Long Term Borrowings
Long-term debts
As of August 28, 2011, the total long-term debt of Costco Wholesale was $2,153 million1. This included the current portion of 5.3% Senior Notes due March 2012, 5.5% Senior Notes due March 2017, 3.5% Zero Coupon convertible subordinated notes due August 2017, 2.695% Promissory notes due October 2017, 0.35% over Yen TIBOR (6-month) Term Loan due June 2018, and other long-term debt.
The 5.3% Senior Notes due March 2012 was originally issued in February 2007. However, as of the date of reporting, its maturity was less than one year and it was reclassified as current liability. The company intends to repay this amount (outstanding principal balance) and the associated interest upon its maturity using the short-term investments balances and the existing liquidity sources of cash and cash equivalents. The ten-year term loan agreement was entered into in June 2008 by the Japanese subsidiary, with a variable interest payable semi-annually and 0.35% margin on the outstanding balance. Fluctuations in interest rates, however, affect the interest expenses of the variable rate and the fair value of the fixed rate debt. The Zero Coupon Notes were sold in August 1997, priced with a yield to maturity of 3.5%. After August 2002, the company may decide to redeem the Zero Coupon Notes at any time. The 5.5% Senior Notes due March 15, 2017 was issued in February 2007, with interest payable semi-annually (March 15 and September 15). As seen, these debts are widely spaced in terms of maturity to give the company ample time to repay them.
For the competitor firm, Kroger Company; the total long term debt for the financial period ended Jan 28, 2012 was 10,390 million2. This is a very big value compared to that of Costco, depicting that Kroger is financed more by the non-owners as compared to Costco.
Bond covenants
The company invests in FDIC-insured corporate bonds which are guaranteed by full faith and credit of U.S. government under FDIC’s Temporary Liquidity Guarantee Program. However, reduction of interest rates and market liquidity results in losses. The corporate bonds are evaluated based on the credit ratings by the rating agencies. Be that as it may, the company revised its investment policy to limit future investments.
Every bond issued by the company has an agreement based on the maturity and the associated interests. These bonds include Senior Notes due March 2012, Senior Notes due March 2017, and Zero Coupon convertible subordinated notes due August 2017, as discussed earlier.
Kroger Company issues bonds such as Kroger 144A 7.7% that matures on 06/01/2029, Kroger 6.15% that matures on 01/15/2020, Kroger 7.5% that matures on 01/15/2014, among others. Each bond type issued has an agreement based on the maturity and the associated interests.
Convertible bond issues
The company’s convertible bond issues are the Zero Coupon convertible subordinated notes due August 2017. The principal amount of $900 was sold in August 1997, priced with a yield to maturity of 3.5%. This resulted in gross proceeds of $450. The balance was convertible into Costco Common Stock shares, a maximum of 878,000 shares, at an initial conversion price of $22.71. The company could purchase the Zero Coupon Notes as required by the holders, or redeem them at any time from August 2002. The purchase is made at the discounted issue price in addition to the accrued interest to the date of purchase.
Kroger Company bonds are not convertible and have a fixed coupon type and middle credit quality.
Leases
The company has both operting and capital leases. It leases land or buildings at the warehouses, and offices and distribution facilities. At the end of 2011, the operating leases totaled to $2,707 while the capital leases totaled to $376.
Debt to equity ratio of Costco = total debt/total equity = $14,188/12,573 = 113%
Considering the operating leases, the debts involved and the assets financed, and if the operating leases were capitalized, the effect on the debt to equity ratio is negligible and the net worth of the company is not understated.
Kroger Company, on the other hand, had a Debt to equity ratio of 206.91%; a higher ratio compared to that of Costco. Kroger is financed more by the non-owners.
Shareholders’ Equity
Shareholders’ equity includes both the preferred stock and the common stock. For the preferred stock, 100,000,000 shares were authorized, but no shares were issued. On the other hand; 900,000,000 common stock shares were authorized, 434,266,000 and 433,510,000 issued and outstanding respectively. Common stock is a unit of ownership that influences corporate decisions due to its voting rights3. Preferred stock, however, does not influence the corporate decisions. Common stock represents the interest of the owners/founders of the company. It is the security for the creditors, and by issuing the common stock, the company raises more capital from the owners. Preferred stock is a hybrid equity security with the properties of both debt and equity instrument. By failing to issue the preferred stock, the company limits the debt.
Costco Company does not have treasury stock.
Kroger Company, just as Costco, didn’t issue the Preferred Stock. The common stock issued totaled to 959 million, a slight difference from that of the competitor. The company had Treasury Stock amounting to 8,132,000.
Market and Book Value
The Market value/Book value (also called the price-to-book ratio) is a ratio that compares the stock's market value to the book value. It measures the relative value of the company compared to the market value or the stock price and tells the value of the company at present, as compared to the capital invested by the shareholders. Costco’s price-to-book value is 2.914. The company is trading for more than its book value (high share price relative to the asset value) thus; its return on assets is high. This is a viable company for investors.
For Kroger Company, the book value per share is given as zero, thus, price-to-book value not calculated. It is therefore not easy for investors to determine whether the company is trading for more or less than its book value.
Return on Assets (ROA)
ROA measures the profitability of a company with respect to its total assets. It shows the efficiency of the management in using the assets to generate earnings. For Costco, ROA = $ 1,462 million / $26,761 million = 5.46%. This indicates that the company is profitable and the management is efficient in generating income from the assets. The company is therefore viable for investors. For every dollar invested, the investor is sure to earn some amount.
Kroger, on the other hand, has a ROA of 6.03% indicating its profitability5. Based on this ratio, the assets of Kroger generate returns at a slightly higher rate than Costco.
Return on Common Equity (ROCE)
ROCE= (net profit - preferred share dividends) / (shareholders equity- preferred shares)
During the period, the company authorized 100,000,000 preferred shares; but none was issued and outstanding.
Therefore, ROCE = (1,462 – 0) / (12,573 – 0) = 11.63%
This shows that the company is able to pay the common share dividends and still retain funds for its growth. This further depicts Costco is profitable and the management is efficient in generating income from the common stock equity. Profit margin of Costco is 1.66%6; a further indicator of the profitability of the company.
The ROCE for Kroger is 12.87%, an indication that the company is profitable.
Costco Wholesale Corporation continues to perform well as indicated by an increase in its share price, and the shareholders are sure to get good returns. Kroger Corporation also shows an increase in its performance. These two firms are potential stock investment and potential companies to which to lend money. The value of the stock is high and on the rise, thus the stock holders are sure to have higher returns. In addition, the companies are profitable and efficient in generating income from the assets and the investments. Thus, lenders are sure to get back their money.
Works Cited
Bernstein, L. and John, W. Analysis of Financial Statements. McGraw-Hill. 2000
Costco Wholesale., Annual Report 2011.
Palmiter, A.R. Stock rights, 2004. Web. 28 May 2012.
Western Asset. Introduction to High-Yield Bond Covenants, 2011. Web. 28 May 2012.
Yahoo Finance, Costco Wholesale Corporation (COST): Key Statistics, 2012. Web. 30 May 2012.
Yahoo Finance, The Kroger Co. (KR): Balance sheet, 2012. Web. 31 May 2012.
Yahoo Finance, The Kroger Co. (KR): Key Statistics, 2012. Web. 31 May 2012.
