Running Head: COSTCO SEC REPORT 1

SEC Report:

Costco Wholesale Corporation

Fiscal Year Ended August 28, 2016

Professor’s Name:

Course Name
COSTCO SEC REPORT 2

Costco Wholesale Corporation

Introduction and Company Background

The Costco Wholesale Corporation began as a single warehouse in Seattle, WA in 1983. As of

August 28, 2016, Costco owned 715 stores across 10 countries. Focusing primarily on the
selling of merchandise, Costco purchases products directly from national branded manufacturers
who then ship their products directly to Costco warehouses; eliminating costly and slow
processes associated with multi-step supply channels. The overall theme of Costco’s business
practice is allowing shoppers to save money through buying produce, meats, and other
merchandise in bulk quantities. This gives shoppers the opportunity to purchase more quantity at
a cheaper price than a normal grocery store or outlet store can offer (Costco Wholesale
Corporation, 2016).

The company incorporates the use of membership fees, meaning that people must first purchase
a membership card to buy merchandise – another form of revenue for Costco. Costco sends out
yearly monetary rewards to its members based on the percentage of that individuals purchases
over the year; the rewards max out at $750 and the percentage is based on the tier of membership
purchased by the customer (Costco Wholesale Corporation, 2016).

Costco offers common stock and trades on the NASDAQ Global Select market under the symbol
“COST.” As a company that continues to grow and remain successful because of its quality
merchandise and unique shopping experience, Costco’s common stock has shown steady growth
and has become a reliable choice in the stock market (Costco Wholesale Corporation, 2016).
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Income Statement

An income statement is a mandatory portion of a financial report and it details a company’s

revenues and expenses from operating and non-operating activities for a certain time period
(Walther, 2012). Costco’s consolidated statements of income showed that the company has
progressively increased revenue each year since 2014; earning at least 2.5 billion dollars more
than each previous year. Since Costco placed a concerted effort on growth in 2016, it can be
expected that 2017 will yield even more revenue than ever before. In FY 2016, Costco closed
out at $118,719 (million) of total revenue and a net income of $2,350 (million); a contributing
factor that makes Costco a serious competitor in merchandise sales. Net income decreased from
2015 to 2016 by $27 million, which is a hit on Costco’s profits, but this was likely due to
management shifts and preopening expenses needed to accommodate the opening of 26 new
warehouses in 2016. Expenses increased each year leading into 2016, but the increases were
small – approximately $500 million increases each year. These expenses pale in comparison to
Costco’s steady profit growth and expenses associated with opening new storefronts. The subtle
increase of expenses and large gains in profit are representative of Costco’s efficiency in
logistics and administrative functions (Costco Wholesale Corporation, 2016).

The cash dividends declared per share of common stock was $1.70 at the end of 2016.
Dividends declared per share of common stock at the end of FY 2015 was $6.51. This
significant decrease from 2015 to 2016 was attributed to the company’s intensive expansion of
stores. With 438,535,000 of shares outstanding at the close of FY 2016, Costco payed out
approximately $746 million in cash dividends to their stockholders (Costco Wholesale
Corporation, 2016).

Balance Sheet

The company’s balance sheet gives a comprehensive breakdown of Costco’s assets, liabilities,
and equity. The 2016 balance sheet portrays a positive financial position going into 2017. The
corporation’s total assets were $33,163 (million). The bulk of Costco’s assets rest in their
property and equipment with a total of $26,167 (million), or 79% of Costco’s total assets. This is
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no surprise as Costco has a rather large physical footprint across the U.S. and other countries
(Costco Wholesale Corporation, 2016).

As of August 28, 2016, total liabilities were at $20,831 (million). While high, liabilities were
still overshadowed by total assets giving some indications that Costco has the financial means to
pay off their debt. Of note, Costco’s long-term debt was $4,061(million), demonstrating
Costco’s publicly announced intentions to lower long-term debt carried from previous years
(Costco Wholesale Corporation, 2016).

The stockholders’ equity portion reflects that Costco does not sell or distribute preferred stock to
its shareholders, and only offers common stock. Par value for common stocks was $.005 with
900,000,000 authorized and 437,524,000 shares issued and outstanding. Total liabilities and
equity totaled $33,163 (million), and retained earnings were an income of $7,686 (million) –
retained earnings represent 23% of all liabilities and equity. These retained earnings will likely
go towards business development in 2017 as Costco intends to build at least 15 more warehouses
(Costco Wholesale Corporation, 2016).

Statement of Cash Flows

The statement of cash flows (CFS) is another required part of a company’s financial reports. It
provides information to investors so they understand how a company generates its cash through
operations and how that cash is being used, or invested. Cash is a general term used to define
cash or similar that will mature in less than 90 days. The statement of cash flows focuses
primarily on three areas: operating activities, investing activities, and financing activities
(Averkamp, n.d.). Since Costco has international stores, their CFS also includes a segment on
exchange rate changes and its effect on cash. Costco’s 2016 operating activities showed net cash
of $3,292 (million), a 23% decrease from 2015’s net cash of $4,285 (million). This was caused
by Costco’s push to build more warehouses, increasing accounts payable by $2,412 (million)
from 2015 to 2016. Costco’s investing activities show that $2,345 (million) were spent on
investing, $135 (million) less than 2015. Once again this is conducive to Costco’s geographic
expansion, and committing cash to other needs. Costco spent $2,419 (million) in 2016 on
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financing activities; 47% of this money was contributed to paying off long-term debt – a greater
contribution than any previous year (Costco Wholesale Corporation, 2016).

Ratio Analysis
(All calculation amounts in millions, except earnings per share)
Formula Ratio
Current Assets / Current
Current Ratio 15,218 / 15,575 = .98
Liabilities
The current ratio is a measure of a company’s ability to pay off short-term debt. This ratio
of .98 is low and shows that Costco has 98 cents for each dollar of liability.
20,831 / 33,163 = .0628
Debt to Total Assets Total Debt / Total Assets
63%
This is the percentage of assets that are backed by both long and short-term debt. Costco has a
high debt to asset ratio, which can be interpreted as a financial risk for investors.
Return on Stockholders Net Income – Preferred Dividends 2,350 – 0 / 12,079 = .194
Equity / Average Common Equity 19.4%
A way for stockholders to measure a company’s earnings performance. Costco’s return on
equity is close to 20% making it an appealing investment.
Income Available to Common /
2,350,000,000 / 437,524,000
Earnings per Share Weighted-Average Number of
= $5.37
Common Shares Outstanding
EPS represents the amount of earnings stockholder can receive per share of common stock.
This EPS shows that each stockholder received $5.37 per share in FY 2016.
Debt to Total Equity Total Debt / Total Equity 20,831 / 12,332 = 1.69
The debt to equity represents how much debt a company uses to finance its assets compared to
the value of the shareholder’s equity (Debt to Equity Ratio, n.d.).
(Walther, 2012).
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Horizontal Analysis

(All numbers in millions except percentages)

Balance Sheet 2015 2016 Difference $ Difference %

Receivables, Net 1,224 1,252 28 2%
Receivables are an asset and it is money that customers owe Costco through purchases on
account. Receivables have consistently increased from previous years.
Merchandise
8,908 8,969 61 1%
Inventories
This is the cost of the amount of inventory on hand. It shows that inventories had a marginal
increase, but not enough to be significant.
Cash and Cash
4,801 3,379 1,422 30%
Equivalents
This is the amount of cash or other immediately available liquid assets. Costco had a 30%
increase of cash. This cash may be used to pay off debt or reinvest back into the company.

Income Statement 2015 2016 Difference $ Difference %

Net Sales 113,666 116,073 2,407 2%
The is the revenue made from Costco’s direct sales. The 2% increase means more revenue
was made and 2016 was Costco’s most profitable year since its creation.
Membership Fees 2,533 2,646 113 4.5%
This is the revenue from Costco’s annual membership fees. This shows that in one year, the
company was able to increase memberships by 4.5%.
Merchandise Costs 101,065 102,901 1,836 1.8%
Merchandise costs are the expenses used to purchase inventory. This increase is logical
because the number of Costco’s warehouses went up, and so did merchandise costs. The more
shelves there are to fill means more merchandise is needed.
COSTCO SEC REPORT 7

Vertical Analysis

(All numbers in millions except percentages)

Income Statement Base Account: Total Revenue

Income Statement Amount Percentage of Total

Total Revenue 118,719 100%

Net Sales 116,073 (116,073/118,719) * 100 = 97.8%

Preopening Expenses 12,068 (12,068/118,719) * 100 = 10.2%

This vertical analysis show that net sales made up over 97% of Costco’s total revenue. Also,
Costco’s preopening expenses were 10.2% of the total revenue. This expense is high and reflects
the high number of new Costco stores built and opened in 2016 (Costco Wholesale Corporation,
2016).

Balance Sheet Base Account: Total Assets

Balance Sheet Amount Percentage of Total

Total Assets 33,163 100%

Short-term Investments 1,350 (1,350/33,163) * 100 = 4%

Buildings and 13,994 (13,994/33,163) * 100 = 42.2%

Improvements

This shows that Costco’s short term investments made up only 4% of the total assets. Buildings
and improvements to current structures are almost half of the total assets. As stated before, this
is congruent to number large facilities built last year (Costco Wholesale Corporation, 2016).

Competitive Analysis
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Costco continues to be a profitable business, for the welfare of the customers’ and the company,
and for the investors. The corporation continues to offer low prices and, because of this,
continues to grow its members; a steady form of revenue. Costco is not a household name in
every state yet, but it still challenges the big name companies like Target and Amazon each year
as its assets and revenues increase with each fiscal year. Costco remains consistently strong in
its growth because the company expands using only the money from its retained earnings, which
was over $7.5 billion in 2016; over a billion more than 2015. This good business practice allows
for steady progress without accumulating unnecessary amounts of long-term debt. With a current
stock price of $170.77 per share (as of April 23, 2017), the profitability and investor interest
drives this company towards future success (Nasdaq, 2017).

Conclusion

While Costco has been around for over three decades, it is still a growing company. Costco
continues to adapt to business habits just like its competitors. While 2016 may not have been as
profitable as most investors would have hoped, it is almost irrelevant due to the company’s
expansion. The Costco leadership envisions creating a merchandise dynasty over the next few
years; the financial handlings of 2016 was a calculated move towards this vision. Over time, as
revenue can catch up with the geographic footprint of Costco and the new warehouses, this
company will set itself apart by its original business practices and its high standard for quality
control. It is reasonable to expect that Costco will continue to grow as the leader for bulk
merchandise sellers in the future. Many stores attempt to replicate Costco’s environment and
quality, but most have fallen short; making Costco an example for others to follow and emulate.

References

Averkamp, H. (n.d.). Cash flow statement. Retrieved from

https://www.accountingcoach.com/cash-flow-statement/explanation/1
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Costco Wholesale Corporation. (2016). SEC 10-K report: Costco Wholesale Corporation.
Retrieved from http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-
SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2l
wYWdlPTExMTc3MzIyJkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTl
RJUkUmc3Vic2lkPTU3
Debt to Equity Ratio. (n.d.). What is the ‘debt/equity ratio?’ Retrieved from
http://www.investopedia.com/terms/d/debtequityratio.asp
Nasdaq. (2017). Costco Wholesale Corporation earnings per share. Retrieved from
http://www.nasdaq.com/symbol/cost/eps-forecast
Stock Analysis on Net. (2017). Costco Wholesale Corp. Retrieved from https://www.stock-
analysis-on.net/NASDAQ/Company/Costco-Wholesale-Corp/Valuation/Ratios
Walther, L. (2012). Principles of accounting: Chapter 16 in ACCT301. Powerpoint posted in
UMUC ACCT 301 7980 online classroom, archived at: http://learn.umuc.edu