Costco Executive Summary

Costco is into Services Sector. It is part of Industry which deals with Discount &Variety Stores. Costco operates membership warehouses where it offers various types of merchandise like household consumables, Electronics, Automobile, garden etc. to its members. Costco is well diversified and also operates Pharmacies, Gas stations, Travel business etc. Thus it fulfills almost every need of its members. It boasts of 600+ warehouses across 8 countries with earnings in excess of $2 Billion on Sales of $100 Billion. It has 184,000 employees worldwide and more than 1000 suppliers who have to follow a rigid & comprehensive supply chain & quality policy.

Due to its diverse products range and low prices to its members, it has very high sale volumes and

quick turnover of inventory. Its operational efficiency and low cost of operations allow it to work profitable at lower gross margins than its competitors. It can sustain lower prices as it buys directly from manufacturers and ships them to its stores within 24 hrs through its own network of warehouses.

Due to such quick shipping times &low prices, Costco have negative working capital. It means, it converts its goods to cash even before payment for purchases are due.
One of the key membership features is Member satisfaction wherein any member can return the goods which it is not satisfied with for a full refund or exchange barring electronics which has a 90 days return policy.

Costco’s main competitors are Wal-Mart, Sam’s Club & BJ Wholesale Club to name a few apart from numerous National & international stores & retailers.

Costco has strong financials. A review of its annual reports shows that Costco believes in rewarding its shareholders by having a Liberal dividend policy. Its Dividend had been $1.03 in 2012 and jumped to $8.17 in 2013 due to Special dividend of $7.00.

Costco Debt to Equity Ratio was averaging at about 1.20 till 2012 but then it increased to 1.80. But its healthy TIE ratio of 31.82 and Current Ratio of 1.19 will help it in servicing new Long Term Debt and is not a cause of concern.Costco’s Quick ratio is on lower side at 0.60 but its Collection period is steady at 62 days. In 2012, Costco’s Sales revenues cross $100 Billion for the first time. However its Asset utilization ratio dropped indicating that increase has sales was on a higher asset base. This is something management should be concerned about.

Costco’s Profitability ratios indicate that that Its Gross profit margin is stable at 12.6%. Net profit margin has improved from 1.7% to 1.9%. Return on Assets (ROA) has improved from 6.3% to 6.7%. Return on Equity (ROE) also has shown healthy increase YoY& is currently

18.8%.

By looking at Inventory turnover ratio, we notice that Costco is able to turnover its inventory 13 times in 2013 vs. 14 times in 2012 and is consistent in this parameter. This lower turnover should be investigated and steps should be initiated to improve inventory turnover.

From Market measures, we observe that Costco’s Price to Earnings per share (P/E) Ratio is healthy 22.59 & is growing which confirms our above forecast in increase in Share price and Good buy. Also EPS of Costco is increasing Year on Year (YoY)(It has increased from $3.89 to $4.63) while Shareholders are happy with an assured & growing Dividend especially when they received an unexpected bonanza of $7.00 in Dec’12. This enthusiasm of Investors can be seen from stock price increase of 22% over last year i.e. from $85.81 to $104.56.

Based on Ratio analysis and Stock price, Costco is doing well and is an attractive buy for investors. Analysts believe that Costco’s future expansion plans will face challenges from Local laws and regulations which restrict opening/setting up of new stores/warehouses. Also there have been cases of Local communities protesting against opening of new warehouses at specific sites which in turn will increase the cost of constructing, operation and leasing of such new warehouses/stores. Also some states have enacted laws restricting large retailers in their expansion plans to protect local small businesses who will not be able to compete due to economy of scales & larger negotiating powers of Costco.

Costco’s plans to expand its market share by opening more stores are also affecting its sales in existing stores thus affecting their profitability. This is so because customer base is not increasing at the same pace as expected due to economic pressures, a sluggish job market, changing climate conditions, foreign exchange fluctuations, inflation, high energy costs, etc.