The COSTCO Wholesale Corporation reported back-to-back record sales and earnings in the past two fiscal years, despite the turbulent and weak economic conditions in the world and the U.S. In fiscal 2011, the company’s net sales increased by well over 14 percent to $87,048 million. 1This was however attributed to the inflation in prices of gasoline and the stronger foreign exchange rates in the markets of Canada and Asia.
Operating income of the company is determined by its operating expenses. Over the past three years, the company has recorded a significant increase in operating income. Despite the fact that operating expenses increase year by year, the operating income of the company is still in the rise from year to year. In fiscal 2011, it recorded $2,439 million as operating income. In fiscal 2010 and 2009, it recorded $2,077 million and $1, 777 million respectively4. The sharp changes in operating income is credited to the company’s sound management of selling, general and administrative expenses, merchandise costs as well as the outstanding provision for impaired assets and closing costs5. The operating income for the Kroger Co. is far much less than COSTCO’s operating income for the past three consecutive fiscal years. For instance, the Kroger Co. recorded a tremendous decrease in operating income from $2,182 million in fiscal 2010 to $1,278 million in 2011. On the contrary, during the same period, COSTCO’s operating income increased significantly. This basically reflects COSTCO’s unique performance in the industry.
The COSTCO’s income from continuing operations has also been in the increase over the past three years. In fiscal 2009, the company recorded net income from continuing operations of $1,086 million. In 2010, it recorded $1,303 million while in 2011 it reported a whopping $1,462 million. Basically, it is evident that the profitability of the company increases from year to year. The significant increase in the company’s income from continuing operation is solely accredited to its diverse earnings and superb management of operating expenses. This record breaking value in fiscal 2011 is far much greater than that of the Kroger Co. which has in the past three years reported fluctuating income from continuing operations. For instance, in 2010, Kroger Co. reported $1,116 million6. However, in 2011, this value tremendously decreases to $602 million. Typically, COSTCO’s has unique performance in managing its net income from continuing operations.
Based on the calculation of the common size income statement, it is clear that there are no major shifts in expense categories. The major expense categories are the merchandize costs, selling, general and administrative expenses and the preopening expenses. The computation reveals a minimal shift. For instance, for fiscal 2011, the selling, general and administrative expense shifted slightly from 10.28% in 2010 to 9.97%. Fiscal 2010 as well recorded a slight shift of 0.1%. Basically, the shift shows a conscious management action to control its operating expenses. However, the shift in preopening expenses might have been as result of shifts in demand and supply.
Both the COSTCO and Kroger companies are at the growth phase of its life cycle. In essence, the company has continued to report an increase in net income including non-controlling interests over the past three years signifying growth in sales. Its sales growth accelerates, as typified by an increase in sales from year to year. Also, the company’s gross margins decrease as more costs are incurred in form of operating expenses. The largest cash inflows/outflows appear in fiscal 2011 in the company’s respective statement of cash flows.
Conversely, The Kroger Co. also reported a similar net loss in cash flows from investing activities which totaled $1,908 million with capital expenditure taking larger portion. The loss was far much more than that of COSTCO.
Average Outstanding Shares
According to COSTCO’s Annual report introduction, earnings per share rose 13 percent to reach a record of $3.30/share. It is thus apparent that there is an increase in profit generated on the company’s per share basis. The company is more profitable than Kroger Co. which reported $1.01 earnings per share.
Receivables Analysis
The accounts receivable turnover ratio is used to help measure COSTCO’s AR asset. The ratio is established by computing the ratio between credit sales and company’s receivable balance. Based on the COSTCO’s 2011 annual report11 accounts receivable turnover ratio is 94.2 times. It is apparent that the company’s receivables were converted to cash 94.2 times in 2011.
Accounts Receivable Turnover = Credit Sales / Average Receivable Balance. = 87048/924.5 =94.2 times.
Therefore, the number of days in receivables is 365/94.2 which is approximately 3.8 days or 4 days. Basically, the company took 3 to 4 days in collecting its accounts receivable during the year and thus had them quickly converted into cash. It only took 3 to 4 days to convert debts into cash. The analysis of the company’s cash collection period from 2007 averages 4 days. Conversely, the Kroger’s accounts receivable turnover ratio was 100.7 times which gives an approximate 3.6 days debt collection period. It is apparent that both the companies have equal number of days in collecting their cash. Just like COSTCO, Kroger Co. also takes on average four days to collect its cash.
Inventory analysis
The efficiency with which COSTCO manages and sells its inventory is measured using the inventory turnover ratio. Basically, the ratio is applied to help gauge the liquidity of COSTCO’s inventory. The ratio besides helps in stating how the company can have its sales increased through better management of inventory12.
The inventory turnover ratio for the company in 2011 was approximately 13 times. In essence, it is apparent that the company is efficiently selling and managing its inventory. Similarly, inventory turnover for 2010 is 13.5 times. Averagely, the company reports an average of 13 times inventory turnover13. This value translates to approximately 28 days taken by COSTCO to sell out its inventory. Due to high sales volume and rapid inventory turnover, it sells inventory before it is required to pay many of its merchandize vendors. The inventory turnover for Kroger’s for 2011 is however 17.6 times which translates to approximately 21 days. That of 2010 is 15.5 times. Basically, it is evident that Kroger has better management and selling of inventory than COSTCO.
COSTCO states its inventory using the last-in, first-out (LIFO) method for substantially all U.S. merchandise inventories14. However, it does not have LIFO reserve.
Long term assets
COSTCO’s operating assets turnover in 2011 was 7.6 times. In 2010, the company recorded an operating asset turnover of 6.7 times. In 2011, it reported a return on operating assets of 5.88%. From the company’s annual financial report for 2011, the assets operating are the company’s merchandize inventories and the equipment and fixtures. The net income related to their operations is $87,048 million. However, this value comprises the value of other assets as well.
COSTCO Company has intangible assets like the organizational ability, brand equity and research and development which are all exclusive in its markets. Also, it has customer satisfaction and exclusivity in particular geographic area. The company also has legal intangibles in form of copyrights, trademarks and patents. These kinds of assets should be analyst by analysts since they have real value to COSTCO company and thus pertinent in the company’s success. While the Kroger Co. has brand name and outstanding human resources, it lacks exclusivity to certain geographical areas.
