Business Case Study: Costco Wholesale Corporation

Costco Wholesale Corporation (NASDAQ: COST), headquartered in Issaquah, Washington, is U.S.-based warehouse club. Utilizing a fee-based structure, its broad range of merchandise is made exclusively available to its members. Behind Walmart and Kroger, Costco stands as the third seller of groceries. Within its membership warehouse niche, Costco is largest, dominating the landscape. Launched in 1983 out of San Diego, CA, its first warehouse was first located in Seattle. Over the ensuing 31 years, Costco has scaled its operations to over 650 locations, 72% of which are located in the United States and Puerto Rico. The remaining locations are dispersed as follows: 88 in Canada, 33 in Mexico, 26 in the United Kingdom, 20 in Japan, 11 in Korea,

Costco also has experienced stable net income growth, however this growth has slowed this past year and fell to under 1% from the previous year’s 20%. Wal-Mart has had generally unstable net income growth; year-to-year growth has fluctuated between 14.33% to -5.75% (see Figure A). Costco does have a high cash flow from operations percentage and higher quality of income compared to Wal Mart, and this yields a growth in total assets as Costco is able to invest more with it’s cash on hand. Costco has a smaller dividend yield (0.97) than both Wal-Mart (2.28) and the industry average (1.90). Costco’s return on assets has had steady growth, though it fell 8.45% this year. Costco’s inventory turnover strategies are apparent; its ratio is 50% higher than Wal-Mart’s. Costco’s return on equity, though growing, is seeing a sharp decline in growth rate. Costco’s return on assets ratio also has had steady growth, but declined this past year. Lastly, earnings per share is also seeing a sharp decline in growth. However, the Price/Earnings ratio (30.6%) is still on a very sharp incline and is significantly higher than both Wal-Mart (17.7%) and the industry average