Financial Statements of Costco Wholesale

¶ … Financial Statements of Costco Wholesale Corporation Reflect the Company's Mission

Despite the U.S. national economic challenges in a slowing economy, Costco Wholesale Corporation continues to portray a positive, profitable picture through its financial statements. The reason, according to Patricia Edwards, a Seattle-based retail analyst for Wentworth, Hauser & Violich: Costco is "doing the right things for the business in the long-term." (Hanacek, 2008; Harris, 2008)

In turn, as research in this study confirms, the financial factors relating to Costco reveal a clear picture of a company that through caring for its customers, as Hudson (2007) contends, presents a "model with a success that outstrips competitors, including its chief rival, Wal-Mart Stores Inc.'s Sam's Club."

In this study, Costco's financial statements, along with information from a barrage of published confirmations, not only tell a company's success story, they present a pertinent picture of a profitable company, which consequently confirms its current and projected future values for itself and its customers.

How the Financial Statements of Costco Wholesale Corporation Reflect the Company's Mission

Introduction

Every company's financial statements tell a story about the value of the business."

Tom Wheelwright, CEO of Provision Wealth Strategists (Wheelwright, 2008)

The Starting Point Costco's financial statements, as the financial statements of every other company, according to Tom Wheelwright, an adjunct professor in the Masters of Tax program at Arizona State University, as well as, the founder and CEO of Provision Wealth Strategists, relate a story about the business' value. Consequently, financial statements serve as the preliminary point for the appraisal of a business (also known as a "business valuation"). (Wheelwright, 2008) "Everybody still likes a deal," Richard Galanti, Costco's Chief Financial Officer, stresses. (Harris, 2008) as consumers cut back some of their shopping at malls, clothing sales increased at Costco's 534 warehouses. These sales simultaneously contributed to a 31% increase in profit from a year ago for Costco's second-quarter, reported during March 2008. (Harris, 2008)

During the midst of national economic challenges in a slowing economy, Costco Wholesale Corporation (www.costco.com),the Issaquah, Washington-based company, repeatedly continues to portray a positive, profitable picture in its financial statements. The reason, according to Patricia Edwards, a Seattle-based retail analyst for Wentworth, Hauser & Violich: Costco is "doing the right things for the business in the long-term." (Hanacek, 2008; Harris, 2008) Another factor contributing to Costco's profitable picture portrayed in its financial statements, while simultaneously triggering challenging considerations, links to increasing gas prices. As consumers make fewer trips to the store, to save money due to rising fuel costs, they have begun to stock up on food. This consumer trend contributes to Costco's current profits from increasing food sales, Bloomberg News reported in March, 2008. (Hanacek, 2008) "Costco's net income climbed to $327.9 million or 74 cents a share, matching Costco's previous outlook. Furthermore, revenue advanced 12% to $16.6 billion." (Hanacek, 2008) During July 2008, due to absorbing rising costs by its delay in raising prices related to increasing fuel costs, Costco reported it expects its current quarter earnings to be lower than expected. In fact, shares in Costco, previously presenting profits, plummeted approximately 12%. Costco's current decreasing profit prospect reflects a common retail dilemma accompanying economic struggles. Is it better for companies like Costco to increase product prices, potentially causing a loss of customers "or resist price hikes from suppliers as long as possible, a move that depresses profits as they absorb higher costs"? (D' Innocenzio, 2008)

Research Objectives, Goals, and Approaches

Research objectives/goals for this study include the following two objectives, developed with the goal to present a picture of Costco's financial appearance.

Objective One:

Retrieve information and factors reflected from Costco's financial statements.

Objective Two:

Examine and utilize figures retrieved from Costco's financial statements, along with other relevant published financial information, to "tell" Costco's story.

Data, Tables, Figures, and Survey/Research Results

Hanacek (2008) reports that Costco's annual sale for fiscal year 2007 total $63.1 billion. The average Costco's sales/warehouse totals $130 million. Worldwide, Costco employs 136,000 full- and part-time individuals to complete 1.3 million daily transactions. As of December 2007, 51.0 million individuals in 27.8 million households are noted to be Costco cardholders. Overall, during fiscal year 2007, Costco collected $1.4 billion in cash membership. Currently, Costco's membership renewal rate averages approximately 87%. ("The Costco formula...," 2008) Costco offers a myriad of "high-quality items across the retailing spectrum, from DVDs and 52-inch plasma TVs to brand name clothing and dishwashing detergent on down the line to food, drug and perishable items."

More than 20 years ago, the wholesale company initiated the start of its "astounding" success story when it introduced its first meat department. (Hanacek, 2008) Costco's success is reflected in figures from profits during fiscal year 2007, for example. During this year, Costco sold $1.9 billion worth of TVs. Seafood sales at Costco for fiscal year 2007 totaled $550 million. The 34.7 million rotisserie chickens the wholesale sells annually, totals $173 million. Through its in-store foodservice stands during 2007, Costco also sold 69.3 million hot dog and soda combo. (Hanacek, 2008) in addition to these reported sales during fiscal 2007, Costco posted profits evolving from the following factors:

867 million total U.S. wine sales

27.9 million prescriptions filled

2.4 million pairs of eyeglasses sold

86% membership renewal rate

31 new warehouses opened (Hanacek, 2008)

For 2007, Costco received the following acknowledgments:

in Stores Magazine - Noted to be the 8th largest retailer in the world

April 2007: by Fortune magazine - Ranked as 32nd in Fortune 500

June 2007: report in Retailing Today - 4th largest retailer in the U.S.

October/November 2007: Meat & Deli Retailer magazine - Rated Meat & Deli Retailer of the Year (Hanacek, 2008)

The Customer Is Always Right Meeting customers' needs above everything else constitutes part of Costco's "secret" success strategy.

In addition to lining up its business philosophy with the adage "the customer is always right, Costco maintains control of product stock-keeping units (SKUs) and sharply focuses on filling customer desires. Costco also pays and insures it employees so well that at times, some stockholders have complained to executives regarding employees' compensation and salary packages. Ultimately, albeit, Costco's primary profit perk stems from its concern for consumers, combined with its strategy/ability to portray a quality image. Jim Sinegal, Costco CEO sums up what this researcher proposes to be the best future plan for Costco. "take....time and make sure..." Regarding global expansion possibilities for Costco, Sinegal notes that although India and China are reportedly "two up-and-coming markets" concerns currently present challenges. India's laws currently restrict Costco's ability to conduct business there. China presents possibilities, however, Costco, is not rushing to open warehouses in China at this time. (Hudson, 2007)

Five Years of Financial Figures the following tables (1 & 2) present pertinent, partial pictures of Costco's financial data for five (5) years, from 2003-2007.

Table I: Costco Financial Statement (Costco Wholesale Corp, 2008)

Annual

Financial data in U.S. Dollars Values in Millions (Except for per share items)

Period End Date

Period Length

52 Weeks

53 Weeks

52 Weeks

Revenue

Total Revenue

Cost of Revenue, Total

Gross Profit

Selling/General/Administrative Expenses, Total

Research & Development

Depreciation/Amortization

Interest Expense (Income), Net Operating

Unusual Expense (Income)

Other Operating Expenses, Total

Operating Income

Interest Income (Expense), Net Non-Operating

Gain (Loss) on Sale of Assets

Other, Net

Income Before Tax

Income Tax - Total

Income After Tax

Net Income

Table II: Costco Financial Statement (Costco Wholesale Corp, 2008)

Annual

Financial data in U.S. Dollars Values in Millions (Except for per share items)

Period End Date

Period Length

52 Weeks

53 Weeks

52 Weeks

Net Income/Starting Line

Depreciation/Depletion

Amortization

Deferred Taxes

Non-Cash Items

Changes in Working Capital

Cash from Operating Activities

Capital Expenditures

Purchase of Fixed Assets

Other Investing Cash Flow Items, Total

Financing Cash Flow Items

Other Financing Cash Flow

Total Cash Dividends Paid

Issuance (Retirement) of Stock, Net

Issuance (Retirement) of Debt, Net

Cash from Financing Activities

Foreign Exchange Effects

Net Change in Cash

Net Cash - Beginning Balance

Net Cash - Ending Balance

Figures for Five Fiscal Years

The following four figures (1-4) present Costco's total reported revenue; total gross profit; income after taxes; gross profit and post tax income for years 2003-2007.

Figure 1: Costco's Total Reported Revenue for Years 2003-2007 (adapted from Costco Wholesale Corp, 2008)

Figure 2: Costco's Total Gross Profit for Years 2003-2007 (adapted from Costco Wholesale Corp, 2008)

Figure 3: Costco's Income after Taxes for Years 2003-2007 (adapted from Costco Wholesale Corp, 2008)

Figure 4: Costco's Gross Profit Compared to Its Post Tax Income for Years 2003-2007 (adapted from Costco Wholesale Corp, 2008)

Quantitative and Qualitative Discussion

Four Primary Financial Statements

Four primary financial components comprise a company's financial statement. These include:

balance sheets;

income statements;

cash flow statements; and statements of shareholders' equity. ("Beginners' Guide...," 2007)

Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time. Cash flow statements show the exchange of money between a company and the outside world also over a period of time. The fourth financial statement, called a "statement of shareholders' equity," shows changes in the interests of the company's shareholders over time. ("Beginners' Guide...," 2007)

To be considered profitable, a company's assets must equal, or "balance" the sum of its liabilities and shareholders' equity. Assets = Liabilities + Shareholders' Equity the following formula summarizes what a company's balance sheet pictures, followed by figure 5, which depicts this particular formula. ("Beginners' Guide...," 2007)

Figure 5: Formula Summarizing Balance Sheet (adapted from "Beginners' Guide...," 2007)

The following figure (6) presents a picture of locations of Costco's 529 warehouses, as of December 2007:

Figure 6: Locations of Costco's 529 Warehouses (Hanacek. 2008)

Financial figures presented during the course of this study relate and reinforce Costco's continuing history of making a profit from its sales. In addition, numerous publications reveal Costco's continuing growth in its number of warehouses; employee; cardholders; etc.. In turn, this researcher purports that the financial factors relating to Costco reveal a positive, profitable picture of a company that through caring for its customers, as Hudson (2007) contends, presents a "model with a success that outstrips competitors, including its chief rival, Wal-Mart Stores Inc.'s Sam's Club."

Conclusion

No one financial statement tells the complete story."

Beginners' Guide...," 2007)

As this segment's introductory quote purports, no single financial statement reveals a company's entire story. A combination of financial statements, albeit, provide vital information for investors. In turn, information retrieved from financial statements proves to be investor's best tool when he/she makes investment decisions. ("Beginners' Guide...," 2007)