Costco Wholesale Case Study

Stakeh matureers invest money with the intent to gain sideboard in the next. It is authorised for stakeholders to gain access to information and evaluate the menages feat before they put money in it. On the other hand, it is the firms worry team job to make decisions that would maximize the yearn term value of the firms common stock. The intent of this story is to analyze Costco Wholesale Corporations financial performance and to pass judgment how streamlined the business has been over a five year de cross as salubrious as to impart recommendation for financial wariness strategy.The problem identified in this paper is the low margins in the fabrication. Beca employ margins atomic number 18 low, the profitability of individual companies depends on lavishly volume sales and in force(p) operations. Costco Wholesale Corporation is high- ripening Retail Company. The company has experienced significant yield from 1997 to 2001, which has caught the attention of the compet ition. However, the numbers are decreasing because result on assets, return on equity, and asset turnover ratios stomach declined within the analogous clipping frame. Costco Wholesale Corporation has been a major(ip) player in the lot industry.It is the largest wholesale club operator in the US. The company operates about 555 social rank warehouse stores serving much than 53 million cardholders in few 40 US states and Puerto Rico, Canada, Japan, Mexico, South Korea, Taiwan, and the UK, primarily under the Costco Wholesale name. (Hoovers, Inc, 2010) Costcos strategy is low prices strategy. The management team has been able to pass nest egg to nodes, keep low prices and maintain healthy margins at the same time. This has been a result of the companys ability to become more efficient over time.The company saves on operation costs in site to provide low price while still keeping high property products for customers. It has been constructing warehouses with inexpensive co ncrete floors. Selling items in bulk has allowed for operational(a) efficiencies. overly, carrying less variety of products than other competitors has reachd to keeping descent costs down. senior high school sales volume and rapid inventory turnover are precise important for a firms financial performance. Therefore, they should not be overlooked by investors. Costcos inventory turnover ratio of 11. 7% in 2001 is the highest compared to its competitors.It is a result of operating principle that allows Costco to alter its operative capital and operate much more efficiently than its competitors. For instance, Costco buys nowadays from manufacturers and routes purchases directly to customers in less than 24 hours. Cross-docks never stored inventory, so all of the items delivered were reloaded and shipped that same day. (Case study, p. 6) This has increased efficiency by ensuring the trucks are operating at undecomposed capacity. It also has allowed Costco to receive cash in ha nd before it has to remunerate for the original merchandise from the manufacturer.This has resulted in a actually high operating cash flow for the business. Cash is important to any companys financial performance. It allows the company to pay its bills and invest in the business without having to use debt. According to Torress Common Size Financial statement touch expense has decreased from 0. 35% in 1997 to 0. 09% in 2001. This has demonstrated Costcos ability to reduce its overall amount of debt during these years. For example, the fact that short-term debts absorb increased from 0. 46% in 1997 to 1. 93% in 2001 and enormous-term debt have decreased from 16. 74% of sales in 1997 to 8. 2% in 2001, relates covering to the decrease in Costcos interest expense. This is a representation of the managements team decision turn on to short-term and go a direction from long-term debts. In addition, the decrease in long-term debt has helped minify total liabilities from 53. 32% of total assets in 1997 to 50. 46% in 2001. Costcos occurrent ration in 2001 is 0. 94, which is below its competitors. This could be a sign for weak liquidity position. However, the high inventory turnover ratio examine earlier in this paper in combination with the low current ratio is an indicator for efficient assets management.The competitors higher current ratio great power also be a sign for too much inventory that might have to be written-off or too many old accounts receivables that could turn into bad debts. Sears and Walmarts account receivables are a way higher than Costco and BJs, confirming that there is no significant reason for considering Costcos current ratio a weakness. Costcos taxation margin has been good maintained over the five year period. Their gross margin of 10. 4% is much lower than Sears of 26. 6% and Wal-Marts of 21. 5%. Only BJs has a lower gross margin of 9. 2%.Costcos 2001 gross margin suggests ability to remain profitable and very competitive at the same time. The company has been able to provide goods to customers at a very low mark-up and at a lower per unit cost. According to the quality study Costcos management team has decided to reinvest net income endure into the company instead of paying dividends. This decision has resulted in earnings property ratio of 100% as shown on Torress sustainable growth model. Absence of dividends could lead to some investor dissatisfaction in the short term. The return on equity (ROE) also has been decreasing during the five year period.It has dropped from 18. 6% in 1998 to 14. 2% in 2001, which could also lead to investor dissatisfaction. ROE tells how well stockholders are doing in term of return on their money. Costcos 14. 2% return in 2001 is consistent with the current average industry ROE is 11. 5%1. Costcos ratio is consistent with the industry average, but appears to be on the decline. A look at Costcos ROE since 1997 shows a unshakable decline. Consistent reinvestment into the c ompany has occurred in the form of new store expression and efficient modifications of old stores during these years.such(prenominal) capital investments would take time to devote profits. Even though Costcos ROE in 2001 is lower than in 1997 it still remains a large positive figure. As long as Costcos management team continues demonstrates ability to successfully reinvest and improve efficiencies, stock price would most likely increase in the future and stockholder would be satisfied with long term returns on their investment. stinting factors should be considered when determining the future of the retail business. Economic factors include the frugal growth, interest rates, exchange rates and the inflation rate.Economic downturns have force customers to cut back on expenses. . Any significant decrease to consumer expending has to be considered as a threat. In 2000/ 2001 tough economic environs Costco has shown the ability to persevere and continue growing their business. Pass ing cost savings to customers is even more important in times of economic slowdowns when businesses and individuals are trying to do more with less. Economic constraints play a major role in wholesale business by forcing companies to be more creative and come up with higher efficiencies in fellowship to provide lower prices.On the other hand, economic growth provides opportunities not only if to Costco but to other rivalry as well. Social factors influencing the retail industry include culture, population growth, age distribution, and importance of safety. Costco warehouses are located promote away from residential areas such as cities and older suburban areas. This creates bear upon for customers as they would have to drive further to shop at Costco than a local grocery store. Costco has overcome this with a much better customer environment, larger discounts on bulk purchases and various incentives through their membership programs. ecological factors include ecological and env ironmental aspects. For instance, Costco has been offering boxes to customers instead of plastic bags. Such green initiatives are necessary to address environmental concerns. They could also contribute to increased mart share. Other factors that should be considered are customer demand, heathen changes, and technology. Todays advanced technology provides opportunities for higher efficiencies as well as cultural changes. For instance, the internet has been a great shopping resourcefulness lately.It gives retailers the ability to offer lower prices and customers the convenience of shopping from their own homes. Costcos management team should continue to work closely with customers in order to identify their needs and behavior. Costcos mission is To continually provide our members with quality goods and services at the lowest possible prices. (Costco, 2010). The management team should turn back that systems and processes are in place to carry on the mission. Ensure percipient comm unication channels between employees and management.Employees should be considered when the strategy is being utilise because successful strategy implementation requires motivation. The company should clearly communicate its imaging and mission to all levels throughout the organization. Communicating the companys day-dream and employees involvement in the decision making process would give them a bullockyer sense of job satisfaction. That would increase motivation and contribute to creativity enforce. Also to increase motivation the executive team should review managements compensation and rewards. As part of trategy implementation the leadership team should better support among stakeholders. One aspect of that is to establish global network of strong suppliers and ensure availability of strong partners who share technology, development cost, and speed to market Costcos goal is to Reward our shareholders. (Costco, 2010) This analysis proves that Costco remains one of the indus trys leading players and there seems to be no reason for Torres to sell her shares. References Brigham, Eugene, & Houston, Joel. (2008). Fundamentals of financial management. South-Western Pub. Brigham, & Houston, 2008) Carpenter, M. A. , & Sanders, Wm. G. (2009). New Jersey, NY Pearson Education, Inc. Costco wholesale corporation . (n. d. ). Retrieved from http//www. hoovers. com/company/Costco_Wholesale_Corporation/rkfjif-1. hypertext mark-up language Costco, Initials. (2010). Costco wholesale corporation. Retrieved from http//www. csrglobe. com/login/companies/costco_wholesale_corporation. html Jun, J. (2009, January 19). Taking stock in costco. Retrieved from http//www. oldschoolvalue. com/featured/taking-stock-in-costco/ 1 entropy collected from Google Finance