My Company:

An In Depth
Breakdown of Costco
Wholesale

Written by Steven Noll

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Costco Wholesale and Description of Company…………………………………………..pg 3
Annual Report 2017………………………………………………………………………..pg 9
Industry/Competition………………………………………………………………………pg 18
Conclusion…………………………………………………………………………………pg 20
Bibliography……………………………………………………………………………….pg 22

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 Costco Wholesale Description

Costco Wholesale is a membership-based wholesale retailer. They provide a wide variety of

merchandise, such as food, furniture, electronics, appliances, home improvement, books and media,

clothing, and toys, as well as specialty services such as tire changes, pharmaceuticals, optical services,

hearing aid services, and photography development. All of these are provided to members for low costs

to ensure convenience and a pleasurable experience in shopping.

Costco began in 1976 under the name of Price Club. It started out of a converted airplane hangar

on Morena Boulevard in San Diego. At the time it was the first membership based warehouse club in the

world. Price Club membership was exclusively limited to small businesses to provide a wide range of

supplies and bulk products. The executive vice-president of merchandising, distribution and marketing,

Jim Sinegal, was pivotal in propelling Price Club forward into a successful company. In 1983, Jim

Sinegal co-founded Costco Wholesale with Jeff Brotman, opening the first warehouse in Seattle in 1983.

In 1993, Price Club and Costco Wholesale merged into one company, creating the world’s most

successful warehouse club to date. Today the company stays true to its roots by staying committed to the

qualities that allowed it to be successful in the first place. Costco is committed to quality by carefully

picking products to offer the best value to members. Costco’s entrepreneurial spirit defines the staff of

the company at every level to drive a goal of exceeding member expectations at all times. And finally,

Costco’s focus on employees helps the company to create a workplace culture of positive, high energy,

and happy employees.

Sustainability is an extremely important part of how Costco operates. Costco has a strong code of

ethics as part of its mission statement. Their motto is obeying the law, take care of our members, take

care of our employees, respect our vendors. By following this they seek to realize their ultimate goal of

rewarding their shareholders. Costco’s code of ethics is one of the strongest points that sets them apart

from the competition. It promotes honesty in business and compassion and taking care of employees.

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This leads to happy vendors and happy employees, which allows for good prices and quality products,

which leads to happy members. Happy members mean good business for the company, which pays back

to the shareholders. Additionally, Costco seeks to operate in an efficient and environmentally responsible

manner. They believe that for the company to thrive, the world needs to thrive, and they’re committed to

helping in any way they can.

Costco’s environmental policies extend to all aspects of their business. Their buildings are

designed to use fewer materials while still providing more strength. Their steel system is made up of 80%

recycled products and their building insulation is made up of 76.98% recycled content. Their parking lots

use recycled asphalt and recycled concrete as a base material as well. All landscapes on Costco properties

exceed minimum requirements and are made with larger trees, greater planting density, and drought-

tolerant species. Native vegetation is prioritized and the company is mindful of wetlands and existing

species in the ecosystem. Furthermore, Costco’s business model of bulk product sales reduces shopping

trips made by members, meaning a smaller carbon footprint from all its members. In addition, Costco’s

method of high efficiency depots for distribution minimizes the number of trips needed for warehouses to

remain stocked as opposed to direct to location deliveries from multiple suppliers. Costco also closely

monitors its energy usage. By reducing energy consumption and electricity consumption, Costco not only

reduces its operating costs but also reduces its overall carbon footprint. Costco is also highly mindful of

its water usage. Costco uses active metering and intelligent software to track operational water waste,

thereby allowing them to reduce water usage and use water more efficiently. By more efficiently using

water, they spend less energy on water systems, thereby reducing operating costs and lowering their

carbon footprint. Some locations are also able to process wastewater by using their own treatment

systems. Efficient water systems in their bathrooms allow them to save 40% more water. In terms of

electricity and energy efficiency, Costco has solar powered systems in 100 warehouses. Some use solar

power in the parking lots as well. Additionally, all new buildings use LEDs for all lighting and older

buildings are being rapidly retrofitted with LED lights. The total estimated energy savings from these

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retrofits are estimated to be 110,487,000 kWh per year. Fuel cells have also begun to be installed as an

alternate energy source as of 2017.

Costco is also dedicated to reducing its potential impact on the global waste stream. They have

various donation and recycling programs to reduce the amount of waste going to landfills. Costco

locations all over the world donate food products to various food banks and other non profit organizations

in their areas to reduce the amount of food waste created by warehouses. In 2017, Costco donated over

8.5 million pounds of edible food products in 42 states. Costco also has extensive recycling programs for

both organic and non organic materials. In 2017, over 80.5 million pounds of organic waste material was

diverted from landfills. Over 6.5 million pounds of chicken grease from rotisserie chickens was recycled,

mostly into biofuel, 950,000 pounds of organic waste was turned into certified organic liquid fertilizer,

and 4.8 million pounds of organic waste was converted into animal feed for cattle and hogs. All locations

worldwide also have non organic recycling programs as well. For example, in 2017, over 6.7 million tires

were recycled in the U.S., over 85% of which were recycled into several different beneficial uses.

Additionally, over 546,000 pounds of foam and around 1.5 million pounds of scrap metal were recycled

into various uses.

Costco’s sourcing of merchandise also plays a big part in their sustainability. Costco’s Kirkland

signature brand provides Costco a unique opportunity to have control of the entire supply chain of a

product, including what conditions products are produced under and where they come from. The goals of

the Kirkland Signature product line are to provide members with high quality products at the lowest

possible prices, be respectful of the people or animals that produce them, and be respectful of the

environment in the way they are produced, grown, harvested, processed, transported, and

packaged. Kirkland Signature coffee products, for example, encourage farmer training, housing, health

care, and education to help the people at the source of the product. Kirkland Signature salmon products

allow maximum utilization of salmon by offering as many products as possible from every fish being

harvested, such as skinless boneless canned salmon, salmon fillets, salmon oil, smoked salmon, and

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salmon burgers. These practices of assisting and maintaining quality at every level of the supply line

allows Costco to ensure quality and low prices while still ensuring ethical practices in their products.

Costco’s employees are another extremely important aspect of Costco Wholesale. Costco does a

great deal to take care of its employees. They provide competitive wages starting at $13 an hour, provide

healthcare benefits to all permanent employees, and improved healthcare and stock options for full time

employees. Costco Wholesale also has a high employee retention rate. Over 60% of their U.S.

employees have five or more years with the company and over one third have more than 10 years with

Costco. Costco strives for experience and loyalty from its employees. Additionally, Costco primarily

practices internal promotions within its employee ranks. Over 70% of Costco’s managers began in hourly

positions. Costco is also highly inclusive in its hiring practices and will not discriminate in any way

shape or form when it comes to hiring, promoting, job assignment, training, or termination. Costco

employees also drive forward the friendly and helpful atmosphere of the warehouse. By taking care of

the employees, employees are more prone to positive and helpful attitudes, bringing this atmosphere into

the workplace and, by extension, to the members.

Costco is also highly involved in community contributions. Their philosophy is that the Costco

business is successful not only when they provide good service, good merchandise, and good products to

their members, but also make positive contributions to the communities in which they operate. Costco

budgets 1% of pretax profits to selected charitable contributions. In 2017 over $34.5 million was donated

to various charities worldwide, including Red Cross, food banks, United Way, Children’s Hospitals, and

various educational and scholarship programs. Furthermore, Costco supports the health of the community

through their various medical service departments. Costco provides quality eye care at affordable costs

by way of independent optometrists and their local optical departments. The company provides hearing

aid supplies and services in their hearing aid centers and provides prescriptions and other health items

through their pharmacy. Costco also provides flu shots and other immunizations, health screenings, and

other programs.

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 In the news, Costco has been reported as a great place to work at as well as showing highly

positive financial growth. The first article reports Costco raised their starting hourly wage from $13

to $14. All employees are receiving a 25 cent to 50 cent hourly wage increase as well. This

comes from a much higher tax return this year than the company was expecting, which Costco

has stated it wishes to reinvest into its workforce. Costco expects this increase to wages to result

in an annual cost between $110 million and $120 million before taxes. However, they expect the

effective tax rate this year to be only 28% this year as opposed to the 35% it was last year.

Another article states Costco has reported a 7% increase in their 3rd quarter profit for the fiscal

year. They attribute this rise in profit to strong warehouse sales. Costco reported that their

revenue for the quarter is $750 million, as opposed to their $700 million from last quarter. This

has surpassed analyst expectations by a significant margin. Costco also reported that their

revenue grew 12% to $32.36 billion, also surpassing analyst expectations of $31.77 billion. An

article from NASDAQ starts by relaying Costco’s strong position with a 12% net sales rise in the

third quarter and a 37% rise in digital sales in Q3. It then goes into four specific notes of how

Costco is doing well in the retail world that the management wants investors to know. It starts

with how membership renewals in Q3 are still sitting at 90.1%, with a slight uptick that does not

quite round up to the next .1% and worldwide renewals went up to 87.5% from 87.3%. The

article then moves into how memberships are rising, going up to 50.9 million total memberships

in Q3 from 50.4 million in Q2. The third point of Costco’s strong position is that the company is

growing. Costco opened seven new locations in Q1 and one new location per quarter in Q2 and

Q3 and plans for 15 more in Q4 for a total of 25 new stores opened in the full year. The last

point the article makes is that Costco is strong in the online scene. The CFO said that the rapid

growth in Costco’s digital sales was partly due to expanded offerings and a better online

experience, but mainly from offering better prices. An article from Yahoo Finance analyzes

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Costco’s prospects of being able to continue its growth beyond market predictions. The article

starts off by noting that Costco shares are up by 5.3% since the earnings report was released. It

then begins a breakdown of Costco’s financial situation for the year. Costco reports quarterly

earnings of $1.70 per share, up from market estimates. The article also points out the total

revenue was $32,361 million, which was ahead of market predictions of $31,736 million. The

article then goes into net sales, comparable sales, gross margins, store openings, cash and cash

equivalents, and stockholder equity. The final conclusion was that fresh estimates have had an

upward trend in the past month. Another article looks at Costco’s stock value rise and makes

projections about the stock value for the future. The value for Costco’s stock has risen by 30%,

outstripping the S&P 500’s rise of about 10%. Market traders are expecting an approximately

9% increase in stock value in the coming weeks, a jump from about $207 to $224. The article

suggests that Costco’s stock will jump in the short term, but that the stock will fall overall in the

long term, expecting a growth of only 11.8% in 2019, down from the 18.3% this year.

According to Forbes, Costco Wholesale is the number 1 company for careers for high school

graduate. The ranking was based off employee feedback gained from the website Glassdoor.

Costco gained this ranking based on its good policies on internal promotion, a management

structure that is clear and allows for advancement, and allows for cross-training in various

departments and services. Forbes also rated Costco Wholesale as number 3 on their top 10 retail

companies to work for. Costco’s high starting hourly wage, benefits for permanent employees,

and good workplace environments help Costco to achieve this status. Their internal promotion

policies, cross-training in services and departments, and ability to advance in the company also

help make it one of the highest rated retail companies to work for. Finally, this Forbes article

suggests that buying Costco stock is a great backup to buying Amazon stock. It reports that

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analyst estimates for Costco have been steadily rising and that dividends are also on the rise,

having gone up over 12% over the past five years. The article also praises Costco for making it

easier for small businesses to do business as well as cultivating a loyal customer base. The

article states that Costco is one of the few retailers left that has the ability to compete with

Amazon.

Annual Report

The Costco Wholesale Annual Report begins with the letter to the shareholders. The

letter to the shareholders for Costco opens with stating Costco’s goal to remain dedicated to their

philosophy of doing the right thing by treating members, employees, and suppliers right. They

also state that they are committed to maintaining this philosophy despite losing one of their

founders, Jeff Brotman, this past year. The letter then goes into reviewing their strong financial

showing this year. The letter shows that Costco’s net sales increased by 9%, their net income

increased $.33 billion, and their revenue from membership fees increased by 8%.

The next section of the letter talks about how Costco is remaining competitive as a

retailer. Costco has continued to open new warehouses both domestically and abroad and has

maintained their goal of providing products to members at the lowest prices possible. Costco’s

Kirkland Signature brand has also grown immensely as to be recognized globally as a high-

quality brand. Costco has also been working to expand its organic selection to provide more

options for members in the rapidly growing field.

The letter then moves into talking about how Costco is changing to compete with retail

changes. While Costco is highly competitive as a retailer and has maintained a strong standing

in the retail world, it also recognizes that methods of shopping are changing and that the

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company needs to update to keep up with the times. As such it has made strides in updating the

company’s online services, making them easier to navigate and use for shopping. It has also

introduced grocery delivery for both dry goods and perishable goods by partnering with

Instacart.

The next few paragraphs cover Costco’s Citi Visa credit card, their Costco Travel

program, and new warehouse openings. The section on the Visa card covers the benefits given

by the credit card as well as the fact that over 1.8 million new accounts have been opened since

the launch of the new card. The Costco travel section goes into new offerings of hotel only

booking reservations, low car rental rates, and that all Costco Travel now falls under the

executive membership 2% back program. Finally, the new warehouse section covers Costco’s

expansion into Iceland and France as well as noting the opening of 26 new warehouses globally.

This section also states plans to open 20-25 new warehouses in 2018.

The letter then notes how Costco has created an employee friendly environment, resulting

in one of the lowest employee turnover rates in the industry. Then the letter moves into talking

about Costco’s commitment to sustainability. Costco states its commitment to reducing its

carbon footprint, sourcing products responsibly, and working to preserve natural resources. Next

Costco goes into how the company is using its excess cash flow to provide dividends to

shareholders. It reports $3.9 billion in dividends in 2017 alone and $473 million in stock

buybacks. The last few paragraphs of the letter to the shareholders details changes to the Costco

Board, give a last farewell to Jeff Brotman, and give a thank you to the shareholders for their

continued support.

The Costco Management’s Discussion and Analysis opens with an overview of how the

company drives forward its profitability. The overview first states that the key to increasing

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profitability for the company is to increase sales growth, especially comparable sales. Costco

specifies comparable sales as sales from warehouses open for more than one year and online

sales. The company seeks to improve these sales by increasing member shopping frequency and

increasing the amount bought by members per visit. The discussion then goes on to state that the

main factors affecting sales growth are providing the right merchandise at the right price to

members, the health of the economies where Costco does business, and competition from other

retailers. While Costco acknowledges that it cannot predict changes in economic health or

changes in competition, it has demonstrated the ability to adapt to these changes admirably in the

past.

The discussion and analysis then moves into how it maintains sales growth. It starts by

describing how Costco retains members by maintaining its status as a pricing authority. By this

they mean that, instead of maximizing prices charged in the short term, they focus on

consistently providing the most competitive prices possible to keep members coming back to get

said prices. The discussion goes on to say that sometimes Costco will drop prices to meet

competition or to drive sales. They also will sometime maintain prices despite cost increases

instead of passing the increase in costs onto the members to help maintain customer loyalty to

good prices.

Costco then goes on to describe the impact that opening new warehouses has on sales

growth. It describes how, while initially opening a new warehouse has higher costs due to

initially lower sales compared to other warehouses in the area and taking sales away from

existing warehouses, the overall impact is positive as it gives a greater boost to total operations

overall. They also go on to explain that opening new warehouses in foreign markets provides a

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much higher benefit due to the smaller base of operations within those markets. They also add a

note about how their growth to their online operations has helped to increase sales.

The discussion then goes on to talk about how the membership system and controlling

costs is integral to boosting sales. The bit on membership is brief, but explains that the

membership program helps to reinforce member loyalty and provides continuing revenue in the

form of membership fees. The discussion then goes into how controlling costs is vital to

remaining profitable as a company. Costco then goes on to say that, while they have historically

been good about keeping costs down and maintaining control, there are some costs that are out

their control such as healthcare and utility costs. However, they do not pass on these costs to the

workforce by minimizing benefits and wages. Instead they try to maintain employee

compensation at a rate that is above the industry average in order to minimize employee turnover

and increase employee satisfaction.

The discussion and analysis then makes a few more statements to wrap up the

overview. They make note of how the operating procedures are generally the same across the

US, Canada, and foreign countries, though some foreign countries have slight differences. Then

the discussion makes a note on the impact of foreign exchange rates on currency and the impact

of changes in gasoline prices and how they are factored into the sales calculations. And lastly

Costco states the period of the fiscal year. They state that fiscal year 2017 was a 53-week fiscal

year ending on September 3, 2017. Fiscal years 2016 and 2015 were 52-week fiscal years

ending on August 28, 2016 and August 30, 2015 respectively.

The analysis then goes into the financial highlights for the year. The first highlight is

their warehouse openings for the year. Costco had a net of 26 warehouse openings in 2017 as

compared to their 29 in 2016. They opened 13 in the US, 6 in Canada, and 7 in other foreign

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countries. The next highlight addresses net sales. Costco had a net sales increase of 9% to

$126,172 million. The analysis states that this increase in net sales was driven by the extra week

of sales in 2017, a 4% increase in comparable sales, and sales from new warehouses opened in

2016 and 2017. Another financial highlight that the MD&A makes note of is membership fee

revenue. Membership fees were reported to have increased by 8% to $2,853 million in 2017.

This was primarily due to membership sign ups at existing and new warehouses, executive

membership upgrades, the increase to annual fees, and the extra week of membership fees in

2017. The MD&A then goes into net income for the year. Net income for the year increased by

14% to $2,679 million, compared to the $2,350 million in 2016.

The financial statements start off with the consolidated balance sheet. The balance sheet

is a classified balance sheet, split up into various subcategories of Assets and Liabilities and

Equity. The two categories of assets that account for the most money put into them are buildings

and merchandise. This makes sense for a wholesale retailer due to the necessity for stores and

product to sell. The main liabilities for Costco are accounts payable and long-term debt. The

balance sheet also includes the balance sheet numbers for 2016. The total numbers have

increased from 2016 to 2017, which makes sense as new stores are purchased and opened it will

increase the assets of the company and thereby increase the liabilities as well to balance it.

The next portion of the financial statements covers the Consolidated Statements of

Income. The income sheet is a simple income sheet, breaking down revenue, operating

expenses, other income (expense), income before income taxes, net income attributable to

Costco, net income per common share attributable to costco, cash dividends declared per

common share, net income including noncontrolling interests, and comprehensive income

attributable to Costco. The income statement shows the income statements for 2015 and 2016 as

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well. It shows that there was a decrease in net income from 2015 to 2016, with revenue

increasing a tiny bit from 2015 to 2016, but expenses increasing far more significantly at the

same time. However, from 2016 to 2017 there was a massive spike in net income. This allowed

for a massive spike in the dividends as well, going from $1.70 to $8.90. The comprehensive

income had a solid upward trend over the last 3 years.

The financial statements then go into the consolidated equity and cash flow of Costco.

The consolidated equity covers from the balance at 2014 to the balance at 2017. According to

the consolidated equity the total shares have been on a downward trend since 2015, arriving at

only 437,204 thousand shares in 2017. Additional paid in capital has been steadily increasing

since 2014, hitting $5,800 million in 2017. Retained earnings were $5,988 million in 2017 and

total equity was $11,079 million. The Consolidated Cash Flow sheet covers the cash flow for

Costco from 2015-2017. In the cash flow statements, we find that stock based compensation is

at the highest it has been in the past 3 years, sitting at $514 million. Cash dividend payments

were also at their highest for the past three years at $3,904 million in 2017. 2017 also marked

the first year that the beginning and end of year cash and cash equivalents had a positive change.

In 2015 and 2016, the end of year cash and cash equivalents was lower than it was at the

beginning of the year. However, in 2017, cash and cash equivalents went up from $3,379

million at the beginning of the year to $4,546 at the end of the year.

The notes to the financial statements begin with the discussion of business. The

discussion of business lays out that Costco is a wholesale retailer working on a membership

based business model offering low prices to members on a wide variety of items with a fast

inventory turnover rate and high sales volumes.

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 The notes then move on to more of the significant accounting policies. The fiscal year

for Costco is a 52/53-week year ending on the Sunday closest to August 31. 2017 ended on

September 23, making it a 53-week year as opposed to the 52-week years of 2015 and 2016

which ended on August 30 and August 28 respectively. Merchandise inventories for Costco in

2017 were $9,834 million. Merchandise inventories are reported at the lower of market or cost

values. Costco also provides for physical inventory loss as a percentage of net sales. Revenue at

Costco is primarily recognized as sales transactions including gross shipping costs where

applicable. The sale is recognized and recorded once the member takes possession of the item or

receives the service and the transaction is completed. Any payments that happen before

reception of service or merchandise is recorded as deferred sales in the balance sheet until such a

time as the transaction is completed. Costco also reserves for merchandise returns based on

historical trends of merchandise returns and adjusts sales and merchandise costs accordingly.

Costco also accounts for membership fee revenue over the course of a 1-year period. Rewards

accrued by executive members is counted as a reduction in sales, classified as accrued member

rewards in the consolidated balance sheets.

Costco’s investments are primarily through government and agency securities, asset and

mortgage backed securities, and certificates of deposit. The securities are available for sale

investments and the deposits are held to maturity. Investments from 2016 to 2017 took a slight

dip, going from $1,344 million in 2016 to $1,233 million in 2017.

Costco stock based compensation plans are primarily granted to employees and non-

employee directors. Executive officers have RSUs granted based on performance. RSUs

granted to employees and non-employee directors generally vest over 5 years and 3 years

respectively. RSUs can also be vested on an accelerated basis for employees who have been

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with the company for at least 25 years and for non-employee directors who have been with the

Costco for five or more years. The number of outstanding RSUs at the end of 2016 was 8,326.

At the end of 2017 there were 8,199 outstanding RSUs with a value of $128.15.

As far as legal issues go, Costco notes that it is the defendant in multiple class action

lawsuits that are going against motor fuel retailers for selling gasoline or diesel that is warmer

than 60 degrees without adjusting the volume sold to compensate. Costco has agreed to settle

the actions in which it is the defendant. Costco has also been accused of violating a California

Wage Order by not providing greeters and exit attendants seating. Costco has denied the

allegations in this complaint. The other legal issues Costco is experiencing mostly have to do

with pharmaceuticals, which Costco is seeking to be cooperative in resolving these matters.

The Management’s Reports is broken down into three sections, covering management’s

report on the consolidated financial statements, disclosure controls and procedures, and

management’s annual report on internal control over financial reporting. The report starts off

with stating management’s responsibilities in preparing and reporting the financial statements of

the annual report honestly, accurately, and objectively. They also report that they have prepared

the financial statements in conformity with GAAP standards and regulations. This section goes

on to state management’s responsibility to report the additional financial information in the

annual report accurately and consistently. The last piece of the first section reports that the

financial statements have been audited by KPMG LLP, an independent registered public

accounting firm, and that they have done their audit in accordance with PCAOB rules and

regulations.

The second section covers management’s evaluation that their disclosure controls and

procedures, as defined by the Securities and Exchange Act, are effective. Costco did an

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evaluation of its controls and procedures under the supervision and with the participation of

management, including the CEO and CFO, and found it’s methods to be effective. There has

been no change in their methods that has materially affected, or is likely to materially affect,

their internal control over financial reporting.

The last section covers management’s responsibility to establish and maintain internal

control over financial reporting according to the Securities and Exchange Act. Costco has

designed its internal controls to provide reasonable assurance as to the reliability of financial

reporting and the preparation of financial statements for external purposes according to

GAAP. The internal controls cover maintenance of records of transactions and assets to report

them accurately and fairly and with reasonable detail, provision of reasonable assurance that

transactions are recorded for the preparation of financial statements in accordance with GAAP,

and provision of reasonable assurance regarding prevention or timely detection of unauthorized

use, acquisition, or disposition of assets that could have a material effect on financial

statements. This section of the report goes on to clarify that due to inherent limitations, internal

controls cannot entirely prevent or detect misstatements. Therefore, these systems can only be

said to provide reasonable assurance regarding financial statement preparation and presentation.

Internal control effectiveness was assessed as of September 3, 2017 under supervision and with

participation from management using criteria set forth by the Committee of Sponsoring

Organizations of the Treadway Commission in Internal Control and was found to be

effective. KPMG LLP attested that the internal control systems were effective as well.

After the Management’s Reports is the Report of Independent Accounting Firm. This

report opens with a statement from the accounting firm KPMG LLP that it has conducted an

audit of Costco’s financial statements found within the annual statement. It notes that the firm’s

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responsibility is to provide an opinion on the financial statements based on their audits, and that

it is Costco management’s responsibility to provide accurate and objective financial statements.

The report goes on to say that all audits were conducted according to the standards laid

out by the PCAOB. The audits were made to assess that the financial statements, with

reasonable assurance, were made with no material misstatement. The audits were made by

examining evidence on a test basis supporting the disclosures and amounts found within the

financial statement. The audits also include assessing the overall presentation of the financial

statements and and assessing significant estimates made by management as well as general

accounting principles used. The firm finds that their audits provide a reasonable basis for their

opinion.

The auditors found that the financial statements present the financial situations of Costco

Wholesale fairly and accurately. They also found that the financial statements were in

accordance with GAAP. The audits also found that Costco’s financial internal control systems

were effective.

Industry/Competition

Costco’s financial ratios depict a very strong position for the company. The current

liquidity ratio for Costco Wholesale is 99% in 2017, up from 98% in 2016, with a quick ratio of

43%, up from 40% in 2016. This shows that Costco’s liquid assets cover its debts to a nearly

one to one ratio. Costco could cover its debts by liquidating its liquid assets with relative

comfort if needed. Costco’s profitability ratios start with their gross profit margin, which as of

2017 and 2016 was unchanged at 13%. Their operating margin and profit margins were also

unchanged from 2016 to 2017, sitting at 3% and 2% respectively. Their return on equity ratio

was 37% in 2017, up from 30% in 2016. The gross profit margin may be low, but the

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consistency of the gross profit margin shows that Costco is operating steadily and consistently

across the years, constantly making a profit every year. The operating and profit margins also

are consistent with Costco’s method of doing business. They specifically operate at a 2% profit

margin in order to give the lowest possible prices on items sold to members and operate at low

margins to maintain low costs for members while still turning a profit. The return on equity is

most telling, as it shows that Costco’s profitability for investors is on the up and quite high at

that.

Other competitors in the retail industry are not doing as well or consistent as

Costco. Walmart’s current liquidity ratio had a massive drop from 2017 to 2018, going from

86% in 2017 to 76% in 2018, with a quick ratio of 22% in 2017 to 20% in 2018. This shows that

Walmart is having difficulty keeping their liquid assets at pace with their debt. Their liquid

assets are on a steep decline regarding the debt that they have accrued and are operating without

much, if any, safety net. However, Walmart’s gross profit margin is much higher than Costco’s,

sitting at 25% in 2018 (down only slightly from 26% in 2017). Their operating margin took a

slight dip from 2017 to 2018, going from 5% to 4% respectively. Their profit margin also took a

slight dip from 3% in 2017 to 2% in 2018. However, the most worrying aspect of their

profitability ratios is the ROE. Walmart’s ROE dropped from 26% in 2017 to 19% in 2018. The

profitability of Walmart’s gross profit margins may be high, but investors are losing out in terms

of Walmart’s return on investment.

Macy’s is another competitor of Costco in the retail industry and is in a much stronger

position than both Walmart and Costco. Macy’s current liquidity ratio for 2018 is 147%, up

from 135% in 2017, with a quick ratio of 45% in 2018, up from 39% in 2017. Macy’s has a

large amount of liquid assets and is operating with a high buffer from its debts in terms of liquid

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assets it can use to cover debts. Furthermore, Macy’s gross profit margin is 39% in 2018, steady

from 2017. Their operating margin has gone up from 5% in 2017 to 7% in 2018, a high window

of profitability compared to Walmart and Costco. Their profit margin has also increased from

2017 to 2018, going from 2% to 6% respectively. Finally, their ROE is also on the up, going

from 22% in 2017 to 27% in 2018. Macy’s has been highly profitable and has been improving

their standings dramatically between 2017 and 2018. Their presence in the retail industry is

strong and gives a good indication of how the industry is doing.

These statistics help paint a picture of how well the retail industry as a whole is doing.

While some companies are experiencing trouble, such as Walmart, it appears that overall

companies are maintaining steady improvement to their standing in the industry. Macy’s and

Costco’s improvements to ROEs and high buffers in liquidity ratios as well as healthy gross

profit margins help show that the retail industry is healthy and improving overall.

Conclusion

Costco Wholesale is a shining example of how to run a retail company correctly. They

operate in a highly ethical way, treating members, employees, and stock holders well. They

operate their company and facilities in a way that is sustainable and environmentally responsible,

they treat their employees with respect and reward loyalty with frequent pay raises and benefits,

and they do everything in their power to keep prices as low as possible for members. All of

these aspects combined keeps their business consistent and healthy, constantly improving their

standing in the retail industry and keeping their position from slipping. This allows them to in

turn reward their investors with high dividends and high returns on equity. Their solid

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commitment to ethics and good business practice make Costco a company that is to be looked to

as a model way of running a retail company.

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