Financial Analysis

Financial Analysis of Costco

Introduction

This paper presents a financial analysis of Costco Wholesale Corporation using different financial models.

Company Overview

Costco Wholesale Corporation, which commenced operations in 1983 in Seattle, originated the membership wholesale club retail concept. By providing low prices on consumables like fresh foods, health and beauty care items, high-quality apparel, electronics, hardware, jewelry and other general merchandise, the company pioneered the retail concept that encourages members to visit regularly to achieve savings; meanwhile, the retailer has been successful in encouraging members to spend the savings on impulse big-ticket, discretionary purchases.

Today, Costco operates about 429 membership warehouse stores across 40 US states. Costco has 64.0 million members. The company's stores stock 3,900 products on average, ranging from alcoholic beverages to appliances to fresh food. Customers become a member by paying an annual fee to shop at Costco stores. This membership format is designed to promote customer loyalty and provide a recurring revenue stream, which in turn helps the company lower retail prices. Costco member renewal rates are strong, and have varied between 85.0% and 88.0% during the past five years (ww.costco.com/).

Costco has been increasing its selection of fresh food and specialty stores, such as optical departments and gas stations in the five years to 2012. The decision to expand its product range follows strong competition from Sam's Club and Target, which also offer consumables at discounted prices. Along with the expansion of products, Costco has been expanding its premium private-label, Kirkland Signature, to differentiate the company's offerings from intense competition. The company has about 300 Kirkland Signature items in 2012. Nonetheless, the most significant threat to Costco's growth is its overexpansion, which contributed to negative comparable-store sales growth in 2009. By building new stores relatively close to an existing store, the new location can sap customers from the old store, thereby hampering comparable-store sales. As a result, the company has announced it will slow its domestic expansion plans, opening only 13 domestic stores in 2011, down from a peak of 25 new domestic stores in 2005.

Publicly listed, Costco operates over 400 membership-only warehouse clubs in the US. Costco stores offer discount prices on an average of around 4,000 products (many in bulk packaging). Aside from its retail and wholesale business, Costco also offers products and services such as car and home insurance, banking, travel packages, identity protection, mortgage and real estate services, and business-only services such as credit card processing, payroll services, health and dental insurance, and more. The company believes that requiring membership provides greater customer loyalty. There are three tiers of membership: Business (US$55 annually); Gold Star (US$55); and Executive (offering additional services for a reduced rate, US$110). The company's membership renewal rate is nearly 90%.

Through its offering of bulk-sized products, Costco benefits from purchasing by small business owners. The business membership is designed for consumers who purchase supplies and food for their business, but they often purchase other items for personal use in the same or separate transactions. Therefore, it is difficult to distinguish accurately the ...