Costco Wholesale Case Study

Stakehageds throne funds with the intent to gain snuff it in the proximo. It is important for stakeholders to gain ad perpetration price to information and evaluate the slosheds carrying into action before they put money in it. On the other hand, it is the firms precaution aggroup calling sector to make decisions that would maximize the extensive condition value of the firms parking lot stock. The intent of this written report is to analyze Costco in large quantities communitys financial performance and to assess how efficient the business has been e precisewhere a five year menses as well as to stand recommendation for financial management strategy.The paradox identified in this paper is the hap little marges in the manufacture. Beca single-valued function metes argon pocket-sized, the profit efficacy of individual companies depends on high volume crude(a) revenue and efficient ope symmetryns. Costco Wholesale Corporation is high- developing sell Comp any. The go with has experienced significant growth from 1997 to 2001, which has caught the attention of the competition. However, the numbers are lessening because return on assets, return on equity, and asset turnoer ratios experience declined inwardly the same time frame. Costco Wholesale Corporation has been a study player in the retail diligence.It is the largest wholesale club manipulator in the US. The fraternity operates about 555 membership warehouse retentivenesss serving much(prenominal) than 53 million cardholders in well-nigh 40 US states and Puerto Rico, Canada, Japan, Mexico, South Korea, Taiwan, and the UK, primarily under(a) the Costco Wholesale name. (Ho e reallyplaces, Inc, 2010) Costcos strategy is baseborn prices strategy. The management aggroup has been able to subside savings to customers, keep low prices and husband healthy allowances at the same time. This has been a result of the conjunctions ability to become more efficient over time .The club saves on operation cost in erect to provide low price while subdued tutelage high quality products for customers. It has been constructing warehouses with inexpensive cover floors. Selling items in bulk has whollyowed for direct efficiencies. as well as, carrying less variety of products than other competitors has contributed to charge inventory costs d throw. High sales volume and rapid inventory derangement are very important for a firms financial performance. Therefore, they should non 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 run principle that allows Costco to improve its working corking and operate much more expeditiously than its competitors. For instance, Costco buys directly 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 s ame day. (Case study, p. 6) This has subjoind efficiency by ensuring the trucks are operating at luxuriant capacity. It overly has allowed Costco to receive cash in hand before it has to hand for the overlord merchandise from the manufacturer.This has resulted in a very high operating cash melt down for the business. Cash is important to any smart sets financial performance. It allows the caller-up to pay its bills and invest in the business without having to use debt. According to Torress Common size Financial statement Interest set down has decreased from 0. 35% in 1997 to 0. 09% in 2001. This has demonstrated Costcos ability to tighten up its overall amount of debt during these years. For example, the fact that short- boundary debts welcome increased from 0. 46% in 1997 to 1. 93% in 2001 and long-term debt birth decreased from 16. 74% of sales in 1997 to 8. 2% in 2001, relates back to the decrease in Costcos interest expense. This is a representation of the manage ments team decision turn on to short-term and move a sort from long-term debts. In addition, the decrease in long-term debt has helped lessen total liabilities from 53. 32% of total assets in 1997 to 50. 46% in 2001. Costcos stream ration in 2001 is 0. 94, which is below its competitors. This could be a sign for weak fluidity position. However, the high inventory turnover ratio analyzed earlier in this paper in combination with the low authorized ratio is an indicator for efficient assets management.The competitors high contemporary ratio might excessively be a sign for in any reason much inventory that might stir to be written-off or too legion(predicate) 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 on-going ratio a weakness. Costcos gross margin has been well maintained over the five year period. Their gross margi n 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 union has been able to provide goods to customers at a very low mark-up and at a lower per unit cost. According to the case study Costcos management team has decided to reinvest net income back into the company sort of of paying dividends. This decision has resulted in earnings retention ratio of hundred% 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. hard 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 steady decline. Consistent reinvestment into the company has occurred in the form of new store construction and efficient modifications of old stores during these years.such(prenominal) capital investments would take time to riposte profits. Even though Costcos ROE in 2001 is lower than in 1997 it still remains a large exacting figure. As long as Costcos management team advances demonstrates ability to successfully reinvest and improve efficiencies, stock price would most(prenominal) likely increase in the future and stockholder would be satisfied with long term returns on their investment. economical factors should be considered when determining the future of the retail business. Economic factors acknowledge the economic growth, interest rates, commuting rates and the inflation rate.Economic downturns have forced custom ers to cut back on expenses. . Any significant decrease to consumer pass has to be considered as a threat. In 2000/ 2001 tough economic environment Costco has shown the ability to persevere and continue growing their business. passing 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 order to provide lower prices.On the other hand, economic growth provides opportunities not only to Costco but to other competitor as well. Social factors influencing the retail industry include culture, population growth, age distribution, and splendor of safety. Costco warehouses are located further remote from residential areas such as cities and older suburban areas. This creates inconvenience for customers as they would have to drive further to shop at Costco than a local grocery store. Costco has defeat this with a much better customer environment, larger discounts on bulk purchases and heterogeneous incentives through their membership programs.Ecological factors include ecological and environmental aspects. For instance, Costco has been produceing boxes to customers instead of plastic bags. Such green initiatives are necessary to address environmental concerns. They could also contribute to increased marketplace share. new(prenominal) factors that should be considered are customer demand, heathen changes, and engineering science. Todays advanced technology provides opportunities for higher efficiencies as well as cultural changes. For instance, the internet has been a large shopping resource lately.It gifts 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 behavio r. Costcos representation is To continually provide our members with quality goods and operate at the lowest possible prices. (Costco, 2010). The management team should ensure that systems and processes are in place to carry on the mission. fasten open communication channels between employees and management.Employees should be considered when the strategy is being apply because successful strategy implementation requires motivation. The company should clearly communicate its vision and mission to all levels throughout the organization. Communicating the companys vision and employees involvement in the decision making process would give them a heartyer sense of job satisfaction. That would increase motivation and contribute to creativity enforce. Also to increase motivation the executive team should review managements wages and rewards. As part of trategy implementation the leading team should develop support among stakeholders. mavin aspect of that is to establish global i ntercommunicate 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 analytic thinking proves that Costco remains one of the industrys leading players and there seems to be no reason for Torres to sell her shares. References Brigham, Eugene, &038 Houston, Joel. (2008). Fundamentals of financial management. South-Western Pub. Brigham, &038 Houston, 2008) Carpenter, M. A. , &038 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. html Costco, Initials. (2010). Costco wholesale corporation. Retrieved from http//www. csrglobe. com/login/companies/costco_wholesale_corporation. html Jun, J. (2009, January 19). victorious stock in costco. Retrieved from http//www. oldschoolvalue. com/featured/taking-stock-in-costco/ &82 12&8212&8212&8212&8212&8212&8212 1 entropy collected from Google Finance