Case Study: Costco Wholesale Corp. Financial Statement Analysis (A) A-186A
1. Chief elements of Costco’s Strategy
Costco’s strategy relies on 3 main components: Customers, Supplier and Operating efficiency. Costco delivers the value to its customers by: products provided by no more than 14% over distributors price, Lowest per unit price in the optimal container, Kirkland brand name quality at discount prices. Costco target the customer segment of middle class customers in addition to small business. Costco delivers the value to its suppliers by: Offering a broad distribution channel, Few SKUs allowing manufactures to reduce production costs, and so being a powerful purchaser. Costco achieves very good operating efficiency by: Running stores in no-frills warehouse facilities, reducing capital expenditures, cross-docking to reduce transportation costs. By gearing up such strategy with its business model, Costco was able to achieve a very competitive position with the largest market share.
2. Costco’s Business Model
Costco’s business model depends on bulk sales to member customer leading to quick inventory turnover, made possible by low prices and limited product selection among a wide variety of branded and private label products. Costco looks to achieve the maximum possible savings and passes these savings on to consumers in the form of low prices.
3. Costco performance from a financial perspective
To analyze the performance of Costco from a financial perspective, one need to analyze the different information provided in different statements, the table below provides a summary of different observations, and then a conclusion will follow after.
Reference Exhibit 5
Observation Warehouse in Operation Net warehouses added from 1997 to 2000 respectively are: 9,18,16,23. In 2001, 34 warehouses are added.
Analysis The number of warehouses added during 2001 is the maximum during the previous 5 years, with a difference of 11 relative to the greatest number of warehouses openings in a single year (34 – 23 = 11). This gives an indication that Costco is doing great expansions. A maximum number of added memberships gives a sign that Costco is looking attractive to consumers.
Members at Year End Number of memberships added from 1998 – 2000 respectively is: 948, 1112, 1249 (Thousands). In 2001, 2404 Thousand memberships has been added.
Reference Exhibit 9
Observation Membership fees and other sources of revenue from 1.82% in 1997 to 1.93% in 2001 Merchandise Costs decreased from 89.9% of net sales in 1997 to 89.57% in 2000, then slightly increased in 2001 to be 89.63% SG&A Costs decreased from 8.74% of net sales in 1997 to 8.67% in 1999, then slightly increased in 2000 and 2001 to reach 9.17% Total Operating expenses decreased from 99.11% of net sales in 1997 to 98.44% in 2000, then slightly increased in 2001 to be 99.03% Operating Income has increased from 2.7% in 1997 to 3.28% in 2000, then decreased to 2.91% in 2001. Net income follows the same trend. Interest expense falls from 0.35% in 1997 to 0.09% in 2001. Discontinued Operations is always constant at 0% Cash and equivalent has increased from 3.2% in 1997 to 6.07% in 2000, then decreased to 5.97% in 2001. Receivables decreased from 2.69% in 1997 to 2.02% in 2000, then increased in 2001 to be 3.22%
Analysis A consequence of increased fees and increased memberships.
Emphasis Costco’s ongoing attempt to provide customers with the lowest per unit cost possible, yet, the increase in the last year may be linked to the tendency of Costco to expand its selection of name brand products and adding ancillary services. Appears to be consistent with the expansions that Costco is undergoing in 2000 and 2001.
Also relates to expansions.
Costco became more efficient during 1997 – 2000. As a result of increased expenses in 2001, net income is slightly affected.
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