Costco Wholesale Corporation runs an multinational chain of membership warehouses. The company provides a limited selection of nationally branded and private-label products across a wide range of merchandise categories, including foods, sundries, hardlines, fresh foods, softlines and other (gas stations and pharmacy), at lower prices. Costco has operations in the US, Puerto Rico, Canada, the UK, Korea, Taiwan, Japan, Mexico, Spain and Australia. The firm is headquartered in Issaquah, Washington. In 1983 the company merged with the Price Company, a US-based retailer, to form Price/Costco. By 1995, Costco had already opened its 200th warehouse, which was located in Wenatchee, Washington. In the same year, Costco created its first private label brand, Kirkland. Costco’s main strategy is to provide its members with high quality goods at the most competitive prices.
Costco’s competitors include but are not limited to Amazon.com, Best Buy, CVS Health Corporation, PetSmart, Staples, Target Corp, The Home Depot, Walgreens, Walmart, Whole Foods Market, etc. Because of Costco’s various departments, (pharmacy, gas stations, etc.), the number of competitors the firm has to deal with increases substantially. Instead of competing against soley food stores like Sam’s Club, Costco now has to take on CVS, Speedway Gas, etc due to its versatility. The reality is that the discount warehouse industry is incredibly competitive, so Costco is forced to be consistently beneficial for its members. Competition is too stiff for Costco to remain at its current level of success. The firm has to be innovative and create new ideas that will give them a competitive advantage. If not, companies like Amazon and BJ’s will lead the industry and run Costco out of business.
As per Costco’s website, the Company went public on December 5, 1985 at $1.67 per share. Costco’s peak in the market was on November 9th, 2018, when one share of the company was $237.74. The price per share closed on Friday, December 7th, 2018, at 224.86. Yahoo’s analysis has 29 recommendations that are distributed as followed: 7 analysts say Costco is a “Strong Buy”. 11 others say “Buy”, and the final 11 analysts recommend holding onto the stock. 0 people recommended selling the stock. This demonstrates that Costco is an excellent company to invest in and has opportunity to grow even more in the future.
Net sales for the 2017 fiscal year totaled $126.2 billion, an increase of nine percent from $116.1 billion in the 2016 fiscal year, with a comparable sales increase of four percent. Net income for the 2017 fiscal year was $2.68 billion, or $6.08 per share, compared to $2.35 billion, or $5.33 per share, in 2016. Revenue from membership fees increased eight percent to $2.85 billion. In just the past five years, the company rewarded shareholders with aggregate dividends of $26.61 per share, of which $19.00 related to three special dividends, translating to a dividend payout of $11.7 billion. In 2017 alone, $3.9 billion in dividends were paid out, including a special cash dividend of $7.00 per share. Additionally, stock buybacks over the past five years totaled $1.8 billion of which $473 million related to 2017. These are all excellent statistics for Costco and those who are currently investing in the company. Profits have risen and the share price has increased as well, which is of course the goal of the CEO. In my opinion, this is an excellent company to invest in with a ton of potential for the future.
To calculate the inventory turnover ratio, one must take the cost of goods sold and divide it by total inventories. Costco’s cost of goods sold in the quarter that ended in August of this year was $38,671 Mil. Costco’s Total Inventories for the same quarter was $10,833 Mil. Therefore, Costco Wholesale Corporations’ inventory turnover for that quarter was 3.57. Next, to calculate the return on assets, one must divide net income by assets. The net income for the quarter that ended in August of 2018 was $4,172 Mil. Costco’s average total tangible assets for the quarter that ended in August of 2018 was $40,218 Mil. Therefore, Costco Wholesale Corporations’ annualized return on tangible assets (ROTA) for that quarter was 10.37%. Finally, to calculate the current ratio, one must take the current assets and divide that by the current liabilities. Costco’s assets in the quarter that ended in August of 2018 was $20,289 Mil. Costco Wholesale Corporations’ liabilities in the quarter that ended in August, 2018 was $19,926 Mil. Therefore, Costco’s current ratio is 1.02.
Costco has a had a couple of major scandals that took a hit on the firm’s’ brand name. The most recent scandal being in 2013, when Costco had to pay $19.4 million to Tiffany. The famous New York Jeweler filed a lawsuit against Costco alleging that the company sold “hundreds or thousands of bogus Tiffany items”. Also in 2013, the bible scandal was when stockers at one warehouse put the bible in the “Fiction” aisle of Costco’s book section, which created an uproar, especially from religious customers.
For SWOT analysis, Costco has many strengths, including a low cost operating model. Costco’s processes are made efficient at every point, which helps the company to maintain margins despite of low price positioning. The company offers only a limited selection of national brands and private labels across a wide merchandise range. Since these are offered at low prices, the inventory turnover is very rapid which reduces the inventory costs. Costco encourages volume purchasing and therefore, the sales volume is kept high despite low prices.
For weaknesses, the firm is over dependent on the US and Canadian market for revenue generation. In 2017, the US and Canadian markets together contributed 72.7% to the net sales of the company. Furthermore, within the US, the company is highly dependent on its California locations, which added up to 30% of Costco’s U.S. net sales in 2017. Another weakness that Costco has is the limitations in product choice. A typical Costco warehouse stocks an average of about 3,700 products for sale at a particular time. Many competitors of the company such as discount retailers, supermarkets and supercenters offer a substantially larger selection of products at a particular time. For instance, The Home Depot offers approximately 30,000 to 40,000 products at its stores.
Costco has opportunities to increase sales and revenue by taking advantage of growing online retail sales. Interactive online shopping is increasingly being preferred over traditional shopping by consumers who have become more vigilant about spending money. According to in-house report, the US online retail sector recorded growth of 15.5% in 2017 and is expected to reach a value of US$447.4 billion by 2020, an increase of 50.3% since 2017. This means Costco can utilize its strength of shopping in bulk at cheap prices by using online shopping to increase sales.
Costco faces threats however, including the increase in labor costs in the US. Tight labor markets, increased overtime, government mandated increases in minimum wages and a higher proportion of full-time employees have resulted in an increase in labor costs for many of the employers. As an employee of Costco myself, I am currently making $14 an hour, and $21 an hour on Sunday. This is extremely competitive compared to Costco’s competitors, and the firm is expected to raise starting wages to $16 an hour next year. Another threat that was touched upon earlier is the intense competition that Costco faces. The company operates in a highly competitive industry, where players primarily compete on the basis of price, merchandise quality and selection, location and customer service. Costco competes with warehouse club operations across the US and Mexico (primarily Wal-Mart’s Sam’s Club and BJ’s Wholesale Club). It also competes with global, national and regional wholesalers and retailers, including supermarkets, supercenters, department and specialty stores, gasoline stations, and internet retailers across the world.