Question

6 How well is Costco performing from a financial perspective?

Use the data in case Exhibit 1 to support your answer. Use the financial ratios presented on pp. 231-232 of the text to help you diagnose Costco’s financial performance. Some answers will be rounded up.

In addition to the financial ratios, you will also need to calculate compound average growth rates (CAGR) for certain financial measures. The formula for calculating CAGR (in percentage terms) is as follows:

                 CAGR % = [ending value ÷ beginning value] 1/n – 1 × 100

                 (where n = the number of year-to-year or period-to-period changes)

Select “true” or “false” for each of the following statements concerning the data in case Exhibit 1.

a. Net sales increased from $31.6 billion in fiscal 2000 to $116.1 billion in fiscal 2016, equal to a compound average growth rate (approx. CAGR) of 8.5% since 2000; this growth rate is respectable, given the tough economic conditions that existed from 2008–2011.

b. Leverage ratios decreased over the years indicating less debt financing in comparison to assets and stockholder’s equity.

c. Total revenues (sales plus membership fees) increased from $32.2 billion in fiscal 2000 to $118.7 billion in fiscal 2016, equal to an average annual compound rate of 8.5% from 2000 through 2016.

d. Net income rose from $631 million in 2000 to $2.35 billion in 2016, a compound average growth rate of 8.6%.

e. Selling, general, and administrative expenses have decreased since fiscal 2000.

f. Diluted net income per share increased from $1.35 in 2000 to $5.33 in 2016, a compound average growth rate of 8.9%.

g. Costco’s financial performance has been in a state of volatility between 2012 to fiscal year 2016.

h. Merchandise cost as a percent of net sales has declined slightly in recent fiscal years and in 2016 was 88.6, which was the lowest since 2000.

i. Net cash provided by operating activities at Costco trended upward over the period 2000 to 2015, climbing from $1.07 billion in fiscal 2000 to $1.77 billion in fiscal 2005, to $3.44 billion in fiscal 2013, $3.9 billion in 2014, and 4.3 billion in 2015. In 2016, net cash fell to $3.3 billion.

j. From fiscal 2005 through fiscal 2016, total revenues grew at a CAGR of 6.55% in the United States.

k. From fiscal 2005 through fiscal 2016, operating income grew at a CAGR of 6.46% in the United States.

Answer 1

Costco operates on a low-cost business model, which is extremely successful for them. They strive to keep their customers coming back by providing them with the lowest possible prices every time. They also focus on providing their customers with products they will actually want and will buy. This is a very appealing business model because since they run on a membership fee and because of their extremely fast turnover rates, they know that they will be financially stable for a while.

Between 2008 and 2011 their total revenue increased by 12.34%. Their net income increased from 2010 to 2011 by 10.87% as well. Their dividends per share also increased by 13.48% between 2010 and 2011 as well, making them more appealing to shareholders. Their profitability however was fairly low, and only had a 12.6% profitability margin.