Financial Performance of Discount Retail Stores During a Recession Comparison of Wal-Mart and Costco. Miriam Rouziek. Financial Accounting Theory

Transcription

1 Financial Performance of Discount Retail Stores During a Recession Comparison of Wal-Mart and Costco by Miriam Rouziek Financial Accounting Theory Spring 2009 University of St. Thomas

2 Abstract Wal-Mart and Costco appear to be two very similar discount retailers with numerous stores, both domestically and internationally, and potential for earnings growth even during a recession due to the nature of their business. However, Wal-Mart appears to be dominating the discount retail industry, consistently outperforming its competitors and reporting earnings significantly higher than that of Costco or its other competitors, such as Target and BJ s Wholesale. Is Wal-Mart s domination of the industry due to its superior business practices, or is it due to the size of the company? In comparison to Wal-Mart, is Costco a poor performer in the industry? How has the recession affected the financial performance of these companies? Through an analysis of financial statements and ratios, and market performance for the two companies and the discount retail industry, this paper will show how well both companies have performed during the current recession, and why Wal-Mart has posted earnings figures ten times larger than that of its competitors. 2

3 Table of Contents 1. Introduction 2. Company Overview - Information about Wal-Mart and Costco, including financial information, merchandising strategies, and company history. 3. Industry Overview - Overview of financial performance of the discount retail industry as a whole during fiscal year Financial Analysis - Analysis of financial statements and ratios for both companies during fiscal year 2008 and early 2009, and comparison to performance in fiscal year Conclusion 6. Appendix I - Summary Financial Data for Wal-Mart Stores Inc. 7. Appendix II - Summary Financial Data for Costco Wholesale Corp. 3

4 Financial Performance of Discount Retail Stores During a Recession Comparison of Wal-Mart Stores Inc. and Costco Wholesale Corp. INTRODUCTION During an economic downturn, consumers wanting to cut back spending are likely to search out bargain prices and shop at discount retailers such as Wal-Mart and Costco. These discount chains offer more merchandise at lower prices, making the discounts more lucrative to consumers who are looking to stretch their dollars further. According to the Wall Street Journal, Wal-Mart s third quarter earnings for 2008 rose 9.8%, while profits for other retailers were significantly lower than previous years 1. Although the discount retail industry is experiencing slight growth overall, Wal-Mart appears to be outperforming its competitors, reporting income figures nearly ten times that of Costco, it s smaller competitor. By examining financial statements, performing ratio analysis, and examining overall industry performance for discount retail stores, this paper will determine how well Wal-Mart and Costco are performing during the current recession. Wal-Mart s net income figures for fiscal year 2008 were nearly ten times that of Costco, but stock for both companies has traded between $45 and $50 in the last few months, and Costco s liquidity ratios are much higher than Wal-Mart s. According to Yahoo!Finance, Costco also has a higher Price/Earnings ratio than Wal-Mart. Although Wal-Mart s profits are much higher, this may be attributable to the fact that Wal-Mart is a much larger company that Costco. Where Costco operates only 512 warehouse stores domestically and internationally, Wal-Mart operates 4,141 stores in the United States alone, including discount stores, supercenters, neighborhood markets, and Sam s Club warehouse 1 Bustillo, Miguel and Zimmerman, Ann. (2008, November 14) Wal-Mart Flourishes As Economy Turns Sour. The Wall Street Journal, p. A1. 4

5 stores. Clearly a comparison of only profits is unfair, but because Wal-Mart and Costco operate in the same industry, they should see comparable changes to earnings during a recession, as reflected in their financial ratios. Similarly, they should see comparable changes to stock price as the market rises and falls during the recession. This paper will also examine in brief how differences in business practice and company size have affected the companies financial performance during the current recession. COMPANY DESCRIPTIONS I. Wal-Mart Stores Inc. According to Wal-Mart s website, Wal-Mart operates over 7,800 Wal-Mart stores and Sam s Club warehouses worldwide, and it employs over two million people. The corporate culture is centered around respect, customer satisfaction, and helping customers save money on basic necessities. Wal-Mart stores are dedicated to providing low prices on consumer goods. The company s mission, as stated on the website: Saving money is a means to helping our customers live better. By offering the best possible prices on the products our customers need, we can help them afford something a little extra. 2 This mission has driven the company s business practices since its founding by Sam Walton forty years ago. It has also helped Wal-Mart realize an 8.6 percent increase in net sales for fiscal year 2008 for the company overall. Seeking better deals and a lower cost of living, customers that would not normally be shopping at Wal-Mart have been attracted by its low prices and large selection of goods. 2 Wal-Mart Stores Inc. (n.d.) Our Purpose. Retrieved March 30, 2009, from AboutUs/8123.aspx. 5

6 Thus, despite the ongoing recession, Wal-Mart has been expanding its merchandising strategy to bring in more customers. To coincide with the release of the DVD movie Twilight, the most pre-ordered movie in Wal-Mart history according to the company s website, Wal- Mart opened Twilight Shops inside the stores, hosted blood drives to support the American Red Cross, and held an exclusive cast greeting on Wal-Mart TV Network in the stores for the midnight release 3. Twilight Shops contained a selection of affordable merchandise related to the movie (apparel, bags, music, and other Twilight-themed goods). The midnight release also included exclusive in-store giveaways, including limited editions of the DVD and a special gift set only available to fans who attended the Wal-Mart release. Fans who donated blood at the Wal-Mart Twilight drive also received exclusive merchandise. Although this may have been a costly project, this kind of merchandising attracts customers who would not normally shop at the discount retailer for discretionary items such as movies, clothing, and related accessories. The expansion and enhancement of Wal-Mart s Great Value brand in the US is another strategy aimed at bringing in more customers. According to the Wal-Mart website, the brand is the country s largest food brand in both sales and volume: 4 According to new consumer data from GfK Custom Research North America, 75 percent of shoppers, say the current economic conditions are playing a big role in their decision whether to purchase national or grocery store brands. Additionally, three out of 10 consumers in the study say they are now buying more store brand products compared to a year ago, and more than 77 percent of respondents agree that the store brands they buy are as good as, if not better than, national brand products. 3 Wal-Mart Stores Inc. (2009, March 18). Walmart Hosts Midnight Events, Blood Drives, and Special Greeting For History-making Twilight Release. Retrieved March 30, 2009, from FactsNews/NewsRoom/9042.aspx. 4 Wal-Mart Stores Inc. (2009, March 16). Walmart's Revamped Great Value Brand Delivers Affordable, Quality Choices When Consumers Need Them Most. Retrieved March 30, 2009, from walmartstores.com/factsnews/newsroom/9028.aspx. 6

7 This strategy closely aligns with reports from the Wall Street Journal that [s]hoppers are spending more on groceries, countertop appliances, and cookware as they cut back on trips to restaurants. With food revenue accounting for 40% of Wal-Mart s U.S revenue, the recent changes to the Great Value brand could help to increase Wal-Mart s revenues during the recession, and help keep it on top of the discount retail industry. Due to the current economic crisis, Wal-Mart has been able to increase its market share by attracting customers who either cannot afford to shop at rivals such as Target and Whole Foods, or those who choose to tighten belts during a poor economy. According to The Wall Street Journal, Wal-Mart is using its current edge to accelerate what it hopes will be a permanent turnaround of its tarnished image and slowing business. 5 As noted in the article, even if Wal-Mart keeps only half of the customers its gained during the recession, it will still be a marked improvement for the company and allow it to grow even larger after the economy recovers. II. Costco Wholesale Corp. Costco Wholesale Corp. operates wholesale membership-based warehouses, similar to the Sam s Club warehouses operated by Wal-Mart. As of 27 March 2009, Costco operates 553 warehouse locations in the United States and internationally, including Canada, the United Kingdom, Japan, Korea, and Mexico 6. The average size of the warehouses is 141,000 square 5 Bustillio, Miguel and Zimmerman, Ann. (2008, November 14). Wal-Mart Flourishes As Economy Turns Sour. The Wall Street Journal, p. A1. 6 Costco Wholesale Corp. (n.d.) Company Profile. Retrieved March 30, 2009, from 7

8 feet, and Costco s workforce is comprised of 104,000 full and part-time employees in the US, and 142,000 full and part-time employees abroad. Reported annual revenues for fiscal year 2008 were $72.5 billion dollars. According to the company s profile, Costco s mission is to help small and medium-sized businesses reduce their costs of resale purchases and everyday business usage, as well as individuals purchasing for personal needs. Costco Wholesale Corporation operates an international chain of membership warehouses, mainly under the "Costco Wholesale" name, that carry quality, brand name merchandise at substantially lower prices than are typically found at conventional wholesale or retail sources. The warehouses are designed to help small-to-medium-sized businesses reduce costs in purchasing for resale and for everyday business use. Individuals may also purchase for their personal needs. As stated by Jim Sinegal, President and CEO, the company achieves this by operating with extremely low overhead, eliminating the frills and costs associated with conventional retail stores. Costco s business strategy is primarily oriented toward serving small business owners. Of the 54.5 million memberships, more than half are business memberships, with only 20.7 million individual (Gold Star) memberships. The Executive Membership offered allows small companies to purchase at a discounted rate consumer services normally not offered by warehouse clubs. These services include auto and homeowner insurance, high-yield savings accounts & CD's, identity protection, personal check printing, online investing, business services (business phone services, merchant credit card processing, health and dental insurance, payroll processing, check and forms printing, small-business 401(k) plans, small-business web sites. In addition, Costco also operates Business Centers, which offer more products and services specifically oriented towards businesses (such as a copy and print center), allowing companies to purchase in store or have orders delivered by the Costco fleet. 8

9 Costco s mission, according to its annual reports, is to operate membership warehouses based on the concept that offering our members low prices on a limited selection of nationally branded and selected private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. According to the May 2009 Consumer Reports magazine, Costco rates highest in customer satisfaction reports 7, which has helped the company maintain positive increases to net sales and net income. This aligns closely to Costco s assertion that, Shoppers enjoy being able to save on the basics and take advantage of high-end luxury items; and we provide plenty of both with great prices and excellent quality. 8 Despite the traditional membership fees charged by warehouse clubs, Costco s low prices are attractive to consumers looking to save money on non-perishable goods bought in bulk. INDUSTRY OVERVIEW Despite the economic recession and a sharp decrease in customer spending for most of 2008, retail stores in general are starting to rebound from lost sales. According to a March 6 article in The Wall Street Journal, Lower gasoline prices are helping get Americans out of the house and putting more cash in their pockets. 9 This news comes as a sharp contrast to December 2008 s grim forecast by Wal-Mart and other retail chains, warning of a decline in profit due to decreased spending 10. However, the discount retail industry as a whole managed to gain even 7 Costco outshines the rest. (2009, May). Consumer Reports, 74, 8. 8 Costco Wholesale Corp. (2008). Annual Report Even Costcoʼs Annual Report is a no-frills affair, printed in black and white with a red and blue logo, and very few pictures. 9 Zimmerman, Ann. (2009, March 6). Retail Sales Show Signs of Life. The Wall Street Journal, p. A1. 10 Bustillio, Miguel and Evans, Kelly. (2009, January 9). Battered Stores Pare Forecasts --- Wal-Mart, Others See Tough Months Ahead; December Same-Store Sales Disappoint. The Wall Street Journal, p. A1. 9

10 during the recession, partly through additional markdowns, but also because these stores offer lower prices on consumer goods. These lower prices allow consumers to save money on basic necessities, which draws them in during a slumping economy. The same article posting profit declines also provided some insight as to why consumers are shopping less: Consumer confidence slumped in December to the lowest level since the Conference Board first began tracking it 40 years ago, as consumers expressed deep concerns about the economy and some 42% said jobs were "hard to get." The U.S. shed a little more than 1.9 million jobs through November, and economists say an additional half-million jobs were likely lost in December, with the unemployment rate rising from its current 6.7%. With consumer confidence low and unemployment rising, consumers are less likely to make purchases from discretionary income on non-essential goods, such as electronics and designer clothing. When consumers do make discretionary purchases, they re more likely to shop at a discount retail store than a higher-priced department store. In a November article in The Wall Street Journal, Wal-Mart was reported as having a 9.8% increase to third quarter earnings and a 7.5% increase to sales 11. This increase is attributed to the low prices offered by Wal-Mart on its merchandise, and consumers turning to Wal-Mart and other discount retailers. As one customer interviewed in the article noted, If I could afford to keep shopping at Whole Foods, I would. Other discount retail stores, such as BJ s Wholesale Club, are also posting profit gains despite the recession. According to an article in Crain s Chicago Business magazine, this is because consumers have not necessarily pared down their shopping but have instead traded big-name department stores for cheaper discount retailers. 11 Bustillio, Miguel and Zimmerman, Ann. (2008, November 14). Wal-Mart Flourishes As Economy Turns Sour. The Wall Street Journal, p. A1. 10

11 Sales at full-line department stores are down 20% this year, according to a survey by New York-based Thomson Reuters. But sales at discount stores are down an average of just 5%, and comparable store sales at A. J. Wright are running 13% ahead of a year ago, notes Howard Davidowitz, a New York retail consultant. 12 This puts discount retailers at an advantage over department stores, and the desire to save money on both discretionary items and necessities helps explain why discount retailers are making some gains. The overall market capitalization for the discount retail industry is 266 billion, with an average of 1.80 billion, and average quarterly revenue growth (year over year) at 6.90%. Revenues for this industry average at $4.65 billion dollars, with average earnings per share of 1.85 and Price to Earnings ratio of Clearly, this industry is performing very well despite the economic problems suffered by other industries. As mentioned previously, this is largely because companies in this industry, including Costco and other warehouse clubs, Target, and Wal-Mart, offer consumer goods at greatly discounted prices, making them very appealing to consumers looking to stretch their dollars. In comparison, companies in the department store industry, such as Macy s and Dillard s, are suffering revenue losses between 5 and 10%, and Dillard s has posted a net loss of nearly $50 million for the quarter ended November 1, Despite this strong financial performance, shares for discount retailers have been down recently. While daily losses for March 30, 2009 were -3.48% for the S&P 500, however, daily losses were only -1.61% for the industry. FINANCIAL ANALYSIS 12 Murphy, H. Lee. (2009, March 23). Cheap Chic: Biggest trade-down in American history has discount retailers on growth binge. Crainʼs Chicago Business, retrieved March 28, 2009 from LexisNexis Academic database. 11

12 On first glance at financial information for Wal-Mart and Costco, it would appear that Wal-Mart is far more profitable and performing far better than Costco. However, looking at revenue numbers alone is misleading. Wal-Mart is a much larger company than costco, operating nearly ten times as many stores in the United States alone than Costco operates in total. Wal- Mart s market capitalization is billion to Costco s billion, and it employs close to two million people worldwide. Clearly, a comparison of only revenue would be incomplete. In terms of warehouse club sales, however, Costco is the largest U.S. warehouse club, and according to a March 5 article in The Wall Street Journal customer visits have increased 4-5% in January and February over previous years 13. However, Costco has also suffered reduced profits, largely due to lower gasoline prices cutting into gasoline sales at Costco warehouses. Excluding gasoline sales, however, Costco s sales increased year-over-year by 4%. However, Costco has a potential advantage over Wal-Mart, with a public image that is far better than Wal- Mart s. According to The Wall Street Journal, people think more positively about Wal-Mart this year than they have in the past, but less positively than [rival] Target. And among collegeeducated consumers, Wal-Mart s reputation has not improved. 14 Although Wal-Mart is clearly a price leader, this has not translated into a positive image for the company, which is also seen as very strongly anti-union. This has the potential to affect the company negatively when the economy improves and customers begin shopping at higher-priced competitors such as Whole Foods, Target, and other department stores. 13 Zimmerman, Ann. (2009, March 5). Corporate News: Costcoʼs Net Tumbles as BJʼs Posts Gain. The Wall Street Journal, p. B3. 14 Bustillio and Zimmerman, p. A1. 12

13 In comparing the financial statements of the two companies, it is clear that Wal-Mart performs well because it is such a large company, drawing in revenues from ten times as many stores as Costco. Wal-Mart s profit margin is roughly double that of Costco s (3.361 vs for FY 2008), and its Return on Assets and Return on Equity ratios are both higher than that of Costco s 15. For the fiscal year ended January 31, 2009, Wal-Mart reported a net income of $12.7 billion, nearly ten times Costco s reported net income of $1.28 billion for the fiscal year ended 31 August Part of this discrepancy can be attributed to the fact that Costco s fiscal year does not include holiday sales for the corresponding calendar year, causing Costco s 2008 revenues to be lower than revenues for similar companies. Revenue figures for these companies give the appearance that Costco has performed poorly in comparison to Wal-Mart. A brief ratio analysis shows that Costco has a lower debt ratio than Wal-Mart s ( vs for FY 2008), and its Times Interest Earned ratio is double that of Wal-Mart s, suggesting that Wal-Mart relies more on long-term debts than Costco. Liquidity ratios also show that Costco is slightly more liquid than Wal-Mart, with a current ratio of :1 to Wal-Mart s 884:1 for FY 2008, owing in large part to Costco s higher percentage of Current to Total Assets. Costco s quick ratio is.49837:1, compared to Wal-Mart s.2122:1, showing that Costco is more liquid than Wal-Mart with more current assets and fewer liabilities. Recent earnings per share figures show that Wal-Mart and Costco are fairly closely matched, with EPS of and respectively. Price-Earnings ratios, as posted on Yahoo!Finance, show that Costco actually exceeds Wal-Mart, with a P/E of compared to Wal-Mart s As a much larger company, Wal-Mart has a significantly higher number of outstanding shares 15 See also Appendix I: Summary Financial Data for Wal-Mart Stores Inc. and Appendix II: Summary Financial Data for Costco Wholesale Corp. 13

14 than Costco, however, so one would assume that earnings per share and price-earnings ratios for Wal-Mart would necessarily be higher. In comparing financial ratios for the previous year, inventory turnover and receivable turnover have increased for Costco, from in FY2007 to in FY2008, while Wal- Mart s receivable turnover has decreased nearly twenty points from in FY 2007 to in FY Both companies have seen a drop in their current assets relative to total assets, and while Costco also saw a drop in current liabilities relative to total assets, Wal-Mart saw an increase in current liabilities. Both companies, however, saw an increase in profit margin, with Costco s profit margin increasing from in 2007 to in 2008, while Wal-Mart saw an increase from in 2007 to in Return on Assets and Return on Equity for both companies has increased as well, with ROA up.68 points for Costco and.323 points for Wal- Mart, and ROE making comparable gains of points for Costco and points for Wal- Mart. Both companies saw a decrease in liquidity ratios in 2008, though those decreases were very small: roughly.02 points in both current and quick ratios for both companies. And while Wal-Mart increased its debt ratio by 1.2%, Costco decreased its debt ratio by.43%. Both companies saw a decrease to TIE ratios, but Costco s was the most severe decrease, dropping from in 2007 to in CONCLUSION Rather than lagging behind Wal-Mart, Costco and other warehouse clubs are closely matched to the retail giant, according to a comparison of financial ratios. Despite lagging growth in recent quarters, it seems that Costco s falling profits are due more to slashed prices and a 14

15 stronger dollar affecting international income figures than Wal-Mart s ability to dramatically outperform its competitors. Indeed, the recession has been good to the discount retail industry as a whole, which has been posting net gains as consumers demand cheaper goods in an effort to keep more cash in their pockets. Without the recession, it s possible that Wal-Mart could lose its dominance because of increased competition from companies such as Costco and its rival BJ s Wholesale Club, and diminishing returns due to its constant expansion. An analysis of public financial information has shown that Wal-Mart and its competitors will perform well during a recession primarily because they offer low prices to consumers. Warehouse clubs such as Costco, which are able to provide low-priced goods because of very low overhead costs, have the potential to grow revenues as consumers increase their demand for low prices. However, slashing prices too far in an effort to draw in more customers will affect company profits negatively. As ratio analysis and an analysis of financial performance has shown, the two companies have both performed well financially during the recession, and both show strong balance sheets. However, Wal-Mart s size has put it at an advantage to its competitors. With a large number of stores providing revenue for the company, Wal-Mart is more easily able to absorb losses from foreign exchange or lower prices. Wal-Mart also has a relationship with its suppliers that allows it to demand significantly lower prices on inventory, making it easier to lower prices while maintaining strong revenue. Wal-Mart s revenues will continue to outperform those of its competitors simply because it is a bigger company, but its competitors have shown that they are capable of performing just as well as the retail giant on a smaller scale. 15

16 WORKS CITED Bustillio, Miguel and Evans, Kelly. (2009, January 9). Battered Stores Pare Forecasts --- Wal- Mart, Others See Tough Months Ahead; December Same-Store Sales Disappoint. The Wall Street Journal, p. A1. Bustillo, Miguel and Zimmerman, Ann. (2008, November 14) Wal-Mart Flourishes As Economy Turns Sour. The Wall Street Journal, p. A1. Murphy, H. Lee. (2009, March 23). Cheap Chic: Biggest trade-down in American history has discount retailers on growth binge. Crain s Chicago Business, Retrieved March 28, 2009 from LexisNexis Academic database. Zimmerman, Ann. (2009, March 5). Corporate News: Costco s Net Tumbles as BJ s Posts Gain. The Wall Street Journal, p. B3. Zimmerman, Ann. (2009, March 6). Retail Sales Show Signs of Life. The Wall Street Journal, p. A1. REFERENCES Yahoo!Finance Wal-Mart Stores Inc. Costco Wholesale Corp

17 Appendix I: Summary Financial Data for Wal-Mart Stores Inc. Financial information for Wal-Mart Stores Inc. is taken from Yahoo!Finance (finance.yahoo.com) and Wal-Mart annual reports, accessible online at Valuation Measures Market Cap B Enterprise Value (27-Mar-09) B Trailing P/E Forward P/E (FY 31-Jan-2011) PEG Ratio (5 year expected) 1.27 Price/Sales 0.50 Price/Book 3.11 Enterprise Value/Revenue 0.59 Enterprise Value/EBITDA Financial Highlights Profit Margin 3.30% Operating Margin 5.62% Management Effectiveness Return on Assets 8.72% Return on Equity 20.41% Income Statement Revenue B Revenue per Share Quarterly Revenue Growth (yoy) 1.60% Gross Profit 92.28B EBITDA 29.54B Net Income Avail. to CS 13.25B Diluted EPS 3.39 Quarterly Earnings Growth (yoy) -7.40% Balance Sheet Total Cash 7.28B Total Cash per Share Total Debt 42.22B Total Debt/Equity N/A Current Ratio Book Value per Share Wal-Mart Stores Inc Income Statement Gross Profit/Sales % % Income from Cont Ops/Sales 3.401% 5.879% Balance Statement Current Assets/Total Assets % % Current Liabilities/Total Assets % % Total Liabilities/Total Assets % % Equity/Total Assets % % Profitability Profit Margin 3.361% 3.236% ROA 7.786% % ROE % % Div. Payout Ratio % - Liquidity Ratios Current.884: :1 Quick.21222: :1 Solvency Ratios Debt Ratio % % TIE Operational Ratios Inventory Turnover Receivable Turnover

18 Cash Flow Statement Operating Cash Flow 23.15B Levered Free Cash Flow 9.00B Stock Price History Beta Week-Change 0.74% S&P Week-Change % 52-Week-High (19-Sep-08) Week-Low (02-Feb-09) Day Moving Average Day Moving Average Share Statistics Average Volume (3 month) 25,137,600 Average Volume (10 day) 21,229,400 Shares Outstanding 3.92B Insider Ownership 43.66% Institutional Ownership 39.30% Dividends Forward Annual Dividend Rate 1.09 Forward Annual Dividend Yield 2.10% Trailing Annual Dividend Rate 0.99 Trailing Annual Dividend Yield 1.90% 5 Year Average Dividend Yield 1.50% Payout Ratio 28% Balance Sheet PERIOD ENDING 31-Jan Jan Jan-06 Assets Current Assets Cash And Cash Equivalents 5,569,000 7,373,000 6,414,000 Short Term Investments Net Receivables 3,654,000 2,840,000 2,662,000 Inventory 35,180,000 33,685,000 32,191,000 Other Current Assets 3,182,000 2,690,000 2,557,000 Total Current Assets 47,585,000 46,588,000 43,824,000 Long Term Investments Property Plant and Equipment 97,017,000 88,440,000 79,290,000 Goodwill 16,071,000 13,759,000 12,188,000 Intangible Assets

19 Accumulated Amortization Other Assets 2,841,000 2,406,000 2,885,000 Deferred Long Term Asset Charges Total Assets 163,514, ,193, ,187,000 Liabilities Current Liabilities Accounts Payable 44,278,000 43,471,000 40,178,000 Short/Current Long Term Debt 11,269,000 8,283,000 8,648,000 Other Current Liabilities 2,907, Total Current Liabilities 58,454,000 51,754,000 48,826,000 Long Term Debt 33,402,000 30,735,000 30,171,000 Other Liabilities Deferred Long Term Liability Charges 5,111,000 4,971,000 4,552,000 Minority Interest 1,939,000 2,160,000 1,467,000 Negative Goodwill Total Liabilities 98,906,000 89,620,000 85,016,000 Stockholders' Equity Misc Stocks Options Warrants Redeemable Preferred Stock Preferred Stock Common Stock 397, , ,000 Retained Earnings 57,319,000 55,818,000 49,105,000 Treasury Stock Capital Surplus 3,028,000 2,834,000 2,596,000 Other Stockholder Equity 3,864,000 2,508,000 1,053,000 Total Stockholder Equity 64,608,000 61,573,000 53,171,000 Net Tangible Assets $48,537,000 $47,814,000 $40,983,000 19

20 APPENDIX II: Summary Financial Data for Costco Wholesale Corp. Financial information for Costco Wholesale Corp. is taken from Yahoo!Finance (finance.yahoo.com) and Costco annual reports, accessible online at under the heading Investor Relations. Valuation Measures Market Cap 20.57B Enterprise Value (27-Mar-09) 19.66B Trailing P/E Forward P/E (FY 31-Jan-2011) PEG Ratio (5 year expected) 1.54 Price/Sales 0.29 Price/Book 2.31 Enterprise Value/Revenue 0.27 Enterprise Value/EBITDA Financial Highlights Profit Margin 1.64% Operating Margin 2.62% Management Effectiveness Return on Assets 5.82% Return on Equity 13.23% Income Statement Revenue 72.95B Revenue per Share Quarterly Revenue Growth (yoy) -0.70% Gross Profit 8.98B EBITDA 2.61B Net Income Avail. to CS 1.19B Diluted EPS 2.71 Quarterly Earnings Growth (yoy) % COST I/S Gross Profit/Sales Income from Cont Ops/Sales B/S CA/TA CL/TA Liab/TA Equity/TA Profitability Profit Margin ROA ROE Div. Payout Ratio Liquidity Ratios Current : :1 Quick.49837: :1 Solvency Ratios Debt Ratio TIE Operational Ratios Inventory Turnover Receivable Turnover Balance Sheet Total Cash 3.28B Total Cash per Share Total Debt 2.37B Total Debt/Equity N/A 20

21 Current Ratio Book Value per Share Cash Flow Statement Operating Cash Flow 2.15B Levered Free Cash Flow M Stock Price History Beta Week-Change % S&P Week-Change % 52-Week-High (14-May-08) Week-Low (06-Mar-09) Day Moving Average Day Moving Average Share Statistics Average Volume (3 month) 6,461,890 Average Volume (10 day) 6,265,310 Shares Outstanding M Insider Ownership 1.05% Institutional Ownership 81.50% Dividends Forward Annual Dividend Rate 0.64 Forward Annual Dividend Yield 1.30% Trailing Annual Dividend Rate 0.64 Trailing Annual Dividend Yield 1.30% 5 Year Average Dividend Yield 0.90%% Payout Ratio 22% Balance Sheet (figures in thousands) PERIOD ENDING 31-Aug-08 2-Sep-07 3-Sep-06 Assets Current Assets Cash And Cash Equivalents 2,619,429 2,779,733 1,510,939 Short Term Investments 655, ,787 1,322,181 Net Receivables 1,008,847 1,089, ,239 Inventory 5,039,413 4,879,465 4,568,723 Other Current Assets 138, Total Current Assets 9,462,045 9,324,153 8,232,082 Long Term Investments 491, Property Plant and Equipment 10,354,996 9,519,780 8,564,295 21

22 Goodwill 73, Intangible Assets Accumulated Amortization Other Assets 295, , ,693 Deferred Long Term Asset Charges 5, Total Assets 20,682,348 19,606,586 17,495,070 Liabilities Current Liabilities Accounts Payable 6,829,254 6,619,576 5,986,051 Short/Current Long Term Debt 140, , ,908 Other Current Liabilities 1,904,499 1,848,440 1,483,232 Total Current Liabilities 8,874,165 8,581,753 7,819,191 Long Term Debt 2,205,952 2,107, ,369 Other Liabilities 214, Deferred Long Term Liability Charges 113, , ,713 Minority Interest 81,857 69,317 63,358 Negative Goodwill Total Liabilities 11,490,287 10,983,245 8,351,631 Stockholders' Equity Misc Stocks Options Warrants Redeemable Preferred Stock Preferred Stock Common Stock 2,163 2,185 2,312 Retained Earnings 5,360,854 5,132,343 6,041,212 Treasury Stock Capital Surplus 3,543,383 3,118,224 2,822,652 Other Stockholder Equity 285, , ,263 Total Stockholder Equity 9,192,061 8,623,341 9,143,439 Net Tangible Assets $9,118,354 $8,623,341 $9,143,439 22