The Financial Status of Costco

1. Introduction: Provide a brief background of the company and description of its business.
Costco Wholesale Corporation provides wholesale goods in a variety of disparate areas including electronics, food and kitchen supplies, basic textiles, automotive parts, and many others including furniture and jewelry. Its business, therefore, is centered upon provisioning the greatest amount of quantity of goods for the most reasonable prices. This company was founded in 1976 in California and was originally known as Price Club. Today it has expanded throughout the continental United States. Its basic business model is that people must pay a membership fee in order to join the company shop in its myriad wholesale locations. There are varying forms of membership, each of which has different benefits.
2. Economy: Assess the overall economic outlook.
The overall economic outlook for Costco is fairly stable. In terms of macro factors, the global economy has considerably improved within the past 10 years, and in reality could not have gotten much worse. This fact has aided Costco stateside because the domestic economy has followed suit. In particular, it has been abetted by the recent amendments in tax legislation which are beneficial to a number of corporate interests. Economically, Costco has been advantaged by multiple openings of warehouse locations across the country (Costco Wholesale), which increases its propensity for achieving business objectives. Costco’s average sales per warehouse has been steadily increasing over the last 10 years (Costco Wholesale), indicative of its overall economic progress.
3. Industry: Perform a brief analysis of the company’s industry. Assess the competitive environment. Who are the company’s major competitor(s)? What are the key success factors?
Although Costco is technically considered a wholesaler, it is worth noting that a significant portion of its business is focused on retail activities. Numerous members simply enroll in this organization to capitalize on the advantageous prices at a wholesale scale, in some instances. Thus, Costco is in a substantially competitive environment which includes both wholesale entities and retail ones. Of the latter, its major “competitor” (Cascii 26) is predominantly Wal-Mart.
These two entities routinely compete for the largest retailer in various categories such as food supplies. Other significant forms of competition are found among conventional physical location retailers and wholesalers, such as Target. However, Costco is significantly challenged by online activities. Formidable competitors in this space include Amazon and Wal-Mart.
4. What are the strengths and weaknesses of the company in operations, marketing, management, and corporate governance? Assess the firm’s strategy. (2 paragraphs).
The company’s strength in terms of operations is its accessibility. With e-commerce opportunities and numerous physical locations in abundance, it is readily accessible. However, it must contend with costs associated with both operating physical stores and staffing warehouses for e-commerce. Part of Costco’s marketing appeal is the wide varieties of goods and services it provides, including gasoline and benefits such as nitrogen inflated tires.
However, it could devote more energy to marketing its online services. Costco’s strength in corporate governance is orderly by-laws and procedures with which it governs the interests of the shareholders and stakeholders. Its weakness is the lack of accountability that its officers have to those shareholders. The management’s strength is largely the recognizable brand which is Costco and which resonates with consumers. Its weakness is the division of its interests among such a multifaceted line of business.
5. Financial ratio analysis: (From PMBA 5225). Perform a financial ratio analysis for the firm for the past three years. Analyze the company’s performance in the areas of liquidity, asset management, financial leverage, and profitability.
The financial health of Costco is relatively solid. An analysis of the company’s balance sheet and inventory statement proves this fact. When looking at these documents in terms of Costco’s financial ratio analysis for the past three years in the areas of liquidity, financial leverage, asset management and profitability, it is clear that Costco is not in any sort of financial danger. Its liquidity of 55.66 in 2017 was the highest it has been in three years, which is impressive (Costco Wholesale, 2018). Although its financial leverage was at the lowest since 2016 (of the past three years), it did not get extraordinarily high in 2017. Its profitability—expressed in its return of a assets ratio of .73—also was the highest it has been in three years, indicating financial growth.
Liquidity: 36347/6573=55.66 for 2017 assets divided by current liabilities want highest
33163/4,061= 8.162016
33017/4852= 6.08
Asset Mg: 2017 126172 net sales/inventory 18161=6.94=INVENTory turnover ratio
16 116073/17043=6.81
15 113,666/15401=7.3
Profitability: return on assets ratio net income/total assets
2017 2,679/36347=.073
16 2,350/33163=.070
15 2,377/33017= .071
Financial Leverage: total liabilities/total assets= debt ratio wantthe lowest
2017 6573/36347=.180
2016 4061/33163=.122
2015 4852/33017=.146
6. Capital Structure: Examine the firm’s current capital structure.
Costco’s current leverage-related ratio is expressed in this report as its debt ratio, which was the lowest it had been in three years since 2016 at .122. It ended 2017 at .180. Significantly, the cash dividends declared per common share in 2017 was also the highest it has been in three years at 8.90, signifying that its capital structure is highly related to cash. However, the projection of the financial needs of this company is relatively stable. Nonetheless, it would likely be beneficial for Costco to anticipate some sort of future borrowings to account for the high valuation of cash for its current capital structure. In this regard, it is best for Costco to take on more equity—as opposed to taking on more debt—to offset this likely future occurrence.
7. Cost of capital: After you obtain an estimate of the company’s Beta from a financial website, estimate the company’s cost of equity using the Capital Asset Pricing Model (CAPM).
Predicated on the foregoing information that the risk-free rate is equitable to the current 10-year U.S. Treasury Bond yield of 2.53, and the information provided by a financial website that the current Beta for Costco’s stock is 1.05 (Macroexis, 2018), as well as the fact that the market risk premium is at 6 percent, Costco’s price of equity is estimated at 2.593 when incorporating the formula known as the Capital Asset Pricing Model. Moreover, based on this cost of equity and an ensuing cost of debt largely correlated to the aforementioned cost of equity, Costco’s weighted average cost of capital does not exceed 2.5. Thus, were Costco to become and equity only firm by paying off its debt in entirety, its Beta, cost of equity Re and weighted average cost of capital should increase accordingly. The critical factor is that relationships between the firm’s leverage, financial risk and overall cost of capital are causal in nature.
8. Economic value added (EVA). Estimate the EVA for the company for the most recent fiscal year. Interpret the results.
When attempting to estimate the economic value added to Costco for its most recent fiscal year—which completed in 2017—it is necessary to consider a host of factors. Specifically, one is responsible for subtracting the cost of capital from the return of capital. After doing so, one is then required to multiply that amount by the amount of capital invested in the project. Therefore, when applying this formula to Costco for its financial findings for 2017, the cost of capital for this organization has already been demonstrated to be 2.593. This figure is commensurate to its cost of equity. The return of capital for this particular year is approximately 2.00. Thus, the difference is .593 which, when multiplied by the cost of capital, gives a sum not excessively higher than that of the cost. Thus, this figure reveals that Costco’s financial prowess is not less than should be expected, and is worthy of inspiring confidence in an investor.
9. Firm valuation using comparable analysis: What is the market assessment of the company’s growth prospects based on its P/E ratio compared to those of the industry peers?
The market assessment of Costco’s growth prospects based on its price to earnings ratio is largely propitious. This fact becomes particularly eminent when compared to the price earnings ratio of Costco’s competitors which, for the purpose of this assignment, may very well be considered its peers. What is significant about these facts is that Costco has maintained a favorable balance of its current share price to its per share earnings. Some of its competitors, most notably Target, are not able to make this claim—especially during the epoch immediately preceding the security breach Target endured near the end of 2013 (Abrams, 2013). Based on this assessment, it appears that Costco’s financial prowess is secure for the next couple of years.
10. Recommendation: Should your small investment company invest in Costco? What one key recommendation would you make to Costco’s senior management to create further value for its shareholders?
Overall, it greatly appears as though the small investment company represented by this author (for the purposes of this assignment) in fact should invest in Costco. Its line of business has propagated fairly well despite a number of significant developments within the industry in the past 10 years. Both paid membership and average sales per warehouse have inclined for much of this time period. Perhaps the one key recommendation I would deliver to Costco’s senior management to create further value for shareholders is to further entrench itself in the e-commerce market. Although conventional physical shopping will endure (Ellis 14-15), the process of comparing prices between bricks and mortar location and online entities will persist (Ellis 14-15). Costco must avail itself of this opportunity.
Works Cited
Abrams, Rachel. “Target to Pay $18.5 Million to 47 States in Security Breach Settlement.” www.nytimes.com 2017. Web. https://www.nytimes.com/2017/05/23/business/target-security-breach-settlement.html
Ellis, James E. “Why Costco Is Lagging Online.” Bloomberg Businessweek. 4535(1), 14-15.
Cascio, Wayne. “Decency Means More than "Always Low Prices": A Comparison of Costco to Wal-Mart's Sam's Club.” Academy of Management Perspectives. Vol. 20, issue 3, 26-37.
Costco Wholesale. “Annual Report 2017”. http://investor.costco.com/ 2018. Web. http://investor.costco.com/phoenix.zhtml?c=83830&p=irol-reportsannual
Macroexis. Costco wholesale Beta. https://www.macroaxis.com/
2018 Web. https://www.macroaxis.com/invest/ratio/COST--Beta