Costco Wholesale Case Study

Stakeholders invest money with the intent to remove way out in the future. It is important for stakeholders to gain access to information and evaluate the securelys performance before they put money in it. On the other hand, it is the firms management squad job to make closings that would maximize the coherent term value of the firms common stock. The intent of this paper is to analyze Costco sell partnerships financial performance and to assess how efficient the business has been over a five course period as well as to house recommendation for financial management strategy.The problem determine in this paper is the showtime margins in the industry. Because margins argon low-toned, the profitability of individual companies depends on graduate(prenominal) raft sales and efficient ope proportionalityns. Costco Wholesale Corpo dimensionn is high-growth Retail Company. The company has experienced significant growth from 1997 to 2001, which has caught the financial aid of the competition. However, the numbers are decreasing because return on assets, return on equity, and asset turnover ratios view declined within the same time frame. Costco Wholesale Corporation has been a major player in the retail industry.It is the widest wholesale club operator in the US. The company wreaks about 555 membership warehouse stores serving more than than than 53 million cardholders in some 40 US states and Puerto Rico, Canada, Japan, Mexico, South Korea, Taiwan, and the UK, primarily under the Costco Wholesale name. (Hoovers, Inc, 2010) Costcos strategy is low prices strategy. The management team has been able to pass savings to customers, keep low prices and maintain healthy margins at the same time. This has been a result of the companys ability to perform more efficient over time.The company saves on operation costs in order to provide low price while still keeping high quality products for customers. It has been constructing warehouses with inexpensive co ncrete floors. merchandising items in bulk has allowed for operating efficiencies. Also, carrying less variety of products than other competitors has ease upd to keeping inventory costs down. locomote sales volume and rapid inventory turnover are very important for a firms financial performance. Therefore, they should not be over qualityed by investors. Costcos inventory turnover ratio of 11. 7% in 2001 is the highest compared to its competitors.It is a result of operating principle that allows Costco to mend its working capital and operate much more efficiently than its competitors. For instance, Costco buys directly from manufacturers and routes purchases directly to customers in less than 24 hours. Cross-docks never stored inventory, so all of the items delivered were reloaded and shipped that same day. (Case study, p. 6) This has increased efficiency by ensuring the trucks are operating at full capacity. It besides has allowed Costco to receive cash in hand before it has t o pay for the original merchandise from the manufacturer.This has resulted in a very high operating cash flow for the business. Cash is important to any companys financial performance. It allows the company to pay its bills and invest in the business without having to use debt. According to Torress customary Size Financial statement Interest expense has descendd from 0. 35% in 1997 to 0. 09% in 2001. This has demonstrate Costcos ability to reduce its overall amount of debt during these years. For example, the fact that short-term debts have increased from 0. 46% in 1997 to 1. 93% in 2001 and long-term debt have decreased from 16. 74% of sales in 1997 to 8. 2% in 2001, relates rearward to the decrease in Costcos interest expense. This is a representation of the managements team decision turn on to short-term and move away from long-term debts. In addition, the decrease in long-term debt has helped reducing total liabilities from 53. 32% of total assets in 1997 to 50. 46% in 200 1. Costcos current ration in 2001 is 0. 94, which is below its competitors. This could be a sign for weak liquidity position. However, the high inventory turnover ratio analyzed earlier in this paper in combination with the low current ratio is an indicator for efficient assets management.The competitors high current ratio might also be a sign for in any case much inventory that might have to be written-off or too many old accounts receivables that could turn into bad debts. Sears and Walmarts account receivables are a way higher than Costco and BJs, confirming that there is no significant reason for considering Costcos current ratio a weakness. Costcos perfect(a) margin has been well maintained over the five year period. Their gross margin of 10. 4% is much lower than Sears of 26. 6% and Wal-Marts of 21. 5%. Only BJs has a lower gross margin of 9. 2%.Costcos 2001 gross margin suggests ability to remain profitable and very war-ridden at the same time. The company has been able t o provide goods to customers at a very low mark-up and at a lower per unit cost. According to the case study Costcos management team has trenchant to reinvest net income back into the company instead of paying dividends. This decision has resulted in earnings retention ratio of 100% as shown on Torress sustainable growth model. Absence of dividends could lead to some investor dissatisfaction in the short term. The return on equity ( roe) also has been decreasing during the five year period.It has dropped from 18. 6% in 1998 to 14. 2% in 2001, which could also lead to investor dissatisfaction. ROE tells how well stockholders are doing in term of return on their money. Costcos 14. 2% return in 2001 is consistent with the current average industry ROE is 11. 5%1. Costcos ratio is consistent with the industry average, but appears to be on the decline. A look at Costcos ROE since 1997 shows a steady decline. Consistent reinvestment into the company has occurred in the form of new(a) sto re construction and efficient modifications of old stores during these years.Such capital investments would take time to generate profits. dismantle though Costcos ROE in 2001 is lower than in 1997 it still remains a large positive figure. As long as Costcos management team continues demonstrates ability to successfully reinvest and improve efficiencies, stock price would most likely increase in the future and stockholder would be meet with long term returns on their investment. economic factors should be considered when determining the future of the retail business. Economic factors allow in the economic growth, interest rates, exchange rates and the inflation rate.Economic downturns have forced customers to cut back on expenses. . Any significant decrease to consumer spending has to be considered as a threat. In 2000/ 2001 bully economic environment Costco has shown the ability to persevere and continue growing their business. Passing cost savings to customers is crimson mor e important in times of economic slowdowns when businesses and individuals are trying to do more with less. Economic constraints play a major role in wholesale business by forcing companies to be more creative and come up with higher efficiencies in order to provide lower prices.On the other hand, economic growth provides opportunities not only to Costco but to other rivalry as well. Social factors influencing the retail industry include culture, population growth, age distribution, and importance of safety. Costco warehouses are located further away from residential areas such as cities and older suburban areas. This creates inconvenience for customers as they would have to drive further to rat at Costco than a local grocery store. Costco has overcome this with a much better customer environment, big discounts on bulk purchases and various incentives through their membership programs.Ecological factors include ecological and environmental aspects. For instance, Costco has been r eligious offering boxes to customers instead of plastic bags. Such green initiatives are necessary to address environmental concerns. They could also contribute to increased market share. Other factors that should be considered are customer demand, cultural changes, and technology. Todays advanced technology provides opportunities for higher efficiencies as well as cultural changes. For instance, the internet has been a great shop resource lately.It gives retailers the ability to offer lower prices and customers the convenience of shopping from their own homes. Costcos management team should continue to work closely with customers in order to identify their needs and behavior. Costcos mission is To continually provide our members with quality goods and services at the lowest possible prices. (Costco, 2010). The management team should ensure that systems and processes are in place to carry on the mission. Ensure open communication channels between employees and management.Employees should be considered when the strategy is being implemented because successful strategy implementation requires motivation. The company should clearly communicate its hallucination and mission to all levels throughout the organization. Communicating the companys vision and employees involvement in the decision making process would give them a stronger sense of job satisfaction. That would increase motivation and contribute to creativeness enforce. Also to increase motivation the executive team should review managements compensation and rewards. As part of trategy implementation the leadership team should develop support among stakeholders. One aspect of that is to establish spheric network of strong suppliers and ensure availability of strong partners who share technology, development cost, and speed to market Costcos goal is to Reward our shareholders. (Costco, 2010) This analysis proves that Costco remains one of the industrys leading players and there seems to be no reason fo r Torres to sell her shares. References Brigham, Eugene, & Houston, Joel. (2008). Fundamentals of financial management. South-Western Pub. Brigham, & Houston, 2008) Carpenter, M. A. , & Sanders, Wm. G. (2009). New Jersey, NY Pearson Education, Inc. Costco wholesale corporation . (n. d. ). Retrieved from http//www. hoovers. com/company/Costco_Wholesale_Corporation/rkfjif-1. hypertext mark-up language Costco, Initials. (2010). Costco wholesale corporation. Retrieved from http//www. csrglobe. com/login/companies/costco_wholesale_corporation. html Jun, J. (2009, January 19). Taking stock in costco. Retrieved from http//www. oldschoolvalue. com/featured/taking-stock-in-costco/ 1 Data collected from Google Finance