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Costco

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  • October 2005
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Financial Statement Analysis:
Costco Wholesale (COST)

Executive Summary
Costco Wholesale is recognized as the largest wholesale club operator in the US. Over the three-year time period of 2002-2004, this company has expanded its membership base while increasing its number of warehouses both in the U.S. and internationally. In 2004 alone, net sales increased 13.1% over the prior year, driven by an increase in comparable sales of 10% and the opening of twenty new warehouses; net income increased for fiscal 2004 by 22.4%, or $1.85 per diluted share; and for the first time, the Board of Directors declared a quarterly cash dividend, with the company issuing quarterly dividends in the third and fourth quarters of $0.10 per share. Costco's ROE remained stable year-over-year from .11 in 2003 to .12 in 2004. The company has maintained a steady profit margin, shown solid liquidity ratios, and experienced minimal solvency issues. These factors will continue to give Costco the ability to provide quality products at low costs to its customers, and as a result, we would recommend purchase of this stock because it presents a low risk opportunity to diversify one's portfolio.

I. Introduction
Costco Wholesale is the largest wholesale club operator in the United States. Operating 415 stores in 36 US states, Puerto Rico, Canada, Japan, South Korea, Taiwan, and the UK, Costco offers discount prices and on average, 4,000 products ranging from alcoholic beverages, appliances, pharmaceuticals, furniture, tires and fresh food. Select clubs also offer services such as car and home insurance, mortgage and real estate services, and travel packages. In 2004 alone, Costco opened over twenty new warehouses. Costco Wholesale requires that its customers be members, a privilege requiring payment of an annual fee. At the highest tier of membership, "Executive" members can purchase additional Costco services such as insurance, mortgage services, and long-distance phone...

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