Group 2 Costco.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

10

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



17


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

20

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

21

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

22

Source: Annual report 2011-2015


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

23

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


24


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

25

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

26

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

27

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

28

Five Forces

29

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

30

Costco financials

31

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

32

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

33

• 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

35

Source: Bloomberg, October 2014

Documents

Group 2 Costco.pptx