Unscrambling Monday's Egg

Costco Wholesale Corporation - More Than Just Chick Books at a Lower Price

Running Costco through the Chicks' Dozen
by Chick Jana

I just got home from the greatest book signing to date.  Chick Kristin and I spent the afternoon at Costco (NASD: COST) in Atlanta, Georgia signing Chicks Laying Nest Eggs books.  I've never had so much fun.  So many people browsing on a Sunday afternoon and they'd just walk by our little book signing table and ask us about the book.  I have no idea how many we sold, but it was so much fun chatting with everyone and they all seemed to love it. 

My girlfriend, Lara, works for Costco. About 2 months ago I was telling her about the upcoming Chicks' book release and she said, "You ought to have a book signing at Costco."  I said, "That'd be great. How do I go about doing that?"  She said, "Well, I'll make it happen."  (I had known Lara for about 6 months and I didn't even know she was a manager at Costco -- I'm such a good listener.)  I then asked her something I would never have asked her before becoming a Chick, "Is Costco public?"  She said, "Yes, and it's a great company; I really like what they stand for and I've worked for them for 8 years." 

I knew I'd have to find out if Costco met the Chicks Dozen, so after a wonderful day spent, I thought I'd run Costco through the Chicks Dozen...

1. Buy What You Know   In case you don't know, Costco is the big, no-frills warehouse that has everything from diapers to Waterford Crystal. Everything they sell is at a lower price than what you'd normally pay somewhere else. The Chicks Laying Nest Eggs book is on sale there, as well as many other household items you might need. Before my friendship with Lara, I had shopped at Sam's Wholesale club and didn't know that much about Costco. Now I do, and my Costco application's processed!

2. K.I.S.S.  How simple is it to explain buying cool stuff on sale?  Yes, everything at Costco is on sale or should I say at a price lower than normal.  Costco buys special name brand stuff at a discounted price and gives the savings directly to you.

3. The Industry   Costco's industry is retail and to be a little more specific, it's called specialty retail.  Is this industry growing faster than others?  Retail is not the fastest growing industry out there right now, however with the economy the way it has been for the last year, consumers are looking for bargains, and Costco definitely has some great bargains.

4. Leader In Its Field   Costco is not the leader in the specialty retail industry.  I thought Costco's biggest competitor would be Sam's Wholesale Club, but after doing a little research, I found out that Sam's Wholesale club is owned by Wal-Mart.  Duh?! Sam Walton started Wal-Mart, thus, Sam's club.  I can't believe I didn't know that.  Anyway, Wal-Mart is the biggest dog in this park and its revenues are more than five times its competitors, such as Target, K-Mart, Dollar Stores and yes, Costco.  However, Wal-Mart has a lot more than just Sam's Clubs.  As far as no frills, discounted items sold in warehouses, there's nothing really like Costco out there.

5. Repeat Profitability  You do need a membership card in order to shop Costco. They do offer different types of membership depending on how much you shop.  So after you've filled out the membership form, you're free to come back and shop and shop again. Based on my Sunday survey, Costco customers return at least once monthly to shop for discounted goodies. It's not exactly a place you'd come daily or weekly, but depending on your family needs, you'll drive to Costco to save a buck or two when you're going to do your bulk shopping or buy something special.

(The following formulas were based on figures taken from Costco's most recent quarterly income statement of 2/18/01.)

6. Gross Margins

8,306.3 - 7,276 / 8,306.3 = .124

Change to a percentage

100 x .124 = 12.4%

This is not exactly the Chicks' 50% requirement.  Costco makes 12 cents on every dollar they charge you.  They can't charge you more, cuz remember, they're a discounted warehouse.  They're trying to save you money.

7. Net Margins

176.6 / 8306.3 = .0212

Change to a percentage

100 x .0049 = 2.12%

We like Net Margins to be above 8% in the companies we invest in, but again, in the discounted warehouse, Costco is still making profit.

(The following figures were taken from Costco's most recent quarterly balance sheet of 2/18/01.)

8. More Cash than Long Term Debt

Cash = 537.8

Long Term Debt = 827.8

Right now they have more debt than they have cash in the bank. We'd prefer for companies to have more cash than debt.

9. Flow Ratio

(Current Assets - Cash*) / (Current Liabilities - Short Term Debt)

3,760.9 - 537.8/ 3913.4-15.7 =  

3223.1 / 3897.7 = .826 or .83 

WOW! That's a great Flow Ratio. It looks as if Costco has a handle on managing its accounts payable and receivable.  Nice Job!      

10. Increasing Growth

Sales (revenues) increased 8.76% from last quarter to this quarter, but it looks as if they've had a few hiccups over the past year; some definite good quarters and some not-so-good quarters.

11. Strong Management and Operating History   Jim Sinegal, 64, was the founder of Costco in 1984 and has been Costco's President and CEO since 1993 when Costco merged with The Price Club. (Yep, another competitor bit the dust)  I also found it interesting that one of Costco's directors, (since 1997) Charles T. Munger, is also is the Vice Chairman of the Board of Berkshire Hathaway Inc. We love Warren Buffet and I'm glad to see someone on the board at Costco is also working with Mr. Buffet (not Jimmy). I also found it intriguing to see how large Costco presence is here and internationally--Costco has at total of 357 warehouses (as of 5/2/01). They have 257 locations in 34 US states; 60 locations in nine Canadian provinces; 11 locations in the United Kingdom; 3 locations in Taiwan; 5 locations in Korea; 2 locations in Japan;19 locations in six Mexican states. Talk about room for continued growth! Can Wal-Mart tout the same international presence? 

What kind of a company is Costco? I have to quote my friend Lara here again, "Costco only puts items on the shelves they know are going to save the customer money. It's great working for a company that never sways from its philosophy and it's something I believe in." 

Awww, now how nice is that, and from an employee as well?   After taking a look at their website, I found I liked them even more.  They offer a great deal on-line as well as in their warehouses. 

12. Buy on Sale

It looks like Costco is on sale, just like all of its merchandise! 

To summarize, Kristin and I had a ball at Costco today and now that I've found them, I'm going to be doing some more shopping there.  I'm also going to keep my Chick Eye on them and see how they grow.