COSTCO WHOLESALE CORPORATION WHOLESALE

FINANCIAL STATEMENT ANALYSIS (A)

By: Asmer Khan (15879)

Discounters vs Wholesale Clubs
Discounters: They differentiate themselves by de-emphasizing the shopping experience and instead
focusing on delivering items at the lowest price

Wholesale Clubs: Same premise as discounters but delivered value in a different way
 Customers have to purchase an annual membership
 Limited selection of goods (4000 SKU’s compared to 40,000 SKU’s)
Case Background
• Margarita Torres, a Costco shareholder, finds that it is time to reanalyze her
previous investments in the company, and decide whether or not these
investments are worth holding onto, or if it is time to sell her shares and look for
other investing opportunities.

• Some questions that Margarita Torres is looking to answer include:

• Will the factors that have led Costco to have such a successful growth in the past
hold consistent going forward?
• Is the company still operating efficiently?
• How has the company been affected by growth?
• Has their operational efficiency changed?
• How is Costco financing its growth and how has its capital structure evolved?
Common-Size Financial Statements

• Cash and equivalents: 3.20% of total assets in 1997 to 5.97% in 2001

• Receivables: 2.69% of total assets in 1997 to 3.22% in 2001
• Inventory: 30.79% of total assets in 1997 to 27.14% in 2001

It signifies Costco’s improving efficiency over this five-year period. Also Costco has
positively increased the liquidity of its assets and increased its inventory turnover
over this five-year period
Common-Size Financial Statements
• Interest expense: has decreased from – 0.35% in 1997 to – 0.09% in 2001
demonstrating Costco’s ability to reduce its overall amount of debt during these
years

• Short-term borrowings have increased from 0.46% in 1997 to 1.93% in 2001

and long-term debt has decreased from 16.74% in 1997 to 8.52% in 2001
relating back to the decrease in Costco’s interest expense. These numbers
represent that management’s decision throughout the past 5 years is to move
away from L/T debt and focus more on short-term debt.
Common-Size Financial Statements
• Operating Expenses: merchandise costs remained rather constant between
89.9% of net sales in 1997 to 89.63% in 2001
This reflects Costco’s ongoing attempt to provide customers with the lowest per
unit cost possible and demonstrates the increase in purchasing power obtained
through expansion

• Operating Income: rose from 2.70% in 1997 to 2.91% in 2001.

This is a positive factor, meaning that the firm became more efficient. Costco was
expanding its operations, therefore increasing its operating income.