Description
The presentation explaining Costco wholesale corporation discusses Financing growth, income statement, Year on year performance and comparison with its competitors Walmart, Sears, BJ.
COSTCO WHOLESALE CORPORATION FINANCIAL STATEMENT ANALYSIS
Topics covered
• Financing growth by COSTCO • What is common size income statement & preparing common size statements • Year on year performance of Costco & competitors based on its common size income statement • Costco’s performance vis-à-vis its competitors • Suggestions to Margarita Torres based on the analysis
FINANCING GROWTH STRATEGIES
Value to customers
• Not marking up products more than 14% over distributors price • Optimal container size • Delivering lowest per unit price • Target markets • Middle class customers • Small businesses • Kirkland Signature store brand • Brand name quality at discount prices
Value to manufacturers
• Broad distribution channel • Few SKU’s
• Run continuous production lines
• Powerful purchaser
Ancillary services
• Numerous products shoppers can add to basket • Increased sales per store
Operating efficiency
• Cost conscious approach • Low gross margin on products • High return on assets • High inventory turnover • Lower operating expenses than competitors
• Possible increase in tax efficiency
Minimizing capital expenditure
• No frills warehousing
• Cross-docking
• Reduce transportation • Full capacity utilization
Growth drivers
? No dividend ? Increase in current liabilities
? Decrease in liquidity
? Capital structure
? Debit/equity ratio of approximately 1 ? Moderate financial leverage
? High return on equity ? Reinvestment of earnings
Common Size income statement
A financial statement, which expresses the different values in form of percentage, is called a Common size financial statement
• Horizontal common size statement (trend analysis) •Vertical common size statement
Common Size Income Statement
• Financial statements reveal the financial credibility of a company.
CSI components
• Helps in comparing two companies, which differ in size.
Balance sheet
Income statement
Net assets are taken as 100 %
Net sales are taken as 100 %
Horizontal analysis
• Horizontal analysis ( or trend analysis ) shows the changes between years in the financial data in percentage and dollar form. • Highlights changes that are unusual.
Formulas
• Dollar change = Current year fig. – Base yr. fig.
• Percentage change = Dollar change X 100 Base year fig.
E.g.
Trend percentages
• Trend percentages state several years financial data in terms of a base year which equals 100%. • Horizontal analysis can be even more useful when data from a number of years are used to compute trend percentages.
Trend analysis
• Trend % = Current yr. amount Base yr. amount X 100
Trend analysis (e. g.)
• Berry products financial info. (2001 – ’05)
• The base year is 2001 and its amounts = 100%
• Analysis - cost of goods sold is increasing faster than sales, which is slowing the increase in gross margin.
Trend analysis ( graph )
Vertical analysis
• Vertical analysis focuses relationships among financial statement items at a given point of time • In a common size financial statement each item is expressed as a percentage
Vertical analysis
• In income statements, all items are expressed as a percentage of sales • In balance sheets, all items are usually expressed as a percentage of total assets
e. g.
Common size statement for comparison
• Useful when comparing data from diff. companies
• In 2002, Wendy’s net income is $219Mn and McDonald’s net income is $893Mn. Comparison is misleading due to diff. sizes of the companies. • Wendy’s net income as 8% of the sales and McDonald’s net income is 5.80% of sales. In this light, Wendy’s performance is better than that of McDonald’s.
Advantages
• The size of the companies being compared is not relevant. The companies being compared may be small or big. Hence, it is termed as common size. • Removes any kind of bias • Changes in different values pertaining to company's performance can also be ascertained during a particular period. Eg: to know how the cost of goods sold over a span of time has changed, the common size financial statement can be helpful. • Predicts future trends and analyzes prevailing trends in the industry.
Limitations
As with financial statements in general, the interpretation of common size statements is subject to many limitation, in the accounting data used to construct them. • Different accounting policies may be used by different firms or by the same firm at different points of time. Adjustments must be made • Different firms may use different accounting calendars, so accounting periods may not be directly comparable.
COSTCO’S & COMPETITORS’ COMMON SIZE FINANCIAL STATEMENTS & ANALYSIS
Year on Year Vertical Common Size Income Statements
COSTCO
SEARS
Wal-Mart
BJ
WHOLESALE CORP.
Costco vis-à-vis competitors – vertical common size income statements.
• 1997
• 1998
• 1999
• 2000
• 2001
Vertical Common – Size Income Statement Analysis
COSTCO
BJ Wholesale corp
High operational efficiency
Lower net income in 2001 due to lease obligation
SEARS
WAL-MART
High operating expenses
High gross margin Higher operational efficiency Lower operating expenses
Year – on – Year Horizontal Common - Size Income Statements
COSTCO
SEARS, ROEBUCK
WAL-MART
BJ WHOLESALE CORP.
Year – on – Year Horizontal Common - Size Income Statements Analysis
Costco
• The graph of net sales has been above the oper. Expenses hence showing that the firm is growing without increase in oper.exp. • Consistent gross margin over time.
Sears
• Sharp decline in the gross income around 2001 alongwith rising oper.expenses as compared to the net sales
Wal-mart BJ wholesale Corporation
• Consistent increase in net sales and gross income • Stable growth
•A sharp decline in the gross income between 2000-01 •Rising operating expenses do not contribute to sales
Suggestions to Margarita Torres
• As per the analysis,
• Costco & Wal-mart are market leaders.
• Monitor the performance of Costco and keep the existing shares of Costco • Wal-mart is a good option from an investment perspective
Margarita should purchase Wal-mart shares as well ; retaining the present shares of Costco
doc_916003414.ppt
The presentation explaining Costco wholesale corporation discusses Financing growth, income statement, Year on year performance and comparison with its competitors Walmart, Sears, BJ.
COSTCO WHOLESALE CORPORATION FINANCIAL STATEMENT ANALYSIS
Topics covered
• Financing growth by COSTCO • What is common size income statement & preparing common size statements • Year on year performance of Costco & competitors based on its common size income statement • Costco’s performance vis-à-vis its competitors • Suggestions to Margarita Torres based on the analysis
FINANCING GROWTH STRATEGIES
Value to customers
• Not marking up products more than 14% over distributors price • Optimal container size • Delivering lowest per unit price • Target markets • Middle class customers • Small businesses • Kirkland Signature store brand • Brand name quality at discount prices
Value to manufacturers
• Broad distribution channel • Few SKU’s
• Run continuous production lines
• Powerful purchaser
Ancillary services
• Numerous products shoppers can add to basket • Increased sales per store
Operating efficiency
• Cost conscious approach • Low gross margin on products • High return on assets • High inventory turnover • Lower operating expenses than competitors
• Possible increase in tax efficiency
Minimizing capital expenditure
• No frills warehousing
• Cross-docking
• Reduce transportation • Full capacity utilization
Growth drivers
? No dividend ? Increase in current liabilities
? Decrease in liquidity
? Capital structure
? Debit/equity ratio of approximately 1 ? Moderate financial leverage
? High return on equity ? Reinvestment of earnings
Common Size income statement
A financial statement, which expresses the different values in form of percentage, is called a Common size financial statement
• Horizontal common size statement (trend analysis) •Vertical common size statement
Common Size Income Statement
• Financial statements reveal the financial credibility of a company.
CSI components
• Helps in comparing two companies, which differ in size.
Balance sheet
Income statement
Net assets are taken as 100 %
Net sales are taken as 100 %
Horizontal analysis
• Horizontal analysis ( or trend analysis ) shows the changes between years in the financial data in percentage and dollar form. • Highlights changes that are unusual.
Formulas
• Dollar change = Current year fig. – Base yr. fig.
• Percentage change = Dollar change X 100 Base year fig.
E.g.
Trend percentages
• Trend percentages state several years financial data in terms of a base year which equals 100%. • Horizontal analysis can be even more useful when data from a number of years are used to compute trend percentages.
Trend analysis
• Trend % = Current yr. amount Base yr. amount X 100
Trend analysis (e. g.)
• Berry products financial info. (2001 – ’05)
• The base year is 2001 and its amounts = 100%
• Analysis - cost of goods sold is increasing faster than sales, which is slowing the increase in gross margin.
Trend analysis ( graph )
Vertical analysis
• Vertical analysis focuses relationships among financial statement items at a given point of time • In a common size financial statement each item is expressed as a percentage
Vertical analysis
• In income statements, all items are expressed as a percentage of sales • In balance sheets, all items are usually expressed as a percentage of total assets
e. g.
Common size statement for comparison
• Useful when comparing data from diff. companies
• In 2002, Wendy’s net income is $219Mn and McDonald’s net income is $893Mn. Comparison is misleading due to diff. sizes of the companies. • Wendy’s net income as 8% of the sales and McDonald’s net income is 5.80% of sales. In this light, Wendy’s performance is better than that of McDonald’s.
Advantages
• The size of the companies being compared is not relevant. The companies being compared may be small or big. Hence, it is termed as common size. • Removes any kind of bias • Changes in different values pertaining to company's performance can also be ascertained during a particular period. Eg: to know how the cost of goods sold over a span of time has changed, the common size financial statement can be helpful. • Predicts future trends and analyzes prevailing trends in the industry.
Limitations
As with financial statements in general, the interpretation of common size statements is subject to many limitation, in the accounting data used to construct them. • Different accounting policies may be used by different firms or by the same firm at different points of time. Adjustments must be made • Different firms may use different accounting calendars, so accounting periods may not be directly comparable.
COSTCO’S & COMPETITORS’ COMMON SIZE FINANCIAL STATEMENTS & ANALYSIS
Year on Year Vertical Common Size Income Statements
COSTCO
SEARS
Wal-Mart
BJ
WHOLESALE CORP.
Costco vis-à-vis competitors – vertical common size income statements.
• 1997
• 1998
• 1999
• 2000
• 2001
Vertical Common – Size Income Statement Analysis
COSTCO
BJ Wholesale corp
High operational efficiency
Lower net income in 2001 due to lease obligation
SEARS
WAL-MART
High operating expenses
High gross margin Higher operational efficiency Lower operating expenses
Year – on – Year Horizontal Common - Size Income Statements
COSTCO
SEARS, ROEBUCK
WAL-MART
BJ WHOLESALE CORP.
Year – on – Year Horizontal Common - Size Income Statements Analysis
Costco
• The graph of net sales has been above the oper. Expenses hence showing that the firm is growing without increase in oper.exp. • Consistent gross margin over time.
Sears
• Sharp decline in the gross income around 2001 alongwith rising oper.expenses as compared to the net sales
Wal-mart BJ wholesale Corporation
• Consistent increase in net sales and gross income • Stable growth
•A sharp decline in the gross income between 2000-01 •Rising operating expenses do not contribute to sales
Suggestions to Margarita Torres
• As per the analysis,
• Costco & Wal-mart are market leaders.
• Monitor the performance of Costco and keep the existing shares of Costco • Wal-mart is a good option from an investment perspective
Margarita should purchase Wal-mart shares as well ; retaining the present shares of Costco
doc_916003414.ppt