HBS Case Study 2:
Costco Wholesale Corporation
Financial Statement Analysis (A)
MMS 185: Managerial Finance
September 27, 2007
It is important for stockholders to continuously re-evaluate their investments. Although some investors do this more frequently and thoroughly than others, the majority of shareholders do so at least once each year. Therefore, Torres’ desire to update her analysis in order to determine whether Costco was still operating efficiently makes perfect sense. After thorough examination, my analysis proves that Costco remains one of the industry’s leading competitors and there seems to be no reason for Torres to sell her shares as long as she wishes to retain holdings of a retail wholesale club in her portfolio.
The common-size financial statements evaluating the period 1997-2001 (exhibit 9) reveal valuable information regarding Costco. Torres noticed that there were two revenue lines: net sale of goods and membership fees. She decided to use net sales of goods as the point of comparison and express other line items, including membership fees, as a percentage of net sales in order to allow for a clearer reflection of gross and operating margins. This format enabled her to analyze the profit and asset structures of Costco over time.
To begin, Margarita Torres’ common-size financial statements for Costco demonstrate a rise in membership fees and other sources of revenue from 1.82% in 1997 to 1.93% in 2001. This is supported by Costco’s trend to increase membership fees over time and also gain new members. For example fees cost $25 in 1986 and rose as high as $45 in 2002. But why were customers willing to pay a fee to shop at Costco when they could go to discount stores for free? Costco created value for the customer by only purchasing a handful of SKUs from its vendors, by selling goods at such a...