Costco Internal Assessment
Part 1

Qualitative Analysis

Brief Company Overview

Having commenced its operations in 1976 with the establishment of the very first retail warehouse club in San Diego by a warehouse club retailing pioneer by the name Sol Price, Costco has grown to become one of the largest retailers in the world. The company’s first location mainly served small enterprises and was located in a modified/adapted plane hangar (Costco, 2019). The name of this first establishment was Price Club. It was, however, not until 1983 that the first Costco was opened by James D. Sinegal and Jeffrey H. Brotman in Seattle. In 1993, the two formations (Costco and Price Club) merged to become Price/Costco, and six years later, the corporation adopted its current name.

Presently, the company is headquartered in Issaquah, Washington and company has operations in not only the United States, but also Spain, Australia, the UK, and Mexico. When it comes to Costco’s business model, it is important to note that the corporation “provides a wide selection of merchandise, plus the convenience of specialty departments and exclusive member services, all designed to make your shopping experience a pleasurable one” (Costco, 2019). In essence, the corporation engages in the operation of membership warehouses together with its various subsidiaries (Yahoo Finance, 2019). Towards this end, the corporation offers for sale “dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio products; meat, bakery, deli, and produces; and apparel and small appliances” (Yahoo Finance, 2019). Further it is also important to note that in addition to engaging in travel business and running food courts and optical dispensing centers, the corporation also operates pharmacies and gas stations. At present, Craig Jelinek serves as Costco’s CEO and president, while Hamilton E. James serves as its Chairman. The company’s mission statement is captured as “to continually provide our members with quality goods and services at the lowest possible prices” (Costco, 2019). The corporation does not have an official vision statement.

With regard to its corporate values, it is important to note that the company seeks to operate within the set legal parameters, ensure its employees are well taken care of, serve its customers in the best possible way, establish meaningful and mutually beneficial relations with suppliers, and ensure that the interests of its shareholders are taken care of (Costco, 2019). In essence, the company’s objectives revolve around ensuring that that its operations remain not only relevant, resilient, and responsible, but also in line with its code of ethics and mission statement.

The company’s full time employees number approximately 143,000 (Yahoo Finance, 2019). The most recent financial statements of the company indicate that Costco had total revenue amounting to 141.5 billion for the year ended September 2018. The net income figure for the same period was captured as 3.1 billion. Some of Costco’s key competitors include, but they are not limited to, Wal-Mart and Home Depot.

Resources

In basic terms, Costco’s tangible resources are inclusive of some of its current assets as well as fixed assets. More specifically, the company’s fixed assets as per its most recent financial statements (i.e. for the year ended September 2018) are inclusive of: land (6,193 million); buildings and improvements (16.1 billion); equipment and fixtures (7.2 billion); and construction in progress (1.1 billion). The company’s inventory, on the other hand, is indicated as 11 billion.

The company’s intangible ‘resources are inclusive of all of its assets that do not have physical substance. It should, however, be noted that Costco does not list or identify any of the more common intangible assets such as trademarks, goodwill, copyrights, as well as patens. However, some...…on Equity

(Net Income/Shareholder Equity)

0.25

0.24

Liquidity Ratios

Year

2017

2018

Current Ratio

(Current Assets/Current Liabilities)

0.99

1.08

Leverage Ratios

Year

2017

2018

Debt Ratio

(Total Debt/Total Assets)

0.70

0.68

Debt-to-Equity Ratio

(Total Debt/Total Equity)

2.34

2.17

Activity Ratios

Year

2017

2018

Receivables Turnover

(Annual Credit Sales/Accounts Receivable)

90.10

84.83

Inventory Turnover

(Cost of Goods Sold/Average Inventory)

*Average Inventory = 10,437,000,000

10.72

11.80

Summary

With regard to sales, it is important to note that the company has consistently increased its sales over the last three years under consideration – with sales growing by 19.25% over the said period. Similarly, the company’s net income has also increased over the three year period. There was also an increase in not only the current ratio, but also the return on assets ratio. It is also important to note that the company has within the last two years reduced its debt appetite. This is apparent from the reducing debt ratio. When it comes to activity ratios, the receivables turnover ratio comes in handy in the measurement of how fast an entity is in the collection of its accounts receivables. The receivables turnover ratio for Costco decreased within the two years under consideration.

In the final analysis, therefore, it is clear from the analysis above that the increase in the current ratio indicates that the company’s ability to settle its obligations has improved within the last two years under consideration. The return on assets ratio indicates that the ability of Costco’s management to effectively utilize the company’s assets in the generation of profits has improved within the last two years. The reduction in the debt appetite of the company is also welcome. In some instances, the additional interest expense associated with a high debt ratio could cause volatile earnings. The company may, however, need to work on how fast it collects its accounts receivables going forward.…