financial crisis, Costco has been thriving, and

its price per share has also doubled since 2009. Now,

Costco is one of the largest retailers in the U.S, and the

7th biggest in the world, according to the 2012 Annual

Report. Costco is one of the fastest growing industries

during the period of the financial crisis. As we can see in

the data shown in its 2012 annual report, net income

has increased significantly. In fact, they had “the best

results in Costco’s 29-year history” (Brotman, Jelinek).

One of the goals in 2012 fiscal year was to decrease

expenses, which was also achieved “by 17 basis points”.

The stock price has been rising since 2009, and there is

no sign that it will come down recently. So what sets

Costco apart from its competitors in this especially

difficult economical situation?

Industry Situation &

Company Plans The unique business philosophy is one of the most important

factors that are driving Costco on a high way for the past 5

years. According to the article titled Costco CEO Craig Jelinek

Leads the Cheapest, Happiest Company in the World, Costco

sets the per hour salary for its employees way above the

standard of other retailers in the U.S. With an average of

$20.89 comparing to Walmart’s $12.67, Costco dedicates to

incentive its employees with higher salaries to encourage

them to work harder and hence make more profit.

Any other spot light for Costco is its “bulk sale”. Article named

How A Trip To Costco Can Work As An Investment Strategy

points out that customers can just save a lot of money by

coming to the warehouse once and get everything they need

and save all the transaction fees if they go to the store

regularly. Also with inflation, it is always good to get real stuff

as early as possible, even save some for the future.

Industry Situation &

Company Plans So, what’s the future plan for Costco? From the letter to

shareholders in its 2012 annual report, the CEO states that

customer loyalty and the locations for the warehouses has

increased in 2012. Since Costco is a membership based retailer,

the customer loyalty and very important in terms of its financial

performances. Therefore, it looks like Costco will continue working

on enhancing the customer loyalty around the globe.

Costco opened 17 new locations in 2012, says in the annual

report, and planed to “open approximately 30 new warehouses

in fiscal 2013”. It is certain that expanding the locations in

Costco’s one of the biggest financial plans in the coming years.

Since highly salary-encouraged employees have brought the

company huge success, it is clear that the company will

continue this policy. The CEO wrote a letter the president Obama

about raising the minimum salary around the country. Although

the congress declined his proposal, we can clearly see that this is

Costco way in the next few years.

Executive Summary Great company to invest! The financial crisis since late 2008

has been a disaster for most of the retail industries. People’s

willing to purchase has been at its lowest since a few

decades. However, if you look at Costco’s financial

performance in the past 5 years, you will find it certainly

stands out from its competitors. As the data in the previous

slides show the booming performance of the company, such

as increasing net income, average price per share, and

decreasing expenses, Costco is really on the right track. If we

take a look into its annual reports from the previous years, we

will find the same positive changes throughout a relatively

long period.

As my conclusion, this is a great company to invest. With its

increasingly better reputation build-up among customers

these years, investing in Costco is also more reliable and a

wise decision.

Sources Used

http://www.businessweek.com/articles/2013-06-

06/costco-ceo-craig-jelinek-leads-the-cheapest-

happiest-company-in-the-world#p1

http://www.npr.org/2013/05/30/186450423/how-a-trip-

to-costco-can-work-as-an-investment-strategy