Costco Wholesale Case Study

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Stakeholders invest money with the intent to gain return in the future. It is important for stakeholders to gain access to information and evaluate the firm’s performance before they put money in it. On the other hand, it is the firm’s management team job to make decisions that would maximize the long term value of the firm’s common stock. The intent of this paper is to analyze Costco Wholesale Corporation’s financial performance and to assess how efficient the business has been over a five year period as well as to provide recommendation for financial management strategy.

The problem identified in this paper is the low margins in the industry. Because margins are low, the profitability of individual companies depends on high volume sales and efficient operations. Costco Wholesale Corporation is high-growth Retail Company. The company has experienced significant growth from 1997 to 2001, which has caught the attention of the competition. However, the numbers are decreasing because return on assets, return on equity, and asset turnover ratios have declined within the same time frame.

Costco Wholesale Corporation has been a major player in the retail industry. It is the largest wholesale club operator in the US. “The company operates about 555 membership warehouse stores serving more than 53 million cardholders in some 40 US states and Puerto Rico, Canada, Japan, Mexico, South Korea, Taiwan, and the UK, primarily under the Costco Wholesale name.” (Hoover's, Inc, 2010)

Costco’s strategy is low prices strategy. The management team has been able to pass savings to customers, keep low prices and maintain healthy margins at the same time. This has been a result of the company’s ability to become more efficient over time. The company saves on operation costs in order to provide low price while still keeping high quality products for customers. It has been constructing warehouses with inexpensive concrete floors. Selling items in bulk has allowed for operating efficiencies. Also, carrying less variety of products than other competitors has contributed to keeping inventory costs down.

High sales volume and rapid inventory turnover are very important for a firm’s financial performance. Therefore, they should not be overlooked by investors. Costco’s inventory turnover ratio of 11.7% in 2001 is the highest compared to its competitors. It is a result of operating principle that allows Costco to improve its working capital and operate much more efficiently than its competitors. For instance, Costco buys directly from manufacturers and routes purchases directly to customers in less than 24 hours. “Cross-docks never stored inventory, so all of the items delivered were reloaded and shipped that same day.” (Case study, p.6) This has increased efficiency by ensuring the trucks are operating at full capacity. It also has allowed Costco to receive cash in hand before it has to pay for the original merchandise from the manufacturer. This has resulted in a very high operating cash flow for the business. Cash is important to any company’s financial performance. It allows the company to pay its bills and invest in the business without having to use debt. According to Torres’s Common Size Financial statement Interest expense has decreased from – 0.35% in 1997 to – 0.09% in 2001. This has demonstrated Costco’s ability to reduce its overall amount of debt during these years. For example, the fact that short-term debts have increased from 0.46% in 1997 to 1.93% in 2001 and long-term debt have decreased from 16.74% of sales in 1997 to 8.52% in 2001, relates back to the decrease in Costco’s interest expense. This is a representation of the management’s team decision turn on to short-term and move away from long-term debts. In addition, the decrease in long-term debt has helped reducing total liabilities from 53.32% of total assets in 1997 to 50.46% in 2001. Costco’s current ration in 2001 is 0.94, which is...
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