Wholesale Corporation is a multinational membership warehouse club with 741
stores in eight countries. Established
in Seattle Washington over 30 years ago, Costco has grown to become the second
largest global retailer after Walmart.
Since its inception, Costco has maintained a strong stock price and
financials even during times of economic downturn. This report will summarize Costco’s financial
performance over the past 5 years including some financial statement and ratio
analysis, corporate risk factors, discuss critical accounting policies, and current
legal proceedings the company is involved in using a 10k report.
10k, is a detailed annual report summarizing a company’s financial performance
which all U.S. based corporations must file within 60 days of the end of its
fiscal year with the Securities and Exchange Commission. It provides a thorough breakdown of a
company’s financial statements, gives investor information, and discusses future
corporate goals and visions. 10k reports
are of one of the most significant and financially plausible document a company
files. We will review some selected financial
results from the analysis done. Refer to
the exhibits for more detailed financial results.
Analysis, also referred to as trend analysis, shows the changes in a company’s
financial data over a given period of time. The data shows the difference in
totals during a period and the percent of change (increase or decrease). Below represents
Costco’s Income Statement from 2013 to 2017.
sales increased by almost 9% in 2017 to $126,172. This increase was related to the opening of
26 warehouse stores, 13 in the United States and 13 internationally. Revenue from membership fees increased to
$2,853 (8%) due to increased annual fee premiums, new membership sign-up at new
stores and customer upgrades to executive memberships at existing stores. There was an increase in net income by 14% to
$2,679 which was the lowest annual increase over the past five years. Changes in net sales over the five-year
period are mainly attributable to the amount of stores the company opens
annually. Net increases and decreases in
revenue and net income during the selected period have been based on some
external economic factors such as increases in fuel prices, foreign currency
analysis is a method used to analyze financial statements by taking each line
item and dividing it by the total in that category. The data shows the proportion between
accounts on common-sized financial and makes it easier to compare financial data
amongst similar companies. For example,
on the balance sheet this would be represented as a percentage of assets,
liabilities and equity.
Sources of Cash
and cash equivalents and short-term investments are Costco’s primary source of
liquidity. The total balance in these
accounts at the end of 2017 and 2016 fiscal period was $5,779 and $4,729,
Over 20% of theses balances represents credit and debit card receivables
which are usually settled in four days. Exchange
rate changes had a positive impact on the cash and cash equivalents amounts in
2017 and 2016 but were negatively affected in 2015. There has been an overall net decrease in
cash and cash equivalents and short-term investments over the 5-year period.
Net sales and membership fees are the primary source of net cash
provided by operating activities. Operating
cash outflows consist of payments to vendors, cost of warehouse operations, and
processing fees for debit and credit card transactions. Net cash provided by operating activities
increased at the end of 2017 due to an updated accounting system.
Net cash used in investing
activities increased by $21 due to warehouse expansion and improvements. Maturities of short-term investments and
purchase account for cash inflows from investing activities.
Net cash used in financing
activities included the payment of dividends and a special dividend, payment of
Senior notes and the repurchase of common stock.
There are three risk
factors that can affect Costco’s operations and performance:
Business and Operating
Market and Other
Legal and Regulatory
Costco’s generates most
of its income from its operations in the U.S. and Canada. In 2017, California accounted for most of its
U.S. sales. California warehouses
generate higher sales volume in comparison to other domestic locations. Declines in these markets would greatly
impact the financial performance of Costco.
In the retail industry, each company has locales in which they perform more
strongly and those areas become a primary source of operational income to that
company. This is universal risk factor
in the retail sector.
Market and other
external risks come from market competition and factors that affect the cost of
operations. Costco offers a not only
products but services so its competition can range from online retailers to
local gas stations. Fluctuations in
foreign exchange rates, inflation, natural disasters and various other
uncontrollable factors affect the performance of Costco and other retailers in
Operating in 10
countries outside of the United States, Costco must pay close attention to the
political and economic environment of its international locations. Changes in activities such as regulations and
fiscal polices abroad must be monitored like operations here in the United
States. Multinational corporation all
face similar risk when operating globally.
Costco is not currently involved in any significant legal
Critical Accounting Polices & Estimates
Costco states its inventories
at lower of cost or market. Its uses
last-in, first-out (LIFO) for valuation its inventories in its U.S.
market. Internationally, it uses the
FIFO method, first-in, first out. Costco
uses historical trends to estimate for sales returns and allowance at its net
realizable value. Because, Costco is
committed to annual expansion, another important estimate is how it depreciates
its assets, which it uses the straight-line method. “In May 2014, the Financial
Accounting Standards Board (FASB) issued new guidance on the recognition of
revenue from contracts with customers. The guidance converges the requirements
for reporting revenue and requires disclosures of the nature, amount, timing,
and uncertainty of revenue and cash flows arising from these contracts.
Transition is permitted either retrospectively or as a cumulative effect
adjustment as of the date of adoption. The new standard is effective for fiscal
years and interim periods within those years beginning after December 15,
2017. The Company plans to adopt this guidance at the beginning of its first
quarter of fiscal year 2019.”
This report analyzed the
income statement and balance sheet using horizontal and vertical analysis,
displayed an analysis of its ratios for liquidity, activity, profitability and
coverage over a 5-year period. It summarized
the statement of cash flows and discussed some key elements affecting cash
inflows in outflows of Costco. Furthermore,
it covered three of the most significant risk factors that can affect the
financial performance of Costco both domestically and internationally. It concluded by discussing some important
accounting policies and estimates the company uses. The 10k analysis reveals that Costco is
financially stable and profitable company.