Costco Wholesale

For the Year Ended September 2, 2018

and the Six Months Ended February 17, 2019

Sophie Scher
Retail Studies
June 3, 2019
 Basic Company Information
Company Legal Name: Costco Wholesale Corporation

Place of Incorporation: Washington

Location of Headquarters: Issaquah, Washington

CEO: Walter Craig Jelinek

Bio: W. Craig Jelinek has been a director and President of the Company since February 2010, and Chief Executive Officer since
January 1, 2012. Mr. Jelinek previously was President and Chief Operating Officer from February 2010 until January 2012, and was
Executive Vice President in charge of merchandising beginning in 2004. He spent the previous twenty years in various management
positions in warehouse operations.

Stock Exchange: NASDAQ: COST

Price of Stock at February 15, 2019 (Final Trading Day of the Quarter): $215.15

Slide 2
 Overview of Business
Principal Industries: Membership Warehouse Club

Description and Outlook of Industry: Low Market, High Volume, Low SKUs (stock keeping units), Low Prices, Quick Inventory
Turnover

Main Competitors: Walmart, Target, Kroger, and Amazon.com are among Costco’s significant general competitors.

Costco’s Future Plans: As the company evolves, it stays true to the qualities that helped attract and retain its loyal members, including a
commitment to quality, maintaining entrepreneurial spirit, and focusing on employees. Costco plans to continue being a place where
efficient buying and operating practices gives members access to unmatched savings. Their operating philosophy is to keep costs down
and pass the savings to members. They plan to drive sales by lowering prices, and buying better in the future.

Slide 3
Balance Sheet Information

Slide 4
 Balance Sheet Analysis
February 17, 2019 September 2, 2018

Working Capital -$802,000,000 $363,000,000

Days Sales in Receivables 3.85 4.09

Inventory Turnover 5.48 11.8

Asset Turnover Ratio 1.69 3.97

Return on Assets 4.013% 8.24%

Debt to Equity Ratio 2.02% 2.12%

Return on Equity 12.24% 25.92%

Slide 5
Operating Results

Slide 6
 Company Specific Operating Information SEC Filings
U.S. Operations Canadian Operations Other International Operations
2018 Revenues: 2018 Revenues: 2018 Revenues:
$102,268 $20,698 $18,601

2018 Operating Income: 2018 Operating Income: 2018 Operating Income:

$2,787 $939 $754

Percentage of net sales by merchandise Percentage of net sales by merchandise Percentage of net sales by merchandise
category 2018: 0.272% category 2018: 0.0454% category 2018: 0.0316%

Percentage of net sales by merchandise Percentage of net sales by merchandise Percentage of net sales by merchandise
category 2017: 0.0282% category 2017: 0.0448% category 2017: 0.0319%

The U.S. is Costco’s largest segment, which makes sense, because Costco started in the United States. Canada and other international
segments do not make nearly as much as the U.S. segment does.

Slide 7
 Analysis of Operating Results
Percentage Changes:

Revenues; Year-to-Date (February 2018-February 2019): 7.3% Growth

Revenues; Annual (2017-2018): 9.7% Growth

Gross profit; Year-to-Date (February 2018-February 2019): 6.9% Growth

Gross Profit; Annual (2017-2018): 7.5% Growth

Slide 8
Analysis of Operating Results
Operating Profit; Year-to-Date (February 2018-February 2019): 23.2% Growth

Operating Profit; Annual (2017-2018): 9.97% Growth

Net Income (February 2018-February 2019): 26.8% Growth

Net Income (2017-2018): 16.98% Growth

Net Income Per Share(February 2018-February 2019): 26.25% Growth

Net Income Per Share (2017-2018): 17.02% Growth

Slide 8 pt. 2
Cash Flow Information

Slide 9
 Accounting Policies and Reserves
Costco makes estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues
and expenses during the reporting period.

Short-term investments classified as available-for-sale are recorded at fair value using the specific identification method.

Fair value is estimated by applying a fair value hierarchy, which requires maximizing the use of observable inputs when measuring fair
value.

Merchandise inventories are stated at the lower of cost or market. U.S. merchandise inventories are valued by the cost method of
accounting, using the last-in, first-out (LIFO) basis.

The Company provides for estimated inventory losses between physical inventory counts as a percentage of net sales, using estimates
based on the Company’s experience.

Depreciation and amortization expense is computed using the straight-line method over estimated useful lives or the lease term, if
shorter.

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 Accounting Policies and Reserves- CONT.
The estimated fair value of the Company's long-term debt is based primarily on reported market values, recently completed market
transactions, and estimates based upon interest rates, maturities, and credit.

The Company records an adjustment each quarter, if necessary, for the projected annual effect of inflation or deflation, and these
estimates are adjusted to actual results determined at year-end, after actual inflation or deflation rates and inventory levels for the year
have been determined.

Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as the Company progresses towards
earning those rebates, provided that they are probable and reasonably estimable.

In general, new building additions are classified into components, each with an estimated useful life, generally five to fifty years for
buildings and improvements and three to twenty years for equipment and fixtures.

Liabilities associated with the risks that are retained by the Company are estimated, in part.

The sales returns reserve is based on an estimate of the net realizable value of merchandise inventories expected to be returned.

Slide 10 pt. 2
 Analyst Call
Date of call: March 7, 2019 5:00 PM ET

Who spoke from management: Richard Galanti, Executive Vice President and Chief Financial Officer at Costco

How many questions were asked: 32 individual questions were asked. There were nine investors that asked about 2-4 questions each.

Question: One question, from Chuck Grom of Gordon Haskett, asked Richard Galanti to comment on how Costco has improved from a
steady year in 2018, to a recent uptick both in the U.S. and worldwide.

Answer: Galanti answered, stating that Costco has been focusing on what is important, like customer service, great products, and great
services at low prices. Costco does not have a PR department, yet has a lot of good press about the e-commerce site and customer
satisfaction. He hopes that this uptick will continue.

Slide 11
 Analyst Report 1
Report 1: Before call

Date of the Report: February 5, 2019

Analyst cited: The Research Analysts, Joseph Feldman, Sarang Vora, CFA and Cristina Fernández, CPA, of the Telsey Advisory
Group.

Recommendation – HOLD; TAG continues to view Costco as a share gainer, with solid sales, and high membership renewal rates of
about 90%. Stock is expected to perform in line with the average total return of the industry universe over the next 12 months.

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 Analyst Report 2
Report 2: After call

Date of the Report: April 8, 2019

Analyst cited: Christopher Graja, CFA of Argus Research Co.

Recommendation – BUY; Stock is expected to outperform the market on a risk-adjusted basis over the next year. Costco’s financial
strength and ability to deliver value to consumers are believed to be key differentiators for the stock in the current market environment.
Analysis of core operations suggests that execution of business plan remains excellent, with strong traffic and membership renewals.

Slide 12 pt. 2
 Stock Price Analysis
Earning’s release: http://investor.costco.com/news-releases/news-release-details/costco-wholesale-corporation-reports-
second-quarter-and-year-19

Date of the Earnings Release: March 7, 2019

Adjusted Close Stock Price-Day Before (3/6/2019) : $243.57

Adjusted Close Stock Price-Day After (3/8/2019): $240.69

When the Statements of Income and the Balance Sheets were released, investors could have inferred based on the reported net
sales, current and long-term assets, and current and long-term liabilities that the Costco did not have the resources to have a
good next quarter or do well in the future. Since the earnings call discussion stated that Costco had an uptick recently and had
been doing well, investors could have predicted that stock value was higher than usual, and decided to sell the stock while it
was high in value. The drop in stock price indicates that some investors decided to sell their stock immediately following the
earning’s release.

Slide 13
 Appendix
February 17, 2019 September 2, 2018

Working Capital Current Assets - Current Liabilities Current Assets - Current Liabilities
= $21,648 - $22,450=-$802 = $20,289 - $19,926 = $363

Days Sales in Receivables (AR / Total Credit Sales) X # of (AR / Total Credit Sales) X # of
days = 3.85 days = 4.09

Inventory Turnover COGS / Avg. Inventory = 61,313 / COGS / Avg. Inventory = 123,152 /
Avg. Inventory = 5.48 Avg. Inventory = 11.8

Asset Turnover Ratio Net Sales / Avg. Total Assets = Net Sales / Avg. Total Assets =
70,465 / 41,814.5 = 1.69 141,576 / 38,588.5= 3.97

Return on Assets Net Income / Avg. Total Assets = Net Income / Avg. Total Assets =
1,678 / 41,814.5 = 4.013% 3,179 / 38,588.5 = 8.24%

Debt to Equity Ratio Total Liabilities / Shareholders Total Liabilities / Shareholders

Equity = 2.02% Equity = 2.12%

Return on Equity Net Income (Annual) / Shareholders Net Income (Annual) / Shareholders
Equity = 1,678 / 13,858 = 12.24% Equity = 3,179 / 12,799 = 25.92%
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