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Flash Player 9 or higher is required to view the chart Click here to download Flash Player now See all Bulls Reasons Bulls: Reasons To Buy Costco Quaterly Report Beats Forecasts 100% agree Costco Quaterly Report Beats Forecasts Quarterly Report Tops Wall Street Forecasts The bulk discounter reported a 32% increase in its fiscal third quarter profit, topping Wall Street expectations, as cash squeezed customers flocked to its warehouse clubs in search of bargains on food, toiletries, TVs and... read more View or Edit Reason 2 votes 100% agree Electronics Retailers with Momentum 100% agree Electronics Retailers with Momentum Discount retailers and wholesale clubs like Costco and Wal-Mart continue to pull market share from the established electronics leaders like Best Buy. Yet another example of the retail spending transformation we've been seeing in ChangeWave surveys all year. Although... read more View or Edit Reason 1 votes 100% agree Law passed in favor of company 100% agree Law passed in favor of company The new California law that decreases Costco's employee's pay, will contribute to helping the company increase their total amount of stores. The more stores Costco gets, the more memberships they will receive. All in all this will increase the companies total revenues each year. View or Edit Reason 1 votes 100% agree Add your own Bulls Reason See all Bears Reasons Bears: Reasons To Sell Context of margin and employee policy 0% agree Context of margin and employee policy The context of the company's margins and employee policy needs to be explained a little better. Costco's entire business model is predicated on low margins and high volume, and the company's high employee cost is favorable as it creates low turnover, attracts better... read more View or Edit Reason 0 votes 0% agree Low margins 0% agree Low margins Costco has had consistently low profit margins in past years, and Costco's ability to increase margins is limited by its high employee cost. View or Edit Reason 0 votes 0% agree Costco has been raising membership fees annually for the past 5 years 0% agree Costco has been raising membership fees annually for the past 5 years Costco has been raising membership fees annually for the past 5 years. Since Costco heavily relies on renewed and new memberships, increased fees may drive consumers to competing warehouse clubs. View or Edit Reason 0 votes 0% agree Add your own Bears Reason Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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Costco's low prices help the retailer maintain positive growth during rough economic times. For example, in Q4 2008, as the 2008 Financial Crisis hit its peak, Costco's sales increased 13% with a 9% jump in comparable store sales.^[5]

Costco's biggest concern is overexpansion and cannibalization of existing store locations, which the company claims had a 2.67% negative effect on its 2008 comparable store sales.^[3] As a result, the company has announced it will slow its domestic expansion plans, opening 15 domestic stores in 2008 and 19 in 2009, down from a peak of 25 new domestic stores in 2005.^[1] Costco will instead look to international markets for future growth, with plans to open a new store in Australia and an additional 13 stores in new international markets during 2009-2010.^[6]

[edit] Company Overview

Costco operates 512 locations stores of its membership-only warehouse club^[1] that sell general merchandise including fresh and packaged foods, appliances, and apparel. Almost 80% of the company's stores are in the U.S., with additional stores in Canada, Korea, Japan, Taiwan, and the United Kingdom.^[1] The United States also accounted for almost 80% of the company's sales, followed by Canada at 15% and other international sales representing 7% of its 2008 revenue.^[7]

Costco Revenue Breakdown by Geographic Region ^[7]

[edit] Products

The company focuses on selling high volumes of its merchandise at low prices at its warehouses worldwide, which together earned about $71 billion in revenue in 2008.^[2] This represents a 12.5% increase in sales from 2007, which the company attributes to an 8% increase in comparable store sales and the opening of 24 new warehouses during 2008.^[4] In 2009, Costco plans to open 25 new locations, 19 of which will be in the U.S.^[8] Costco's merchandise categories include:

• Sundries which include candy, snack foods, alcoholic and non-alcoholic beverages, and cleaning supplies. In 2008, sundries accounted for 22% of Costco's sales.^[9]
• Hardlines which include major appliances, hardware, electronics, and sporting goods. Hardlines represented 19% of Costco's revenue in 2008.^[9]
• Dry and packaged food sales which earned 20% of Costco's 2008 revenue.^[9]
• Softlines including apparel, jewelry, and small appliances, which accounted for 10% of Costco's 2008 sales.^[9]
• Fresh food sales, like meat and baked goods, which accounted for 12% of Costco's 2008 sales.^[9]
• Other items which include gasoline, pharmacy sales, and Costco's one-hour photo development. In 2008, these items represented 17% of Costco's revenue.^[9]

Costco Sales Breakdown by Merchandise Category ^[9]

[edit] Financial Analysis

Costco 5 Year Financial Performance ^[2]

Costco earned $71 billion in revenue in 2008, a 12.5% increase from 2007.^[2] Furthermore, Costco's 2008 sales mark a 50% growth in revenue since 2004^[2], primarily due to an average 7.8% annual increase in comparable store sales^[2] as well as the opening of an average of 23 new stores each year.^[2] In 2008, U.S. sales increased 10.4%, revenue from Canadian operations grew 20.7%, and Costco's other international sales increased by 21.9%.^[7] This growth was primarily driven by a 6% and 15% increase in domestic and international comparable store sales each respectively, contributing to an overall 8% increase in Costco's comparable store sales.^[2] The increases in comparable store sales were primarily due to slightly higher average amounts spent by consumers as well as higher gas prices.^[3] In 2008, Costco operated at a 10.53% gross margin, up slightly from 10.52% in 2007 due to 0.24% increase in sales higher margin categories, primarily food and sundries.^[10]

Similar to its main competitor Wal-Mart, Costco is also vulnerable to cannibalization from existing stores because of overexpansion. For example, Costco attributes cannibalization to its slowing growth in comparable store sales since 2005. Costco's domestic comparable store sales have increased an average of 6% annually from 2005 to 2008, down from 9% in 2004.^[2] Additionally, Costco's 6% increase in comparable store sales in 2008 is deceptive as higher gas prices in 2008 contributed to 2.67% of this growth.^[3] As a result, the company has reduced its domestic expansion plans, opening 15 domestic stores in 2008 and 19 planned openings in 2009, down from its peak of 25 new domestic stores in 2005.^[1]

Costco's operating margin reached 2.77% in 2008, up from 2.55% in 2007, which was mainly due to the slight increase in gross margin.^[2] As a result, Costco's net income reached $1.28 billion in 2008, a 18.5% increase from 2007, which outpaced the company's 12.5% growth in revenue.^[11]

[edit] Business Growth

For the month of October 2008 (4 weeks ending November 2, 2008), Costco reported total sales of $5.30 billion, which is an increase of 2% from the $5.21 billion sales made in the same four-week period of 2007. Comparable sales for October for stores outside the US increase by 9% in local currency, while gasoline price increases did not have significant effect on October's sales.

Including the effect of foreign currency exchange rate fluctuations, during the four-week and nine-week periods ending November 2, 2008, comparable sales were:

[edit] Trends and Forces

[edit] Overexpansion Leads to Cannibalization of Sales

Costco's domestic comparable store sales have increased an average of 6% annually between 2005 and 2008, down from 9% in 2004.^[2] Like most retailers, Costco's long term sales and net income growth depends primarily on opening new stores and expansion into new markets. However, Costco's overexpansion domestically risks cannibalizing the sales of preexisting stores, essentially competing with itself.

Costco Store Locations by Country ^[1]

As a result of domestic overexpansion, Costco reduced its expansion plans for 2008 and 2009 and switched focus to opening new stores in new markets internationally. For example, Costco opened 24 new stores in 2008, compared to its 2007 forecast of 35 new stores.^[13] Furthermore, the company plans to open a new store in Australia and an additional 13 stores in new international markets during 2009-2010.^[6]

[edit] Higher Employee Pay Leads to Better Performance

Costco's employees are paid significantly more than its competitors. For example, Costco employees are paid an average of $16 per hour, while Wal-Mart employees earn an average $9.68/hr.^[14] Costco is also known for providing its employees with better benefits- Costco covers almost 90% of its employees health insurance premiums, compared to 60% coverage at Wal-Mart.^[15] These higher labor expenses contribute to Costco's 2.77% operating margin^[2], which is lower than Wal-Mart's Sam's Club operating margin of 3.65%.^[16]

The upside to Costco’s high employee costs is increased productivity - in 2005, Costco earned $13,647 in operating profit per hourly employee, compared to $11,039 per employee at Wal-Mart.^[14] Additionally, Costco has a lower employee turnover than the competition, which saves them money on employee recruiting and training costs. For example, Costco's employee turnover rate is slightly above 20%, significantly less than the industry average of 65% or Wal-Mart's 50% turnover rate.^[14] According to a 2005 Rutgers University Study, Costco's lower turnover rate saves the company between $1.5 to $2 million in hiring and training costs each year.^[14]

[edit] Low Prices Attract Customers During Weakened Economy

Because of its low prices and bulk product offerings, Costco is an ideal place for customers to stretch their dollars in times of an economic downturn. For example, the subprime lending crisis and 2007 Credit Crunch drastically reduced the levels of dispensable income for many consumers. In Q4 2008, Costco's sales grew by 13%, driven primarily by a 9% increase in comparable store sales as consumers gravitated towards Costco's low prices in the weakened U.S. economy.^[5]

[edit] Competition

Costco is the largest retailer in the warehouse club market in terms of sales.^[2] Costco's main competition is Wal-Mart's Sam's Club. BJ's, a smaller retail warehouse chain, also competes with Costco and Sam's Club. The three companies share a similar business model, selling high volumes of merhandise at low prices in a membership-only warehouse club. Each company sells a similar array of general merchandise, including food, apparel, and gasoline.

• Sam's Club operates 591 warehouse clubs nationwide and earned $44.4 billion in revenue in 2008.^[16]
• BJ's operates 177 warehouse clubs across 16 states in the eastern U.S.^[17] In 2007, the company earned $9.0 billion in revenue.

 Costco Wholesale

	Select All  |  Select None Metrics Inventory Long Term Debt Sales per Store Membership Fee per Customer Net Income Operating Income Comparable Sales Growth Number of Stores Revenue from Membership Fees Cancel

	Select All  |  Select None Companies Costco Wholesale (COST) BJ's Wholesale Club (BJ) PriceSmart (PSMT) Cancel

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Company	Data From	Comparable Sales Growth	Number of Stores	Revenue from Membership Fees
BJ's Wholesale Club (BJ)	2006	1.2%[22]	172[23]	$177M[24]
Costco Wholesale (COST)	2007	6%[25]	488[25]	$1.31B[25]
PriceSmart (PSMT)	2007	20.1%[26]	23[27]	$13.9M[28]

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See all Discount Clubs Industry WikiData

[edit] References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5} COST 2008 10-K, Item 2, pg. 14
2. ↑ ^{2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 2.11 2.12} COST 2008 10-K, Item 6, pg. 16
3. ↑ ^{3.0 3.1 3.2 3.3} COST 2008 10-K, Item 7, pg. 19
4. ↑ ^{4.0 4.1} COST 2008 10-K, Item 7, pg. 17
5. ↑ ^{5.0 5.1} "Costco Drives a Hard Bargain" 10/10/2008
6. ↑ ^{6.0 6.1} "Costco plans Australian store as part of expansion" 6/17/2008
7. ↑ ^{7.0 7.1 7.2} COST 2008 10-K, Note 12, pg. 83
8. ↑ COST Press Release 8/31/2008
9. ↑ ^{9.0 9.1 9.2 9.3 9.4 9.5 9.6} COST 2008 10-K, Item 1, pg. 4
10. ↑ COST 2008 10-K, Item 7, pg. 20
11. ↑ COST 2008 10-K, Item 7, pg. 24
12. ↑ Costco Net Sales up in October
13. ↑ MSN Money 2/16/2007
14. ↑ ^{14.0 14.1 14.2 14.3} The Labor Research Association 7/5/2005
15. ↑ "Wage Against the Machine" 6/27/2008
16. ↑ ^{16.0 16.1 16.2 16.3 16.4 16.5 16.6} WMT Wikinvest Page
17. ↑ ^{17.0 17.1} BJ 2007 10-K, Item 1, pg. 2
18. ↑ ^{18.0 18.1 18.2} COST 2007 10-K, Item 8, pg. 7
19. ↑ COST Press Release 10/10/2007
20. ↑ ^{20.0 20.1 20.2} BJ 2007 10-K, Item 6, pg. 13
21. ↑ BJ 2007 10-K, Item 7, pg. 14
22. ↑ BJ,2006,10-K,Item-7,Page-18
23. ↑ BJ,2006,10-K,Item-1,Page-3
24. ↑ BJ,2006,10-K,Item-6,Page-12
25. ↑ ^{25.0 25.1 25.2} Cost,2007,10-K,Item 6,Page-15
26. ↑ PSMT,2007,10-K,Item-15,Page-5
27. ↑ PSMT,2007,10-K,Item-1,Page-2
28. ↑ PSMT,2007,10-K,Item-15,Page-4