Corporate Valuation Project .pptx

Nathalie Torres

Zuliat Owoade

Amy Xie

Helen Fleischer

Elsie Eastman

Syrine Bessaad

Corporate Valuation

We value Costco at $161, 4.8% above the current market price

2

Movement into New Distribution

Channels

Low Cost

Structure

Commitment to

Customer

• Low operating cost increases the gross margin• Efficient inventory and labor management• Pricing power over suppliers• New deal with Visa

• Opportunities for domestic expansion• Plans for aggressive global expansion• Increased presence in the E-Commerce

sector

• High membership loyalty and satisfaction• Broadening customer base• Response to consumer trends


3


Channels

Low Cost

Structure

Commitment to

Customer



sector


Revenue is steadily growing by 7% due to the introduction of new warehouses

4

Other International

Canada

U.S.

Source: CSI Market

New Channels ❖ Low Cost ❖ Commitment to Customer

Revenue in $ million

On average, Costco has a yearly increase of 2.8% in number of domestic warehouses

5

Source: Annual Report and CSI Market


• 73% Costco’s revenue comes from US warehouse (2015)

• Costco v. Competitors: high sales and low number of stores

• Possibility of cannibalization

Costco has adopted an aggressive approach to expanding its presence internationally

6

Canada: 89 warehouses in

2015 and 3 more will be added in

2016

Japan: 23 warehouses in


2016

Australia: 7 warehouses in


2016

UK: 27 warehouses in


2016

Taiwan: 11 warehouses in


2016

Spain: 1 warehouse in 2015 and 1 more will be

added in 2016Source: Annual Report


Costco’s appeal has translated well to the international marketplace

7

Source: Annual Report and CSI Market


Compared to competitors, Costco’s E-Commerce makes up a higher percentage of total sales

8

Source: Annual Reports and Market Realist


• Online business grew about 20% in 2015


9


Channels

Low Cost

Structure

Commitment to

Customer



sector


Costco has successfully kept COGS low to maintain a growing gross margin

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Gross Margin

Source: 10-K New Channels ❖ Low Cost ❖ Commitment to Customer

Low shrinkage, volume purchasing, and self-service warehouse facilities contribute to the low COGS

11

Low shrinkage due to the strictly controlled entrance

Limited brands and volume purchasing

Self-service warehouse facilities reduce needs of labor

Source: Annual Report 2015


Costco had the highest inventory turnover ratio among its competitors

12

Costco

Walm

art

Target

Source: Stock Analysis on Net


High employee satisfaction lowers the employee turnover rate for Costco

13

$9.86 $17

33% 8%

Hourly Wage

Health Premium

Source: Harvard Business Review


Costco has pricing power over suppliers

14New Channels ❖ Low Cost ❖ Commitment to Customer

• Costco can absorb costs rather than passing along to customers

• No supplier accounts for more than 5% sales• Kirkland Signature gives more control over cost structure

Source: Market Realist

Costco passes savings on to customers through low operating margins

15

Source: Yahoo Finance


Costco switched co-branded credit cards from American Express to Visa and Citi on June 20, 2016

• Amex transaction fee 3.5% vs. Visa 2-3%

• Wider customer base

• Better customer rewards



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Channels

Low Cost

Structure

Commitment to

Customer



sector


Costco maintains a high rate of customer loyalty

• The “Costco Lifestyle”

• Loyalty: 91% Subscription renewal rate in US and Canada

• 88% renewal rate worldwide

• Satisfaction Guarantee

• Importance of Word-of-mouth


Source: Costco Annual Report 2015, Costco website

Costco uses products, promotions, and sustainable practices to broaden its customer base


Products & Services

• Flowers• Designer Clothing• Cosmetics• E-Commerce

Promotions

• Huge savings for millennials

Sustainability

• Solar panels on warehouse roofs

• Efficient lighting

Source: Costco website, American Builders Quarterly, 2016

Costco’s memberships are steadily increasing year to year

• 81 Million cardholders worldwide

• In 2015, membership increased by more than 6%

– 4% increase in shopping frequency

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Members in million

Gold Star

Business


Costco capitalizes on consumer’s growing preferences for private label brands

• 75% of US customers think of label brands as alternatives to name brands

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Canada

USA

Source: Nielson Global Survey

New Channels ❖ Low CostNew Channels ❖ Low Cost ❖ Commitment to Customer

Membership revenue is on average more than 70% of Costco’s operating incomes

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Source: Annual report 2011-2015


The firm value is $76.2B, suggesting an appropriate price per share of $161

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Financial Assumptions

❖ Sales growth rate: 8.0% ❖ Membership growth rate: 6.4%

❖ COGS as % of sales: 89.2% ❖ Terminal growth rate: 3.0%

❖ SG&A as % of sales: 10.0% ❖ Risk free rate: 2.93%

❖ Beta: 0.845 ❖ WACC: 5.99%

Key Results

Enterprise Value

$76.2BPrice per Share

$161


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Channels

Low Cost

Structure

Commitment to

Customer



sector


AppendixNathalie & ZuliatRevenue growth 4Domestic warehouses 5Map 6International 7E-Commerce 8

Amy & HelenLow COGS 10Reasons for low COGS 11Inventory turnover 12Employee satisfaction 13Pricing power 14Low operating margin 15Visa 16

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Additional Information

Food and Sundries 26History 1976-1989 27History 1991-2015 28Five Forces 29Stock Performance 30Financials 31Membership 32Sustainability 33Future Challenges 34Millennial data 35

Elsie & SyrineCustomer loyalty 18Broaden consumer base 19Membership increase 20Private label 21Membership revenue 22

Valuation 23

Food and Sundries are 55% of Costco’s revenues

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Source: Costco’s Annual Report 2015

History 1976-1989• 1976: Price Club founded by Sol & Robert Price for $2.5 Million.

– First warehouse club for business shoppers only

– Remodeled airplane hangar in San Diego, CA

• 1980: Price Company offers public stock on July 12

• 1983: First Costco warehouse opens in Seattle

• 1984: Price Club sales exceed $1 billion, splits stock 2 for 1 on June 13

• 1985: Costco offers public stock on Dec. 5, opens first Canadian warehouse

• 1986: Price Company Stock splits 2 for 1 on Feb. 4, Costco opens a pharmacy and fresh meat dept.

• 1987: Costco opens first produce and bakery depts. Price Club and Costco open optical depts.

• 1989: Price Company is third most profitable company in US

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History 1991-2015• 1991: Costco stock splits 2 for 1 on May 16

• 1992: Costco stock splits 3 for 2 on March 9, first Price Club in Mexico opens

• 1993: Shareholders approve Costco and Price Company merger, PriceCostco opens first warehouse in UK

• 1994: First Asia Costco opens in Korea, first hearing aid center opens

• 1995: First gas station opens, Kirkland Signature (exclusive, private label) is introduced

• 1997: Executive membership is introduced

• 1998: Costco opens E-Commerce on Costco.com

• 1999: Costco American Express co-branded membership credit card is introduced, average annual sales per warehouse reaches $100 million

• 2000: Costco opens Travel Business, stock splits 2 for 1 on Jan 14

• 2003: Average annual sales per warehouse $105 million, Costco.com generated sales of $226 million

• 2004: True Earnings credit card from Costco and American Express introduced, Costco is 5th largest retailer in US and 11th largest in world

• 2015: Costco announces Visa will replace American Express

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Five Forces

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Rivalries

Low switching cost

Many competitors

STRONG

Low switching costMany available substitutes

Bargaining Power of Customers

STRONG

Large supplier poolCostco only offers a few

Bargaining Power of Suppliers

WEAK

Low barrier to entry

Hard to match economies of scale

Threat of New Entry MEDIUM/WEAK

Traditional

Retail stores

Specialty stores

Growing e-commerce

Threat of Substitutes

STRONG

Costco Stock Performance over 5 years

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Costco financials

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COST WMT TGT Industry

Market Cap 67.36B 223.18B 39.83B 21.43B

EBITDA 4.84B 33.22B 7.41B 2.01B

Operating Margin 0.03 0.05 0.07 0.05

EPS 5.29 4.52 5.4 3.08

P/E 0.57 0.46 0.55 0.85

Membership Explanation

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Gold Star membership

• $55 annual fee• One free

Household Card

Business Membership

• $55 annual fee• $55 per

additional cardholders

• Purchases for resale

Executive Membership

• $110 annual fee• 2% annual

reward• Additionally

discounted services

Costco is committed to sustainability

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• Warehouses made of recycled metal

• Solar panels • Reduced water usage• Increased lighting efficiency• Efficient HVAC units• Better packaging• Grease Biofuel

Solar-Paneled Costco roof in Richmond, CA


Source: Costco Annual Report 2015, American Builders Quarterly, 2016

Future Challenges

Strong online competitors

Reliance on California markets

Fluctuating oil prices

Unpredictable foreign currency rates

Millennials Data

• Increased (percentages in the high single digits) sales of produce, including Kale

– Profit growth of 13% in 4th quarter of 2014

– Membership revenue up 7.3%

– $2.4 million in membership fees in 2014

• Specifically revealed its strategy of using produce to lure in younger customers

• Free delivery service in LA, NYC, and SF via a partnership with Google

• 2 million new shoppers

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Source: Bloomberg, October 2014