Has Costco become more or less efficient over time

CASE : A -186A DATE : 06/19/03 C OSTCO W HOLESALE C ORPORATION F INANCIAL S TATEMENT A NALYSIS (A) INTRODUCTION Margarita Torres first purchased shares in Costco Wholesale Corporation in 1997 as part of her personal investment portfolio. Between 1997 and 2002, she added slightly to her holdings from time to time when the company sold stock for what she felt was a reasonable valuation, and up to that time she did not sell any of her shares. Having watched Costco grow from 265 warehouses to 365 worldwide, and from sales revenue of $21.8 billion to $34.1 billion, she wondered what factors led to such successful grow th. She also wanted to determine whether those factors would hold consistent going forward. At this point, Costco was one of a special breed of retailers called wholesale clubs. Unlike other retailers, wholesale clubs required that customers purchase a nnual memberships in order to shop at their stores. Costco operated a chain of warehouses that sold food and general merchandise at large discounts to member customers. The company was able to maintain low margins by selling items in bulk, keeping ope rating expenses to a minimum, and turning inventory over rapidly. Costco’s closest competitors were SAM’S Club (a division of Wal -Mart) and BJ’s Wholesale, which both operated as wholesale clubs. Other competitors included general discounters (such as W al-Mart), general retailers (such as Sears), grocery store chains (such as Safeway), and specialty discounters (such as Best Buy). Torres first considered investing in Costco because she herself was a member. She was impressed by the compan y’s low prices and noticed in particular that her local Costco was always crowded. She decided to research the company and started, as always, with their annual reports. She discovered a company with tremendous growth potential, strong operati onal efficiency, and a dedicated management team – and a stock selling at a reasonable price. Now, in July 2002, having profited well from her investment, she decided it was time to update her analysis and determine whether the company was still operatin g efficiently. Brian Tayan prepared this case under the supervision of Professor Maureen McNichols as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2003 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e -mail the Case Writing Office at: cwo@gsb.stanford.edu or write: Case Writing Office, Stanfor d Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305 -5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means — electronic, mechanical, photocopying, recording, or otherwise — without the permission of the Stanford Graduate School of Business. Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 2 INDUSTRY OVERVIEW – RETAIL Department Stores The retail industry in the United States was transformed in the late 1800s by the rise of department stores and general merchants. Companies such as R.H. Macy & Company (founded in 1858) and Bloomingdale Brothers, Inc. (1872) opened stores in New York City and subsequently began to expand across the country. Department stores became famous not only as places to shop, but also as destinations for the new pastime of win dow -shopping. These stores revolutionized retailing by offering a variety of products in one location and by developing a reputation for excellent customer service. Other innovations included free delivery of purchases and the ability for customers to ma ke purchases using store credit. The most dominant department store for most of the 20 th century was Sears, Roebuck and Company. Founded in 1893 as a mail -order company, Sears opened its first retail store in 1925. By 1945, Sears achieved $1 billion in sales. Throughout the 1950s and 1960s, the company expanded aggressively across the country, selling everything from clothing to appliances to televisions and home repair items. Trying to find success in ventures beyond retailing, the company had owned at one point Allstate Insurance (home, life and auto insurance), Coldwell Banker (real estate broker), and Dean Witter Reynolds (stock brokerage). Sears also launched the Discover credit card. From the mid -1970s through 2002, howeve r, the company struggled, and all of these companies were been sold off. In 2001, Sears had sales of $41 billion and Federated Department Stores, which owns Macy’s and Bloomingdales, had sales of $16 billion. 1 Discount Stores The 1960s witnessed a n ew breed of retailer, the mass discounter. These companies originally targeted lower income consumers with a broad product line similar to that of Sears and other department stores. Discounters, however, differentiated themselves by de -emphasizing t he shopping experience and instead focused on delivering items at the lowest price. In 1960, discounters had combined sales of $2 billion. Over the next four decades, discounters prospered. In mid -2002, the largest discounter was Wal -Mart, founded by Sam Walton. Walton started his career as a management trainee at J.C. Penney and later as a franchiser of five -and -dime stores. In 1962, he opened the first Wal -Mart store in Rogers, Arkansas . The operating philosophy of Wal -Mart was simple: offer products to customers at the lowest price possible, locate stores in rural locations, where they can serve the average American, maintain a clean store environment where customers will want to s hop, hire energetic employees who provide outstanding customer service, treat employees as “associates” and manage them with an open -door policy where they can express complaints or make suggestions freely. In fact, Walton was famous for allowing empl oyees at any level to walk into his office with comments on how to improve Wal -Mart. Wal -Mart’s subsequent growth was unprecedented. Sales were $44 million in 1970. They had grown to $1.2 billion by 1980 and to $26 billion by 1989 when Walton retired as CEO. For the fiscal year ended January 31, 2001, Wal -Mart had sales of $218 billion. The company operated over 4,400 locations worldwide. 1 Federated sales for fiscal year ended February 2, 2002. Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 3 Wal -Mart also ex panded its product offerings. Wal -Mart stores sold clothing, health and beauty products, prescriptions, electronics, sporting goods, music, and toys. In 1983, Wal -Mart opened its first SAM’S wholesale club to compete with Price Club. In 1987, Wal -Mart opened its first Supercenter, which included a full -sized grocery store along with the complete product line of a traditional Wal -Mart store. By 2000, Wal -Mart was als o selling its products online through Walmart.com. During this era of Wal -Mart expansion, another type of discounter developed, specializing in the sale of only one category of product, such as electronics, hardware, or furniture. Dubbed “category killers,” these companies looked to beat discounters at their own game by achieving even greater efficiencies of scale. Although not all specialty discounters gained lasting success, several continued to dominate their respective categories, i ncluding Home Depot, Circuit City, and Walgreens. Discounters and specialty discounters had been very successful stealing sales from department stores. As a result, general merchandisers from Sears to J.C. Penney have been forced to reinvent themselve s in order to stay in business. Whether they would succeed, however, was still in question. Montgomery Ward, a once -formidable competitor to Sears, was forced to shut down its stores in 2000 after 128 years of operations. Wholesale Clubs The early 1980s saw the introduction of a new trend in retailing – the wholesale club. Wholesale clubs are based on the same premise as discounters: offer the best value to shoppers. They delivered that value, however, in a different way. Fi rst, customers purchased an annual membership in order to shop in the stores. Second, the clubs carried a very limited selection of goods, generally 4,000 SKUs compared to 40,000 SKUs at most grocery stores. Whereas discounters and specialty discounters carried a broad product line, clubs generally carried one or two brands in each category. Third, the clubs sold items in bulk. By limiting the selection of goods and selling in bulk, clubs were able to negotiate discounts from vendors and pass on those discounts to customers in the form of lower prices. These two factors also allowed clubs to turn inventory over faster. Fourth, the clubs kept operating expenses to a minimum. Low operating expenses were essential in order for them to maintain profitability, because they worked on very low gross margins. Clubs achieved low operating expenses by running their stores in warehouse -style facilities and by reducing stocking costs. Wholesale clubs saw annual revenue and earnings growth of 12 – 15 percent during the 1990s compared to 5 – 6 percent annual growth for general retailers. Wholesale clubs expanded internationally with limited success. They gained traction in Canada and Mexico, but growth was not as effectiv e in Europe, South America, and Asia. Although prices of wholesale clubs were attractive to international consumers, there were many challenges in growing internationally, including differences in consumer purchasing behavior, less space at home for c onsumers to store bulk items, high real estate costs for warehouses, government regulations, and difficulties in implementing a distribution system (see Exhibit 1). Online Retailers In 2000, online retailers were thought to be the next dominant player in retailing. Shipping items from centralized distribution centers, online retailers were thought to have a fundamental cost Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 4 advantage over brick -and -mortar retailers. However, consumers did not change behavior to make a substantial portion of their purchases online. As a result, by 2002, online retailers had not gained the sales volume necessary to realize efficiencies of scale. The high cost of shipping and the inability of customers to inspect goods before purchasing were thought to be two main impediments. Although customers adapted to purchasing cer tain categories through the Internet, such as electronics, software, books, and music, online retailers had not yet become a major threat to traditional retailers or discounters. INDUSTRY GROWTH Despite the fabulous growth in revenue for discounters and warehouse clubs, sales for the retail industry as a whole grew roughly in line with GDP. According to Survey of Current Business , retail and wholesale trade activities in the United States totale d $1.6 trillion or 16 percent of GDP in 2001 2. In 1960, retail and wholesale trade were substantially smaller ($68.8 billion) but still represented approximately 15 percent of GDP 3. In this sense, retail was a mature industry with companies achieving g rowth in excess of GDP only by stealing sales from competitors or by expanding beyond the United States. GDP growth over the forty -year period 1960 to 2000 was 8 percent per year in nominal dollars. GDP growth from 1990 to 2000, when inflation was low, at 5.9 percent per year (see Exhibits 2 and 3). COSTCO AND THE COMPETITION Costco History In 1975, Sol Price opened the first wholesale club, named Price Club, in San Diego, California.

Operating on a membership basis, the club sold goods in bulk to small business owners.

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Business owners could buy staple items including consumer product, canned foods and beverages, and tobacco products for resale in their own stores. Customer s typically purchased products at Price Club for their personal use as well. Going public in 1980, Price Club expanded rapidly throughout California and the West, as well as select locations in Canada and Mexico. The company merged with Costco in 1993. Operating under the same business model as Price Club, Costco Wholesale was founded in 1983 by Jeffrey Brotman and James Sinegal. The company went public in 1985 and used proceeds to fund expansion in the Pacific Northwest and Canada. In 1985, merchandise sales were $336 million and membership fees just over $4 million. With the success of the wholesale club concept, competition soon followed. Wal -Mart entered the industry by crea ting SAM’S Club, Kmart opened Pace Clubs, and BJ’s Wholesale began operations in the Northeast. By the early 1990’s, the industry had too many players. In 1993, a wave of consolidation took place, as SAM’S purchased Pace Club and Costco purchased Price Club (creating Price/Costco, which later simplified its name to just Costco). The two main survivors, Costco and SAM’S, were left with 85 percent of the market. 2 U.S. Census Bureau, Statistical Abstract of the United States: 2001 (Washington, DC, 2001), p. 418. 3 U.S. Census Bureau, Statistical Abstract of the United States: 1962 (Washington, DC, 1962), p. 317. Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 5 Costco Strategy In 2001, Costco was the largest wholesale club in the industry with sales of $34 billion. The company, however, was smaller than SAM’S in number of warehouses (365 for Costco vs. 528 for SAM’S). Costco differentiated itself from SAM’S by targeting a weal thier clientele of small business owners and middle class shoppers (see Exhibit 4). Costco, through its history with Price Club, to ok great pride in having invented and developed the club warehouse concept. The company demonstrated its value to customers by refusing to mark up products more than 14 percent over the distributor’s price. By comparison, a typical retailer marked up p roducts 25 percent to 40 percent. Although selling items in bulk allowed for many operating efficiencies, management’s main focus was on delivering the lowest per unit price on the products it sold. For example, a 100 fl. ounce container of Tide liquid detergent would sell at a general retailer for $8.99, or $0.0899 per fl. ounce. At Wal -Mart, a 100 fl. ounce container sold for $7.44, or $0.0744 per fl. ounce. Costco sold the same detergent in a 300 fl. ounce container at a price of $17.99, or $0.06 fl. per ounce. Costco was able to sell at such a low per unit cost precisely because of its bulk packaging. The size of the container, however, was not maximized in order to compel consumers to purchase more goods. Costco had a policy of not increasi ng the size of a container unless it resulted in a lower per unit cost. That is, they would not sell Tide detergent in containers greater than 300 fl. ounces unless the resulting price was less than $0.06 per fl. ounce. They believed that lowering the unit price of goods was what allowed them to deliver value to the customer. Selling through Costco was a mixed blessing for product manufacturers. On the one hand, Costco offered a broad distribution channel that brought increased revenues. In additi on, Costco only purchased a handful of SKUs from its vendors. This allowed manufacturers to greatly reduce production costs. For example, when Costco ordered toilet paper from Kimberly Clark, it ordered one color, one print, and one ply. This allow ed Kimberly Clark to set up the production line only once and run continuous batches of the same product, lowering per unit production costs. On the other hand, because Costco was a powerful purchaser, it could demand that production savings be pas sed on to itself in the form of lower prices. As a result, the manufacturer would see increased revenues, but increases in profits would be limited. Costco passed these savings on to its own customers. The result was lower profits through out the supply chain. Costco created value for the customer through these savings. This drove the value of its membership and allowed Costco to raise fees over time. In 1986, Costco’s membership fee was $25. By 2002, it was $45. The more savings Costco was able to pass on to customers, the more it would be able to increase its membership fee over time. Costco also delivered value to customers by expanding its selection of name -brand products and by adding ancillary services. Costco offered such items as Levi’s jeans, Polo bed comforters, and Compaq computers. Through its proprietary brand, Kirkland, the company offered everything from cheese and ice cream to cookware and vitamins. Kirkland products were developed wherever Costco recognized a need for high quality, low cost items that did not exist in the market. In addition, Costco added photo development services , pharmacies, gas stations, and tire changing stations in many of its stores. The company also increased its fresh food department and added high -end wines and jewelry in an attempt to serve the needs of its Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 6 customers. In fact, with $500 million in wine sales in 2001, Costco was the largest retailer of wine in the United States. All of these services were aimed at increasing the number of visits that members made to Costco stores per year and increasing the total dollars spent per customer per year. Increased sales per customer translated into increased sales per store. Besides offering the lowest cost products, Costco claimed to have the best operating efficiency in the business. 4 Operating efficiency was essential, given the company’s low gross margin. This efficiency was the result of a very cost -conscious culture. In fact, the company reported operating margins down to the basis point in its annual report. Expenses were minimized through various methods. Stores were run in no -frills warehouse facilities, reducing capital expenditures. Whenever possible, goods were not individually stocked on shelves; instead, a forklift delivered a pallet directly onto the warehouse floor, reducing labor costs. The company distributed goods to its stores through a cross -docking procedure, in an effort to reduce transportation costs. Instead of p aying for half -full trucks to deliver products directly from the manufacturer to the warehouse, trucks met at distribution hubs called cross -docks. The manufacturers unloaded full truckloads of products at the cross -dock locations. Costco employees then consolidated and reloaded products into trucks bound for each specific store location. This ensured that trucks were always operating at full capacity, from the manufacturer to the store. Cross -docks never stored inventory, so that all of the items de livered were reloaded and shipped that same day. Costco profited richly from this strategy. In 1985, the company had a net loss of $3 million on product sales of $336 million. By 2001, the company’s profit had soared to $602 million on product sales of $34 billion (see Exhibit 5). 5 SAM’S Club SAM’S Club, operated by Wal -Mart, was Costco’s largest wholesale club competitor. SAM’S outnumbered Costco in terms of number of warehouses and worldwide members. However, Costco had larger total revenues , sales per store, and operating income. A few factors limited SAM’S performance. First, SAM’S traditionally catered to a lower income customer than Costco. As a result, SAM’S customers tended to spend less per visit than Costco’s. Second, until 20 00 , SAM’S lacked a differentiated operating strategy in the Wal -Mart Corporation. Most SAM’S clubs were located adjacent to a Wal -Mart store, offering the same products at the same prices. Many shoppers patronized Wal -Mart without seeing the need to pay a membership fee to enter SAM’S. As a result, many of the cost savings that the two companies enjoyed in real estate development, product purchasing, and delivery were more than offset by decreased sales at SAM’S. 4 Wal -Mart would not break out detailed operating information on SAM’S for comparison. 5 Fiscal year ended September 2, 2001. Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 7 Third, SAM’ S suffered large amounts of management turnover during the 1990s. SAM’S saw four different presidents come and go between 1994 and 1998. In contrast, James Sinegal and Jeff Brotman had been in charge of Costco since the company’s founding. In 2001, SAM’S began undergoing transformation. Its president, Thomas Grimm, was providing stronger leadership to the organization. He was pursuing an aggressive push to regain the lead from Costco by increasing the rate of expansion in warehouse stor es. In fiscal year 2002, SAM’S was planning to open 80 new warehouses. The company had also outlined new plans to renovate older warehouses, add higher -end merchandise to appeal to wealthier clientele, and introduce ancillary product lines similar to Costco’s in order to increase customer visits. Most importantly, SAM’S and Costco’s expansion plans would pit the two warehouse clubs directly against each other in local markets. Traditionally, SAM’ S and Costco did not have a large number of stores competing in the same markets. The majority of SAM’S Clubs were located in the South and most Costco’s were in the West. With plans for both clubs to enter each other’s markets, it was unclear how much cannibalism would take place. One indication came from a recent Costco store, which opened in the Dallas market in 2000. Although SAM’S already had 14 warehouses in Dallas, Costco claimed that their own first -year sales were in line with historical ave rages, approximately $55 million (see Exhibit 7). BJ’s Wholesale Club BJ’s Wholesale Club was a small but efficient competitor to Costco. BJ’s was founded in 1984 in Medford, Massachusetts. By 2002, the company had 130 warehouses, all located in the United States. 2001 sales were $5 billion, on a membership of 6.7 million. BJ’s strategy was similar to Costco’s: to target small business owners and middle -class customers, include high -value goods in the product line to increase sales per customer, and increase store visits through ancillary products. BJ’s strategy diverged from Costco’s in that its stores were smaller (110,000 square feet versus 148,000 square feet), it carried more SKUs (6,000 per store versus 4,000 per store), and it marked up select items more than 14 percent, which was Costco’s limit. Also, BJ’s spent more money on flooring, lighting, and signage in its warehouse facilities in an attempt to improve the shopping atmosphere. The results were mixed. In more recent years, BJ’s had achieved sales and profit growth greater than Costco’s. BJ’s customers visited its stores 12 times per year versus 9 times for Costco and SAM’S. BJ’s also reported gross margins of 9.2 percent, which allowed it to claim that its operations wer e even more efficient than Costco’s 6. On the other hand, sales per store were only $55 million versus $101 million at Costco, and its membership fee was not as high as Costco’s ($40 for a basic membership versus $45) (see Exhibit 8). 6 A direct comparison of gross margins between the two companies is misleading in that BJ’s cost of goods sold figure includes procurement expenses. Costco excludes such expenses from cost of goods sold. Both methods are acceptable under GAAP. BJ’s ac counting method results in shifting costs from operating expenses to cost of goods sold, decreasing its reported gross margins, decreasing operating expenses, but leaving operating profits the same. Information is not available in the BJ’s annual repor t to allow us to quantify the company’s procurement expenses. Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 8 REVIEW OF COSTCO OPERATIONS Torres had been following Costco’ s progress for five years, but decided that it was time to run a more thorough analysis. From an operational standpoint, Costco had seen tremendous growth during this period. But how had the company been affected by growth? Had its operational efficiency changed? How had it financed the growth and how had its capital structure evolved? Torres typically evaluated her investments using two methods: ratio analysis and cash flow analysis. Ratio analysis involved comparing different line items in public financial statements to see how they change over time or how they compare to similar companies. Cash flow analysis involved analyzing a company in terms of the cash it generates from operating activities, investment activities and financing activities. The objective of cash flow analysis was to understand what cash requirements are needed to fund the business, the sources of that cash, and the use management makes of free cash flow. First, she decided to focus on ratio analysis and leave cash flow analysis for another time. She decided to organize her analysis into three parts: common -size financial statements for Costco over the past five years, a sustainable growth model of Costco over the same peri od, and a benchmark of Costco against its competitors in important industry ratios. Common -Size Statements Common -size income statements expressed the line items of a company’s income statement as a percent of revenues. Looking at Costco’ s income statement, Torres noticed that there were two revenue lines: net sale of goods and membership fees. In creating her common -size income statement, she decided to use net sales of goods as the point of comparison (100 percent) and express other li ne items, including membership fees, as a percentage of net sales. Her rationale was that this allowed for a clearer reflection of gross and operating margins. Using this format, she was able to analyze the profit structure of Costco over time. Commo n-size balance sheets expressed the line items of a company’s balance sheet as a percent of total assets. Using this format, she was able to analyze the asset structure of Costco over time and understand how its assets were funded (see Exhibit 9). Susta inable Growth Model The sustainable growth rate was the rate at which a firm could grow while keeping its profitability and financial policies unchanged 7. The sustainable growth model allowed an analyst to isolate the drivers that have led to changes in historical growth in order to isolate causes of change. This model could be decomposed into four steps. Step 1: Profitability and Earnings Retention At the end of each year, the return that a company realized on equity capital could either be reinvested back in the business or paid out to investors in the form of dividends and common stock repurchases. If no dividends or share repurchases were made and earnings were reinvested back into the business at the same incremental rate of return, the company’s return on equity 7 Sustainable growth model taken from: Palepu et al., Business Analysis & Valuation: Using Financial Statements (South -Western C ollege Publishing, Cincinnati, 2000), Chapter 9. Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 9 would hold constant over time. In reality, however, companies frequently experienced changes in their return on equity, and most companies distributed some portion of earnings to investors. As a result, at the highest level, the company’s sustainable growth rate could be expressed as the product of the following two ratios: * Earnings Retention R atio = 1 – Dividend Payout Ratio * Return on Equity (ROE) = Net Income / Owner’s Equity If a company retained all of its earnings, its dividend payout ratio was 0 and its earnings retention ratio was 1. As it paid out more of its earnings in dividends , its earnings available for reinvestment in the business necessarily go down. Return on equity measured how much profit is generated in net income for every dollar invested in equity capital. Step 2: Leverage The ROE component could be expressed as th e product of two ratios: financial leverage and return on assets. Issuing debt allowed a company to increase its return on equity, so long as the return on invested capital is greater than the cost of debt. For example, if a company’s core business earned 15 percent return on invested capital and it could borrow debt at 10 percent, financial leverage would increase its ROE. Financial leverage was expressed as the ratio * Financial Leverage = Assets / Owner’s Equity Assets represented the sum of capital employed in the business at any given time. Likewise, return on assets was a measure of the business’ overall profitability, making no distinction be tween funds due to shareholders and funds due to creditors. Return on assets was expressed as the ratio * Return on Assets (ROA) = Net Income / Assets By breaking down Costco’s ROE into these components, Torres could better understand how leverage inf luenced its return on equity. She could also analyze how the increased asset base from warehouse expansion was affecting the company’s profitability. Step 3: Turnover and Margins A company’s return on assets could be further broken down into two compon ents to determine whether increased sales or increased margins accounted for changes in profitability. The first ratio was asset turnover. Asset turnover measured how many dollars in sales were made for each dollar in assets. The second component was net income margin, which measured how much profit was generated per dollar of sales. * Asset Turnover = Sales / Assets * Net Income Margin = Net Income / Sales Relating this to Costco, she could see how an increase in the asset base affected both sales and net margin. Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 10 Step 4: Pretax Income and Tax Effect The fourth step was to decompose the net income margin into pretax return on sales and the tax effect. * Pretax Return on Sales = Pretax Income / Sales * Tax Effect = 1 – Tax Rate This last step allowed her to determine whether changes in the net margin were driven by operating efficiencies or the ability of Costco management to influence its tax rate. Reviewing these ratios together, she was able to pinpoint which aspects drove the profitability of Costco over time. She was most interested in determi ning whether Costco had grown at a sustainable rate, or whether growth had been too fast or too slow. She could determine this by finding a deterioration in certain ratios. Finally, she considered how new store openings impacted the ratios (see Exhibi t 10). Benchmarking Ratios As the third step in her ratio analysis, Torres wanted to get a better sense for how Costco compared to main competitors in operational efficiency. She decided to use a competitive set of Sears, Wal -Mart, and BJ’ s Wholesale. In a retail setting, the gross margin was a reflection of how much the retailer marked up items for resale. This ratio reflected roughly the pricing strategy of each company. * Gross Margin = (Sales – Cost of Goods Sold) / Merchandise Sale s Operating margin was a reflection of how much profit a retailer generated from selling its items after paying all operating expenses. For Costco and BJ’s, she included membership fees in revenues. * Operating Margin = (Revenues – Cost of G oods Sold – Operating Expenses) / Revenues Net margin, described above, was a bottom -line reflection of profitability taking into account all sources of revenue and expenses from continuing operations. * Net Margin = Net Income / Revenues The current ratio was a reflection of a company’s short -term liquidity. A ratio greater than 1 indicated that short -term assets were sufficient to service short -term liabilities. Historically, a company with a high current ratio was thought to be sec ure. However, managers came to realize that tying up too many funds in short -term assets was an inefficient use of capital. Subsequently, many companies sought to maintain a current ratio closer to 1. As a result, whether a company with current rati o equal to 1 was operating efficiently is open to an analyst’s interpretation. * Current Ratio = Current Assets / Current Liabilities Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 11 Inventory turnover was a reflection of how long inventory remains in the store before sale.

Companies with high inventory turnover were at a competitive advantage because they tied less money up in unsold inventory and because they had the flexibility to a djust their product mix more frequently. * Inventory Turns = Cost of Goods Sold / [(Opening Inventory + Ending Inventory) / 2] Average collection period for receivables measured how many days, on average, it took for a company to receive collections from customers. * Average Receivables Period = 365 Days * Accounts Receivables / Sales Average payables period measured how many days, on average, it took a company to pay suppliers. * Average Payables Period = 365 * Accounts Payable / Cost of Goods Sold In reviewing these numbers, Torres considered how they reflected the differences in strategies between Costco and its competitors. She also wondered what they implied about competi tive differences in the companies (see Exhibit 11). Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 12 Exhibit 1 Sales Revenue for Major Retailers, Logarithmic Scale (1955 – 2000) 1,000,000 100,000 10,000 1,000 100 10 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Federated Department Stores Sears, Roebuck Wal -Mart BJ ’s Wholesale Costco Wholesale Company CAGR of Sales, 1990 – 2000 Federated 9.9% Sears, Roebuck – 3.1% Wal -Mart 19.4% BJ’s † NA Costco †† 22.8% Gross Domestic Product 5.9% NB: Federated Department Store sales 1987 -1989 estimated. Company operated in bankruptcy during this period. † BJ’s growth rate from 1994 to 2000 was 13.6%. †† Costco merged with Price Club during this period, which greatly increased sales. In 1992, the year before the merger, Costco had sales of $6.6 billion. In 1993, the combined companies reported sales of $15.5 billion. Sources: Value Line Company Reports on Federated Department Stores, 1955 – 2000 Value Line Company Reports on R.H. Macy , 1955 – 1985 Value Line Company Reports on Sears, Roebuck, 1955 – 2000 Value Line Company Reports on Wal -Mart, 1965 – 2000 Value Line Company Reports on Costco, 1985 – 2000 Value Line Company Reports on BJ’s Wholesale, 1994 – 2000 Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 13 Exhibit 2 Retail and Wholesale Trade as a Percentage of GDP † 1950 1960 1970 1980 1990 2000 Gross domestic 241 415 801 2,708 5,546 9,873 product, $bn Retail & wholesale 41 64 121 437 884 1568 trade, $bn Retail & wholesale 17% 15% 15% 16% 16% 16% trade, as % of GDP † In current dollars Source: U.S. Bureau of Economic Analysis, Survey of Current Business , 1952, 1962, 1972, 1982, 1992, 2001 Exhibit 3 Per Capita Income † 1950 1960 1970 1980 1990 2000 Gross domestic 1,892 2,918 5,069 12,276 23,215 36,174 product, $bn Personal income, $ 1,502 2,283 4,101 10,205 19,614 30,069 Disposable personal 1,369 2,026 3,591 8,869 17,176 25,379 income, $ Personal 1,270 1,838 3,164 7,741 15,327 24,534 consumption exp., $ † In current dollars Source: U.S. Bureau of Economic Analysis, Survey of Current Business , 1952, 1962, 1972, 1982, 1992, 2001 Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 14 Exhibit 4 Number of Warehouse: Costco, SAM’S, BJ’s (1997 – 2001) 1997 1998 1999 2000 2001 Costco Number of stores 274 292 308 331 365 – US 200 211 221 237 264 – Canada 54 56 58 59 60 – Mexico 13 14 16 18 20 – Other international 7 11 13 17 21 SAM’S Club Number of stores 475 483 497 512 528 – US 436 443 451 463 475 – Canada 0 0 0 0 0 – Mexico 28 28 31 34 38 – Other international 11 12 15 15 15 BJ’s Wholesale Number of stores 84 96 107 118 130 – US 84 96 107 118 130 – Canada 0 0 0 0 0 – Mexico 0 0 0 0 0 – Other international 0 0 0 0 0 Sources: Costco Annual Reports, 1997 – 2001. Fiscal years ended Sunday nearest to August 28. Wal -Mart Annual Reports, 1997 – 2001. Fiscal years e nded Sunday nearest January 31. BJ’s Wholesale Annual Reports, 1997 – 2001. Fiscal years ended Sunday nearest January 31. Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 15 Exhibit 5 Financial Statements for Costco Wholesale Corp. (1997 – 2001) Warehouses in Operation 2001 2000 1999 1998 1997 Beginning of year (including Mexico) 331 308 292 274 265 Openings 41 27 23 19 17 Closings (7) (4) (7) (1) (8) End of year 365 331 308 292 274 Members at Year End (thousands) Business (primary cardholders) 4,358 4,170 3,887 3,676 3,537 Gold Star 12,737 10,521 9,555 8,654 7,845 Income Statement (millions) 2001 2000 1999 1998 1997 Revenue Net sales 34,137 31,621 26,976 23,830 21,484 Membership fees and other 660 543 480 440 390 Total revenues 34,797 32,164 27,456 24,270 21,874 Operating expenses Merchandise costs 30,598 28,322 24,170 21,380 19,314 SG&A 3,129 2,756 2,338 2,070 1,877 Preopening expenses 60 42 31 27 27 Provision for impaired assets / closings 18 7 57 6 75 Total operating expenses 33,805 31,127 26,596 23,483 21,293 Operating income 992 1,037 860 787 581 Other income (expenses) Interest expense (32) (39) (45) (48) (76) Interest income and other 43 54 44 27 15 Provision for merger and restructuring 0 0 0 0 0 Income continuing ops before taxes 1,003 1,052 859 766 520 Provision for income taxes 401 421 344 306 208 Income before cumulative effect of accting 602 631 515 460 312 Cumulative effect of accting, net of tax 0 0 (118) 0 0 Income from continuing operations 602 631 397 460 312 Discontinued operations Income (loss), net of tax 0 0 0 0 0 Loss on disposal 0 0 0 0 0 Net Income (loss) 602 631 397 460 312 Net income per common share: Basic, before accounting change 1.34 1.41 1.17 1.07 0.76 Cumulative effect of accounting changes 0.00 0.00 (0.27) 0.00 0.00 Basic 1.34 1.41 0.90 1.07 0.76 Diluted 1.29 1.35 0.86 1.01 0.73 Number of common shares for calculation Basic 449,631 446,255 439,253 431,012 414,758 Diluted 475,827 475,737 471,120 463,371 449,336 Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 16 Exhibit 5 (Continued) Balance Sheet (thousands) 2001 2000 1999 1998 1997 Current assets Cash and equivalents 602,585 524,505 440,586 361,974 175,508 Short -term investments 4,999 48,026 256,688 75,549 0 Receivables, net 324,768 174,375 168,648 171,613 147,133 Merchandise inventories, net 2,738,504 2,490,088 2,210,475 1,910,751 1,686,525 Other current assets 211,601 233,124 239,516 108,343 100,784 Total current assets 3,882,457 3,470,118 3,315,913 2,628,230 2,109,950 Property and equipment Land and rig hts 1,877,158 1,621,798 1,264,125 1,119,663 1,094,607 Building, leaseholds and land improvements 3,834,714 3,007,752 2,444,640 2,170,896 1,933,740 Equipment and fixtures 1,529,307 1,311,110 1,138,568 948,515 840,578 Construction in process 133,995 200,729 176,824 91,901 81,417 Subtotal 7,375,174 6,141,389 5,024,157 4,330,975 3,950,342 Less accumulated depreciation (1,548,589) (1,307,273) (1,117,269) (935,603) (795,708) Net property plant and equipment 5,826,585 4,834,116 3,906,888 3,395,372 3,154,634 Other assets 380,744 329,706 282,200 236,218 211,730 Total assets 10,089,786 8,633,940 7,505,001 6,259,820 5,476,314 Current liabilities Short -term borrowing 194,552 9,500 0 0 25,460 Accounts payable 2,727,639 2,197,139 1,912,632 1,605,533 1,394,309 Accrued salaries and benefits 483,473 422,264 414,276 352,903 302,681 Accrued sales and other tax 152,864 159,717 122,932 102,367 90,774 Deferred membership income 322,583 262,249 225,903 0 0 Other current liabilities 231,078 353,490 190,490 136,139 150,82 3 Total current liabilities 4,112,189 3,404,359 2,866,233 2,196,942 1,964,047 Long -term debt 859,393 790,053 918,888 930,035 917,001 Deferred income taxes and other liabilities 119,434 90,391 66,990 61,483 38,967 Total liabilities 5,091,016 4,284,803 3,852,111 3,188,460 2,920,015 Minority interest 115,830 108,857 120,780 105,474 88,183 Stockholder’s Equity Preferred 0 0 0 0 0 Common 2,259 2,236 2,214 2,176 2,136 Additional paid in 1,125,543 1,028,414 952,758 817,628 706,324 Other accumulated (173,610) (117,029) (118,084) (151,842) (78,426) Retained earnings 3,928,748 3,326,659 2,695,222 2,297,924 1,838,082 Total stockholder’s equity 4,882,940 4,240,280 3,532,110 2,965,886 2,468,116 Total liabilities and shareholder’s equity 10,089,786 8,633,940 7,505,001 6,259,820 5,476,314 Source: Costco Annual Reports, 1997 – 2001. Fiscal years ended Sunday nearest to August 28. Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 17 Exhibit 6 Financial Statements for Sears, Roebuck (1997 – 2001) Stores 2001 2000 1999 1998 1997 Full -line stores 867 863 858 845 833 Specialty stores 1318 2158 2153 2198 2697 Total 2185 3021 3011 3043 3530 Income Statement (millions) 2001 2000 1999 1998 1997 Revenues Merchandise sales and services 35,843 36,366 36,728 36,704 36,371 Credit and financial products revenues 5,235 4,571 4,343 4,618 4,925 Total revenues 41,078 40,937 41,071 41,322 41,296 Costs and Expenses Cost of sales, buying and occupancy 26,322 26,721 27,212 27,257 26,779 Selling and administrative 8,892 8,807 8,418 8,318 8,322 Provision for uncollectible accounts 1,344 884 871 1,287 1,532 Provision for previously securitized receivables 522 0 0 830 0 Depreciation and amortization 863 839 848 1,423 785 Interest 1,415 1,248 1,268 0 1,409 Special charges and impairments 542 251 41 352 475 Total costs and expenses 39,900 38,750 38,658 39,467 39,302 Operating income 1,178 2,187 2,413 1,855 1,994 Other income, net 45 36 6 28 144 Income before income taxes and minority interest 1,223 2,223 2,419 1,883 2,138 Income taxes 467 831 904 766 912 Minority interest 21 49 62 45 38 Net Income Before Extraordinary Loss 735 1,343 1,453 1,072 1,188 Extraordinary loss on extinguishment of debt 0 0 0 24 0 Net Income 735 143 1,453 1,048 1,188 Net income per common share: Basic 2.25 3.89 3.83 2.70 3.03 Diluted 2.24 3.88 3.81 2.68 2.99 Number of common shares for calculation 326.4 345.1 379.2 388.6 391.6 Basic 328.5 346.3 381.0 391.7 397.8 Diluted Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 18 Exhibit 6 (continued) Balance Sheet (millions) 2001 2000 1999 1998 1997 Assets Cash and equivalents 1,064 842 729 495 358 Retained interest in transferred credit card Receivables 0 3,105 3,211 4,294 3,316 Credit card receivables 29,321 18,003 18,793 18,946 20,956 Less allowance for uncollectible accounts 1,166 686 760 974 1,113 Net credit card receivables 28,155 17,317 18,033 17,972 19,843 Other receivables 658 506 404 397 335 Merchandise inventories 4,912 5,618 5,069 4,816 5,044 Prepaid expenses and deferred charges 458 486 512 506 517 Deferred income taxes 858 920 709 791 830 Total current assets 36,105 28,794 28,667 29,271 30,243 Property and equipment Land 434 408 370 395 487 Buildings and improvements 6,539 6,096 5,837 5,530 5,420 Furniture, fixtures, and equipment 5,620 5,559 5,209 4,871 4,919 Capitalized leases 544 522 496 530 498 Gross property and equipment 13,137 12,585 11,912 11,326 11,324 Less accumulated depreciation 6,313 5,932 5,462 4,946 4,910 Total property plant and equipment, net 6,824 6,653 6,450 6,380 6,414 Deferred income taxes 415 174 367 572 666 Other assets 973 1,278 1,470 1,452 1,377 Total assets 44,317 36,899 36,954 37,675 38,700 Liabilities Current liabilities Short -term borrowings 3,557 4,280 2,989 4,624 5,208 Current portion of long -term debt and capital lease obligations 3,157 2,560 2,165 1,414 2,561 Accounts payable and other liabilities 7,176 7,336 6,992 6,732 36,637 Unearned revenue 1,136 1,058 971 815 830 Other taxes 558 562 584 524 554 Total current liabilities 15,584 15,796 13,701 14,109 15,790 Long -term debt and capitalized lease obligations 18,921 11,020 12,884 13,631 13,071 Post -retirement benefits 1,732 1,951 2,180 2,346 2,564 Minority interest and other liabilities 1,961 1,363 1,350 1,523 1,413 Total liabilities 38,198 30,130 30,115 31,609 32,838 Shareholder’s equity Common shares 323 323 323 323 323 Capital in excess of par 3,500 3,538 3,554 3,583 3,598 Retained earnings 7,413 6,979 5,952 4,848 4,158 Treasury stock – at cost (4,223) (3,726) (2,569) (2,089) (1,702) Deferred ESOP expenses (63) (96) (134) (175) (204) Accumulated other comprehensive loss (831) (249) (287) (424) (311) Total shareholder’s equity 6,119 6,769 6,839 6,066 5,862 Total liabilities and shareholder’s equity 44,317 36,899 36,954 37,675 38,700 Source: Sears Roebuck Annual Reports, 1997 – 2001. Fiscal years ended Sunday nearest to December 31. Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 19 Exhibit 7 Financial Statements for Wal -Mart Corp. (1997 – 2001) Stores in Operation 2001 2000 1999 1998 1997 Wal -Mart stores 2,348 2,373 2,389 2,421 2,209 Supercenters 1,294 1,104 713 502 370 SAM’S Clubs 528 512 497 483 475 Other 19 7 4 0 0 Total 4,189 3,996 3,603 3,406 3,054 Income Statement (millions) 2001 2000 1999 1998 1997 Revenue Net sales 191,329 165,013 137,634 117,958 104,859 Other income -net 1,966 1,796 1,574 1,341 1,319 Total revenues 193,295 166,809 139,208 119,299 106,178 Costs and Expenses Cost of sales 150,255 129,664 108,725 93,438 83,510 Operating: SG&A 31,550 27,040 22,363 19,358 16,946 Interest Costs Debt 1,095 756 529 555 629 Capital leases 279 266 268 229 216 183,179 157,726 131,885 113,580 101,301 Income Before Taxes, Minority Interest, and Cumulative Effect of Accounting Change 10,116 9,083 7,323 5,719 4,877 Provision for Income Taxes Current 3,350 3,476 3,380 2,095 1,974 Deferred 342 (138) (640) 20 (180) 3,692 3,338 2,740 2,115 1,794 Income Befo re Minority Interest and Cumulative Effect of Accounting Change 6,424 5,745 4,583 3,604 3,083 Minority Interest (129) (170) (153) (78) (27) Income Before Cumulative Effect of Accounting Change 6,295 5,575 4,430 3,526 3,056 Cumulative Effect of Accounting Change, Net of Tax Benefit of $119 0 (198) 0 0 0 Net Income 6,295 5,377 4,430 3,526 3,056 Net income per common share: Basic, before accounting change 1.41 1.25 0.99 0.78 0.67 Cumulative effect of accounting changes 0.00 (0.04) 0.00 0.00 0.00 Basic 1.41 1.21 0.99 0.78 0.67 Diluted 1.40 1.20 0.99 0.78 0.67 Number of common shares for calculation Basic 4,465 4,451 4,464 4,516 4,585 Diluted 4,484 4,474 4,485 4,533 4,592 Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 20 Exhibit 7 (continued) Balance Sheet (millions) 2001 2000 1999 1998 1997 Assets Cash and Equivalents 2,054 1,856 1,879 1,447 883 Receivables 1,768 1,341 1,118 976 845 Inventories 21,442 19,793 17,076 16,497 15,897 Prepaid Expenses and Other 1,291 1,366 1,059 432 368 Total Current Assets 26,555 24,356 21,132 19,352 17,993 Land 9,433 8,785 5,219 4,691 3,689 Building and Improvements 24,537 21,169 16,061 14,646 12,724 Fixtures and Equipment 12,964 10,362 9,296 7,636 6,390 Transportation Equipment 879 747 553 403 379 47,813 41,063 31,129 27,376 23,182 Less Accumulated Depreciation 10,196 8,224 7,455 5,907 4,849 Net Property Plant and Equipment 37,617 32,839 23,674 21,4 69 18,333 Property Under Capital Lease 4,620 4,285 3,335 3,040 2,782 Less Accumulated Amortization 1,303 1,155 1,036 903 791 Net Property Under Capital Lease 3,317 3,130 2,299 2,137 1,991 Other Assets and Deferred Charges 10,641 10,024 2,891 2,426 1,287 Total Assets 78,130 70,349 49,996 45,384 39,604 Liabilities and Shareholder’s Equity Commercial Paper 2,286 3,323 0 0 0 Accounts Payable 15,092 13,105 10,257 9,126 7,628 Accrued Liabilities 6,355 6,161 4,998 3,628 2,413 Accrued Income Taxes 841 1,129 501 565 298 Long -Term Debt Due Within One Year 4,234 1,964 900 1,039 523 Short -Term Obligations Under Capital Leases 141 121 106 102 95 Total Current Liabilities 28,949 25,803 16,762 14,460 10,957 Long -Term Debt 12,501 13,672 6,908 7,191 7,709 Long -Term Debt Under Capital Leases 3,154 3,002 2,699 2,483 2,307 Deferred Income Taxes and Other 1,043 759 716 809 463 Minority Interest 1,140 1,279 1,799 1,938 1,025 Common Stock 447 446 445 224 228 Capital In Excess of Par 1,411 714 435 585 547 Retained Earnings 30,169 25,129 20,741 18,167 16,768 Other Accumulated Comprehensive Income (684) (455) (509) (473) (400) Total Shareholder’s Equity 31,343 25,834 21,112 18,503 17,143 Total Liabilities and Shareholder’s Equity 78,130 70,349 49,996 45,384 39,604 Source: Wal -Mart Annual Reports, 1997 – 2001. Fiscal years ended Sunday nearest to January 31. Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 21 Exhibit 8 Financial Statements for BJ’ s Wholesale Corp. (1997 – 2001) Warehouses in Operation 2001 2000 1999 1998 1997 Beginning of year 118 107 96 84 81 Openings 12 11 11 12 4 Closings 0 0 0 0 (1) End of year 130 118 107 96 84 Members at Year End (thousands) Business (primary cardholders) 1,552 1,575 1,435 1,296 1,132 Gold Star 5,322 5,021 4,379 3,763 3,465 Income Statement (thousands) 2001 2000 1999 1998 1997 Revenue Net sales 5,161,164 4,828,273 4,115,825 3,476,846 3,159,786 Membership fees and other 118,566 103,822 90,422 75,335 67,556 Total revenues 5,279,730 4,932,095 4,206,247 3,552,181 3,227,342 Operating expenses Cost of sales, including buying and occupancy 4,686,429 4,376,451 3,725,638 3,154,017 2,872,303 SG&A 350,000 339,305 293,538 255,087 231,203 Preopening expenses 10,343 8,471 9,536 7,743 3,190 Pension termination costs 0 0 0 1,521 0 Operating income 232,958 207,868 177,535 133,813 120,646 Interest income (expense), net 3,934 5,955 3,785 956 (8,733) Loss on contingent lease obligations (106,359) 0 0 0 0 Income before income taxes 130,533 213,823 181,320 134,769 111,913 Provision for income taxes 48,185 82,322 70,171 52,964 43,646 Income before cumulative effect of accounting principle 82,348 131,501 111,149 81,805 68,267 Cumulative effect of accounting c hanges 0 0 0 (19,326) 0 Net income 82,348 131,501 111,149 62,479 68,267 Net income per common share: Basic, before accounting change 1.14 1.80 1.51 1.09 0.91 Cumulative effect of accounting changes 0.00 0.00 0.00 (0.26) 0.00 Basic 1.14 1.80 1.51 0.83 0.91 Diluted 1.11 1.77 1.47 0.82 0.90 Number of common shares for calculation Basic 72,519,032 72,870,668 73,657,016 74,804,538 74,962,346 Diluted 73,981,148 74,380,544 75,391,489 76,095,876 75,487,798 Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 22 Exhibit 8 (continued) Balance Sheet (thousands) 2001 2000 1999 1998 1997 Current assets Cash and equivalents 87,158 120,392 118,008 12,250 12,713 Accounts receivable 61,027 55,250 51,998 51,134 38,322 Merchandise inventories 560,001 495,285 446,771 372,740 332,274 Current deferred income taxes 27,226 7,677 5,995 7,859 6,826 Prepaid expenses 17,406 15,967 15,482 12,607 14,050 Total current assets 752,818 694,571 638,254 456,590 404,185 Property at cost Land and buildings 449,619 364,418 342,817 322,712 282,619 Leasehold costs and improvements 74,647 67,565 59,350 45,861 42,541 Furniture, fixtures, and equipment 369,671 331,129 279,381 236,231 207,127 893,937 763,112 681,548 604,804 532,287 Less accumulated depreciation 259,562 239,198 201,486 168,957 140,216 634,375 523,914 480,062 435,847 392,071 Property under capital leases 3,319 3,319 3,319 6,219 6,219 Less accumulated amortization 2,447 2,281 2,115 1,949 1,784 872 1,038 1,204 4,270 4,435 Deferred income taxes 12,571 0 0 0 0 Other assets 21,248 14,211 11,499 10,923 10,945 Total assets 1,421,884 1,233,734 1,131,019 907,630 811,636 Current liabilities Accounts payable 381,112 335,060 346,111 213,702 200,386 Accrued expenses and other current 166,183 147,536 137,641 121,951 71,648 Accrued income taxes 33,352 31,807 20,806 11,757 7,009 Short -term obligations under capital leases 285 240 220 201 185 Short -term contingent lease obligations 44,068 0 0 0 0 Total current liabilities 625,000 514,643 504,778 347,611 279,228 Long -term debt 0 0 0 30,000 42,500 Long -term obligations under capital leases 1,558 1,828 2,050 2,249 2,430 Long -term contingent lease obligations 62,142 0 0 0 0 Other noncurrent liabilities 46,617 44,453 38,431 34,928 36,396 Deferred income taxes 0 7,895 8,362 7,800 4,825 Commitments and contingencies 0 0 0 0 0 Stockholder’s equity Common stock 744 744 744 738 375 Additional paid in capital 68,574 75,583 85,958 78,376 102,408 Retained earnings 730,851 648,528 517,052 405,928 343,474 Treasury stock, at cost (113,602) (59,940) (26,356) 0 0 Total stockholder’s equity 686,567 664,915 577,398 485,042 446,257 Total liabilities and shareholder’s equity 1,421,884 1,233,734 1,131,019 907,630 811,636 Source: BJ’s Wholesale Annual Reports, 1997 – 2001. Fiscal years ended Sunday nearest to January 31. Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 23 Exhibit 9 Margarita Torres: Common -Size Financial Statements for Costco (1997 – 2001) Income Statement 2001 2000 1999 1998 1997 Revenue Net sales 100.00% 100.00% 100.00% 100.00% 100.00% Membership fees and other 1.93% 1.72% 1.78% 1.85% 1.82% Total revenues 101.93% 101.72% 101.78% 101.85% 101.82% Operating expenses Merchandise costs 89.63% 89.57% 89.60% 89.72% 89.90% SG&A 9.17% 8.72% 8.67% 8.69% 8.74% Preopening expenses 0.18% 0.13% 0.11% 0.11% 0.13% Provision for impaired assets / closings 0.05% 0.02% 0.21% 0.03% 0.35% Total operating expenses 99.03% 98.44% 98.59% 98.54% 99.11% Operating income 2.91% 3.28% 3.19% 3.30% 2.70% Other income (expenses) Interest expense -0.09% -0.12% -0.17% -0.20% -0.35% Interest income and other 0.13% 0.17% 0.16% 0.11% 0.07% Provision for merger and restructuring 0.00% 0.00% 0.00% 0.00% 0.00% Income continuing ops before taxes 2.94% 3.33% 3.18% 3.21% 2.42% Provision for income taxes 1.17% 1.33% 1.28% 1.28% 0.97% Income before cumulative effect of accting 1.76% 2.00% 1.91% 1.93% 1.45% Cumulative effect of accting, net of tax 0.00% 0.00% -0.44% 0.00% 0.00% Income from continuing operations 1.76% 2.00% 1.47% 1.93% 1.45% Discontinued operations 0.00% 0.00% 0.00% 0.00% 0.00% Income (loss), net of tax 0.00% 0.00% 0.00% 0.00% 0.00 % Loss on disposal 0.00% 0.00% 0.00% 0.00% 0.00% Net Income (loss) 1.76% 2.00% 1.47% 1.93% 1.45% Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 24 Exhibit 9 (continued) Balance Sheet 2001 2000 1999 1998 1997 Current assets Cash and equivalents 5.97% 6.07% 5.87% 5.78% 3.20% Short -term investments 0.05% 0.56% 3.42% 1.21% 0.00% Receivables, net 3.22% 2.02% 2.25% 2.74% 2.69% Merchandise inventories, net 27.14% 28.84% 29.45% 30.52% 30.80% Other current assets 2.10% 2.70% 3.19% 1.73% 1.84% Total current assets 38.48% 40.19% 44.18% 41.99% 38.53% Property and equipment Land and rights 18.60% 18.78% 16.84% 17.89% 19.99% Building, leaseholds and land improvements 38.01% 34.84% 32.57% 34.68% 35.31% Equipment and fixtures 15.16% 15.19% 15.17% 15.15% 15.35% Construction in process 1.33% 2.32% 2.36% 1.47% 1.49% Subtotal 73.10% 71.13% 66.94% 69.19% 72.14% Less accumulated depreciation -15.35% -15.14% -14.89% -14.95% -14.53% Net property plant and equipment 57.75% 55.99% 52.06% 54.24% 57.61% Other assets 3.77% 3.82% 3.76% 3.77% 3.87% Total assets 100.00% 100.00% 100.00% 100.00% 100.00% Current liabilities Short -term borrowing 1.93% 0.11% 0.00% 0.00% 0.46% Accounts payable 27.03% 25.45% 25.48% 25.65% 25.46% Accrued salaries and benefits 4.79% 4.89% 5.52% 5.64% 5.53% Accrued sales and other tax 1.52% 1.85% 1.64% 1.64% 1.66% Deferred membership income 3.20% 3.04% 3.01% 0.00% 0.00% Other current liabilities 2.29% 4.09% 2.54% 2.17% 2.75% Total current liabilities 40.76% 39.43% 38.19% 35.10% 35.86% Long -term debt 8.52% 9.15% 12.24% 14.86% 16.74% Deferred income taxes and other liabilities 1.18% 1.05% 0.89% 0.98% 0.71% Total liabilities 50.46% 49.63% 51.33% 50.94% 53.32% Minority interest 1.15% 1.26% 1.61% 1.68% 1.61% Stockholder’s Equity Preferred 0.00% 0.00% 0.00% 0.00% 0.00% Common 0.02% 0.03% 0.03% 0.03% 0.04% Additional paid in 11.16% 11.91% 12.69% 13.06% 12.90% Other accumulated -1.72% -1.36% -1.57% -2.43% -1.43% Retained earnings 38.94% 38.53% 35.91% 36.71% 33.56% Total stockholder’s equity 48.39% 49.11% 47.06% 47.38% 45.07% Total liabilities and shareholder’s equity 100.00% 100.00% 100.00% 100.00% 100.00% Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 25 Exhibit 10 Margarita Torres: Sustainable Growth Model for Costco (1997 – 2001) Sustainable Growth Model (millions) 2001 2000 1999 † 1998 1997 Net Income 602 631 515 460 312 Owner’ s Equity 4,240 3,532 2,966 2,468 NA Return on Equity (ROE) 14.2% 17.9% 17.4% 18.6% NA Dividend 0 0 0 0 0 Net Income 602 631 515 460 312 Dividend Payout 0.0% 0.0% 0.0% 0.0% 0.0% Earnings Retention Ratio 100% 100% 100% 100% 100% Net Income 602 631 515 460 312 Assets 8,634 7,505 6,260 5,476 NA Return on Assets (ROA) 7.0% 8.4% 8.2% 8.4% NA Assets 8,634 7,505 6,260 5,476 NA Owner’s Equity 4,240 3,532 2,966 2,468 NA Financial Leverage 2.04 2.12 2.11 2.22 NA Net Income 602 631 515 460 312 Sales 34,797 32,164 27,456 24,270 21,874 Net Margin (Return on Sales) 1.73% 1.96% 1.88% 1.90% 1.43% Sales 34,797 32,164 27,456 24,270 21,874 Assets 8,634 7,505 6,260 5,476 NA Asset Turnover 4.03 4.29 4.39 4.43 NA Pretax Income (continuing operations) 1,003 1,052 859 766 520 Sales 34,797 32,164 27,456 24,270 21,874 Pretax Return on Sales 2.88% 3.27% 3.13% 3.16% 2.38% Pretax Income (continuing operations) 1,003 1,052 859 766 520 Taxes 401 421 344 306 208 Tax Rate 40.0% 40.0% 40.0% 39.9% 40.0% Tax Effect (1 – Tax Rate) 60.0% 60.0% 60.0% 60.1% 60.0% †1999 net income figures used for calculation are before cumulative effect of account change. Costco Wholesale Corp.: Financial Statement Analysis (A) A -186A p. 26 Exhibit 11 Margarita Torres: Other Ratios for Costco and Competitors (2001) Other Ratios (millions) Costco Sears Wal -Mart BJ’s Cost of Goods Sold 30,598 26,322 150,255 4,686 Merchandise Sales 34,137 35,843 191,329 5,161 COGS 89.6% 73.4% 78.5% 90.8% Gross Margin 10. 4% 26.6% 21.5% 9.2% Operating Income 992 1,178 11,490 233 Sales 34,797 41,078 193,295 5,280 Operating Margin 2.85% 2.87% 5.94% 4.41% Net Income 602 735 6,295 82 Sales 34,797 41,078 193,295 5,280 Net Margin 1.73% 1.79% 3.26% 1.56% Current assets 3,882 36,105 78,130 753 Current liabilities 4,112 15,584 28,949 625 Current Ratio 0.94 2.32 2.70 1.20 Cost of Goods Sold 30,598 26,322 150,255 4,686 Average inventory 2,614 5,265 20,618 527 Inventory Turnover 11.7 5.0 7.3 8.9 Accounts receivable 325 28,155 1,768 61 Merchandise Sales 34,137 35,843 191,329 5,161 Average Receivables Period 3 287 3 4 Accounts payable 2,728 7,176 15,092 381 Cost of Goods Sold 30,598 26,322 150,255 4,686 Average Payable Period 33 100 37 30

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