U.S. Consumer Staple U.S. Consumer Staple MarketMarket

PresentersPresenters

Industry: Industry: Jim ShiJim ShiTarget: Target: Chris YooChris YooWal-Mart:Wal-Mart: Doug HuxterDoug HuxterCostco:Costco: Wendy ChoiWendy Choi

Consumer StaplesConsumer Staples

Definition:Definition:– Include any company that manufactures and Include any company that manufactures and

sells sells food/beverages, tobacco, prescription food/beverages, tobacco, prescription drugs and household productsdrugs and household products

– Includes following industryIncludes following industry

Food & Drug RetailingFood & Drug Retailing Food & Beverage & TobaccoFood & Beverage & Tobacco Household & Personal ProductsHousehold & Personal Products

– E.g. Proctor & Gamble, Coca Cola, Wal-martE.g. Proctor & Gamble, Coca Cola, Wal-mart

Types of RetailersTypes of Retailers

Department storesDepartment stores– Wide variety of productsWide variety of products– Ex. SearsEx. Sears

DemographicsDemographics– Stores aimed at certain segmentStores aimed at certain segment– Ex. GapEx. Gap

DiscountersDiscounters– Membership club or low priced variety storeMembership club or low priced variety store– Ex. Costco Wal-martEx. Costco Wal-mart

Porter’s 5 ForcesPorter’s 5 Forces

Low Threat of new entrants: Low Threat of new entrants: – Large concentration of retail chain Large concentration of retail chain

storesstores– Decreasing number of independent Decreasing number of independent

retailersretailers– Barriers to entryBarriers to entry

Favorable supply contract: centralized Favorable supply contract: centralized buying powerbuying power

Favorable lease contractFavorable lease contractRequires large amounts of capitalRequires large amounts of capital

Porter’s 5 Forces (cont’)Porter’s 5 Forces (cont’) Suppliers’ power: limited power to negotiate Suppliers’ power: limited power to negotiate

relatively to large retail chain storesrelatively to large retail chain stores

Buyers’ power: Buyers’ power: – Individuals with limited purchasing powerIndividuals with limited purchasing power– collectively, customers can demand high quality collectively, customers can demand high quality

products at a bargain price; products at a bargain price;

Porter’s 5 Forces (cont’)Porter’s 5 Forces (cont’)

Substitute threat: high, products offered in Substitute threat: high, products offered in one retail chain are available in othersone retail chain are available in others

Rivalry: slow market growth leads to fierce Rivalry: slow market growth leads to fierce price competitionprice competition

Historical TrendHistorical Trend

Annual Changes in U.S. Retail Sales for 2001-2005

2.19%

4.30%

6.49%6.91%

$74

$149

$235

$266

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

2001-2002 2002-2003 2003-2004 2004-2005

Years

An

nu

al %

Ch

ang

e

$0

$50

$100

$150

$200

$250

$300

An

nu

al $

Ch

ang

e (i

n B

illi

on

s o

f D

oll

ars)

Chart Made Based on Data Collected from:Chart Made Based on Data Collected from:

Title: Retail and Food ServicesTitle: Retail and Food Services

Series ID: RSAFSNASeries ID: RSAFSNA

Source: U.S. Department of Commerce : Census BureauSource: U.S. Department of Commerce : Census Bureau

Release: Advance Monthly Sales for Retail and Food ServicesRelease: Advance Monthly Sales for Retail and Food Services

Seasonal Adjustment: Not Seasonally adjutedSeasonal Adjustment: Not Seasonally adjuted

Frequency: MonthlyFrequency: Monthly

Units: Millions of DollarsUnits: Millions of Dollars

Retrieved on Nov. 15/2006 at:Retrieved on Nov. 15/2006 at:

http://www.forecasts.org/data/data/RSAFSNA.htmhttp://www.forecasts.org/data/data/RSAFSNA.htm

U.S. Retail Sales in Past 5 Years

$3.39$3.47

$3.62

$3.85

$4.12

$3.00

$3.20

$3.40

$3.60

$3.80

$4.00

$4.20

2001 2002 2003 2004 2005

Year

An

nu

al S

ales

(in

Tri

llio

ns

of

Do

llar

s)

Seasonal CycleSeasonal CycleU.S. Retail Sales Monthly

$250

$270

$290

$310

$330

$350

$370

$390

$410

$430

Jun.2004

Jul. Aug. Sep. Oct. Nov. Dec. Jan.2005

Feb. Mar. Apri. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan.2006

Feb. Mar. Apri. May Jun.

Month

Bil

lio

ns o

f D

oll

ars

Changes in Monthly Sales

-$100

-$80

-$60

-$40

-$20

$0

$20

$40

$60

Jun.2004

Jul. Aug. Sep. Oct. Nov. Dec. Jan.2005

Feb. Mar. Apri. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan.2006

Feb. Mar. Apri. May Jun.

Month

Ch

ang

es i

n B

illi

on

s o

f $

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

Ch

ang

es i

n %

$ %

Company Size by RevenuesCompany Size by Revenues

48%

37%

7%8%

Other

Walmart

Target

Costco

Retail MetricsRetail Metrics

Revenues, net income and profit Revenues, net income and profit marginsmargins

Number of storesNumber of stores Same store salesSame store sales Sales per square footSales per square foot Target market Target market

Driving Force OverviewDriving Force Overview

Low priced goodsLow priced goods LocationLocation Product lineProduct line Market cycle (economy), Market cycle (economy),

EmploymentEmployment Consumer confidence levelConsumer confidence level Natural disasterNatural disaster

Low-priced GoodsLow-priced Goods

Efficient distribution networkEfficient distribution network Constant search for low-cost goodsConstant search for low-cost goods

– Import goods from countries with low Import goods from countries with low cost labourcost labour

Large volume discountLarge volume discount Strategically located storesStrategically located stores Flexible workforceFlexible workforce

– Part-timePart-time– Non-unionized vs. unionizedNon-unionized vs. unionized

LocationLocation

Store densityStore density Urban vs. SuburbanUrban vs. Suburban Land value of locationLand value of location

Product LineProduct Line

Price vs. qualityPrice vs. quality– High-end: Urban Fare, NordstromsHigh-end: Urban Fare, Nordstroms– Mixed: the Bay, TargetMixed: the Bay, Target– Low-end: Wal-MartLow-end: Wal-Mart

Variety of goods soldVariety of goods sold– Primarily grocery store (Top Food, Primarily grocery store (Top Food,

Safeway)Safeway)– Primarily hard products (Best Buy, Home Primarily hard products (Best Buy, Home

Depot)Depot)– Primarily soft products (the Bay, the Brick)Primarily soft products (the Bay, the Brick)

US EconomyUS Economy

Indicator slowing economyIndicator slowing economy– Cooling housing market slowing Cooling housing market slowing

economy (housing starts)economy (housing starts)– High energy price High energy price – Stabilized interest rates Stabilized interest rates – Household incomeHousehold income

Housing StartsHousing Starts

Monthly Housing Starts in 2006

2,265 2,1321,972

1,832 1,953 1,833 1,760 1,674 1,7721,486

0

500

1,000

1,500

2,000

2,500

Jan. Feb. Mar. Apri. May Jun. Jul. Aug. Sep. Oct.

Month for Year 2006

Ho

usi

ng

Sta

rts

(in

th

ou

san

ds

of

un

its)

Increasing Oil PriceIncreasing Oil Price

Monthly Spot Oil Price for 2006

$65.51

$61.63$62.90

$69.69$70.94 $70.96

$56.00$58.00$60.00$62.00$64.00$66.00$68.00$70.00$72.00

Jan. Feb. Mar. Apri. May Jun.

Month

Oil

Pri

ce (

in d

oll

ars

per

b

arre

l)

Interest RatesInterest Rates

Monthly Prime Interest Rates for 2006

7.267.5 7.53

7.757.93 8.02

8.25 8.25 8.25 8.25

6.66.8

77.27.47.67.8

88.28.4

Jan. Feb. Mar. Apri. May Jun. Jul. Aug. Sep. Oct.

Month

Inte

rest

Rat

e (%

)

Industry Returns and Interest RateIndustry Returns and Interest Rate

1 yr gain after the Fed stop raising rates1 yr gain after the Fed stop raising rates Financials 24.7%Financials 24.7% Health Care 23.4%Health Care 23.4% Consumer staples 17.6%Consumer staples 17.6% S&P 500 9.9%S&P 500 9.9%

Source: CitigroupSource: CitigroupNOTE: NOTE: Based on average change in the 12 Based on average change in the 12

months after final rate increase, 1983-months after final rate increase, 1983-2000 2000

Personal IncomePersonal Income

5 Year Trend

Date(Quarterly)

Unemployment RateUnemployment RateAnnual Arithmatic Average for Unemployment Rate

3.97

4.74

5.786.00

5.525.06

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2000 2001 2002 2003 2004 2005

Year

Un

emp

loym

ent

Rat

e (%

)

Consumer ExpenditureConsumer ExpenditureAverage Annual Consumer Expenditure

$38,045

$39,518

$40,677 $40,817

$43,395

$46,409

$35,000

$37,000

$39,000

$41,000

$43,000

$45,000

$47,000

2000 2001 2002 2003 2004 2005

Year

Co

nsu

mer E

xp

en

ditu

re

Changes in Consumer Expenditure

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

Year

$ C

han

ge in

A

nn

ual

Exp

en

ditu

re

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

% C

han

ge in

A

nn

ual

Exp

en

ditu

re

$ %

Composition of Consumer Composition of Consumer ExpenditureExpenditure

Composition of Consumer Expenditure for 2005

Food, 13%

Housing, 33%

Apparel , 4%Transportation, 18%

Heathcare, 6%

Entertainment, 5%

Insurance, 11%

Others, 10%

Consumer Confidence Index:Consumer Confidence Index:

5 Year Trend

0.020.040.060.080.0

100.0120.0140.0160.0

Ja

n.

Jun

e

No

v.

Ap

r.

Se

pt.

Fe

b.

July

De

c.

Ma

y

Oct

.

Ma

r.

Au

g.

Jan

.

Jun

e

No

v.

Ap

r.

Se

p.(

p)

Date

Natural DisasterNatural Disaster

HurricanesHurricanes– Ex. 2005 August Hurricane KatrinaEx. 2005 August Hurricane Katrina

EarthquakeEarthquake RainRain

– Ex. Rains increase the amount of Ex. Rains increase the amount of turbidity level of tap water turbidity level of tap water

Target®

Expect More. Pay Less. ®

Company Overview

• Listed on New York Stock Exchange• Part of the S&P 100, 500, and 1500 Super

Comp. Russell 1000. • Market Cap: 50.01B• Stock Price 52 week range for 2006: 44.70-

60.34• Shares Outstanding: 874,040,000 • Dividend Yield: 0.48 (0.80%)• Price Earning Ratios: 19.51• EPS: 2.98

Stock Price History

5 Year Trend

20

25

30

35

40

45

50

55

60

65

1/2/

2001

4/2/

2001

7/2/

2001

10/2

/200

1

1/2/

2002

4/2/

2002

7/2/

2002

10/2

/200

2

1/2/

2003

4/2/

2003

7/2/

2003

10/2

/200

3

1/2/

2004

4/2/

2004

7/2/

2004

10/2

/200

4

1/2/

2005

4/2/

2005

7/2/

2005

10/2

/200

5

Date

Pri

ce

Stock Price in 06Price

40

45

50

55

60

65

1/3

/2006

2/3

/2006

3/3

/2006

4/3

/2006

5/3

/2006

6/3

/2006

7/3

/2006

8/3

/2006

9/3

/2006

10/3

/2006

11/3

/2006

Company M & A’s

• From 1960-80’s– Lechmere, J.L. Hudson Company, Mervyn’s,

Ayr-Way, Fed Mart, Gemco,

• From 1990-00’s– Marshall Field’s, Fedco,

• Most recently:– June 9, 2004

• Announced sale of Marshall Field’s Chain, and several Mervyn’s stores

Company Profile

• Large-format general merchandise discount stores in the United States– Target & SuperTarget stores.

• Assortment of general merchandise and limited assortment of food items. – Target-general merchandise– SuperTarget-a line of food items along with general

merchandise. • The credit card operation represents an integral

component of its core retail business. • The company also operates Target.com, an

online business.

Company Profile

• The company now has more than 1,440 stores in 47 states, and employs more than 300,000 employees.

• Year ending 2005, Target reaches an important milestone; 50 billion dollars in sales in a single year.

• Target’s Customers– Median age of 41– Median household income of approx. $58k– Approx. 43% have children at home– About 43% have completed college

Management

• Robert J. Ulrich – University of Minnesota, BA, 1967– Chairman and C.E.O for 12 years– With the company for 35 years– Held various positions– Annual compensation $10.1 million

• Gregg W. Steinhafel– President for 7 years– Annual compensation $2.7 million

Key Figures

• Same-Store Sales Growth (“Comps”)

• Sales per Square Foot

• Inventory Turnover

• Gross Profit Margin

• Debt/Equity Ratio

Same-Store Sales Growth

5 Year Trend

4.1

2.2

4.45.3 5.6

0123456

2001 2002 2003 2004 2005

Date

Perc

ent

Sales per Square Foot

5 Year Trend

274278

282

307

319

250

260

270

280

290

300

310

320

330

2001 2002 2003 2004 2005

Date

Inventory Turnover

5 Year Trend

7.778.41

8.83 8.77

9.77

6.5

7.4 7.3 7.1 7.2

0.00

2.00

4.00

6.00

8.00

10.00

12.00

2001 2002 2003 2004 2005

Date

Target

Industry

Gross Profit Margin

5 Year Trend

29.430.2

30.631.2

31.9

28

29

30

31

32

33

2001 2002 2003 2004 2005

Date

Perc

ent

Debt/Equity Ratio5 Year Trend

1.14 1.18

1

0.73 0.690.63 0.630.57 0.55 0.59

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2001 2002 2003 2004 2005

Date

Target

Industry

Driving Factors of Staple Industry

• Low COGS achieved through distribution and supply chain

• Image

• Location

• Product line

Low COGS achieved through distribution and supply chain

• Significant investments in supply chain and in leading-edge technologies.

• Current distribution network includes 23 regional distribution centers and 3 import warehouses.– Plans to add 2 distribution centers and 3 import

warehouses in the next 2 years

• Derive operating efficiencies through 6Sigma@Target and outsourcing a variety of business functions.

Image

• Target’s store are:– Inviting and easy-to-shop,– Clean, bright, safe and accessible, and– Elaborately designed to excite their guests

• Corporate Responsibility

Location

• Currently not pursuing international expansion, still considers potential continued growth in the U.S.

• By 2010, plans to reach approx. 2000 stores.

• Concentrate store growth in major metropolitan areas.

Product line

• Assortment of general merchandise

• Exclusive brands that make Target a destination for high-quality

• Offers pharmaceutical products

Firm Strategy

• Store Growth Nationally; complemented by innovative design and support

• Increase the mix of competitively priced consumables and commodities

• Expand food offerings in general merchandise stores

• Innovation is key to expansion and growth

Store Growth Pattern

• In 2006, as of Oct 28 they built 75 more Target General Merchandise stores, and 19 more SuperTarget stores, totaling 1494 stores.

Recent Selling of SharesFrom Within

In 2006:• Oct 9th Gregg W. Steinhafel (President)

sells shares totaling $6.2 million.• Oct 17 & 18th Robert Ulrich Jr. (C.E.O)

sells approx 700,000 shares totaling $32.1 million.

• Nov 15th Douglas A. Scovanner (Executive Vice President & C.F.O.) sells shares totaling $2.7 million.

Recent Selling of Shares from Outsiders

• Buffett’s Berkshire Hathaway Inc. owns 745,700 shares of Target, compared with 5.5 million shares in June.

Recommendation

BUILDING SMILES

WAL-MARTWAL-MARTOVERVIEWOVERVIEW

Listed on the NYSEListed on the NYSE Part of the Dow Jones Indust.Part of the Dow Jones Indust. Ticker: WMTTicker: WMT Market Cap: $200 BillionMarket Cap: $200 Billion Stock Price: $47.50Stock Price: $47.50 Dividend yield: 1.4%Dividend yield: 1.4% Shares Outstanding: 4.17 BillionShares Outstanding: 4.17 Billion P/E ratio: 18.17P/E ratio: 18.17

5 Yr. Wal-Mart Price5 Yr. Wal-Mart Price

WAL-MART vs. S&PWAL-MART vs. S&P

Number of SharesNumber of Shares

4,0004,0504,1004,1504,2004,2504,3004,3504,4004,4504,500

Number in Millions

2001 2002 2003 2004 2005 2006

Years

Shares Outstanding

Company OverviewCompany Overview Largest Company in the worldLargest Company in the world

Employs over 1.8 million associateEmploys over 1.8 million associate

Sales of $312 billion in 2005Sales of $312 billion in 2005

176 Million Shoppers visit Wal-Mart 176 Million Shoppers visit Wal-Mart Every weekEvery week

WAL-MARTWAL-MARTHistoryHistory

Founded in 1962 in Arkansas by Sam Founded in 1962 in Arkansas by Sam WaltonWalton

Wal-Mart went public in 1970Wal-Mart went public in 1970

By the end of the 1980’s WAL-MART had By the end of the 1980’s WAL-MART had over 2,200 locations.over 2,200 locations.

Today WAL-MART has over 6100 storesToday WAL-MART has over 6100 stores– 3856 In the USA3856 In the USA– 2290 International stores2290 International stores

Lee ScottLee Scott

Became CEO in 2000Became CEO in 2000 Has been with Wal-Mart since Has been with Wal-Mart since

19781978 Serves on the board of directorsServes on the board of directors Compensation $5 million in cash Compensation $5 million in cash

and $5 million in stock optionsand $5 million in stock options Degree in Business from Pittsburg Degree in Business from Pittsburg

universityuniversity Share value has dropped 22% Share value has dropped 22%

since he has been running the since he has been running the companycompany

Chairman of the boardChairman of the board

Robert Walton Chairman of the Robert Walton Chairman of the boardboard

Son of the founderSon of the founder Only Walton family member still on Only Walton family member still on

the board of directorsthe board of directors Owns over 2 million shares in the Owns over 2 million shares in the

companycompany Walton Family still has large stake in Walton Family still has large stake in

the companythe company

WAL-MARTSWAL-MARTSSTRATEGYSTRATEGY

Improve company imageImprove company image– Improve relationship with associates and Improve relationship with associates and

surrounding communitiessurrounding communities

– Become a leading company in Become a leading company in sustainabilitysustainability

– Provide a diverse variety of products at Provide a diverse variety of products at a great pricea great price

Improving Company ImageImproving Company Image

Pays below average wages but creates over Pays below average wages but creates over 250,000 new jobs a year250,000 new jobs a year

Low cost health care coverage of $3 per month Low cost health care coverage of $3 per month Created an employment advisory council to Created an employment advisory council to

improve standards for minority groupsimprove standards for minority groups Created job & opportunity zones where the Created job & opportunity zones where the

company provides local business with additional company provides local business with additional trainingtraining

WAL-MARTWAL-MARTstaying ahead of the curvestaying ahead of the curve

To Be Supplied 100% By Renewable To Be Supplied 100% By Renewable Energy Energy

To Create Zero Waste To Create Zero Waste

To Sell Products That Sustain Our To Sell Products That Sustain Our Resources & Environment Resources & Environment

Product LineProduct Line

Mainly a general merchandise chainMainly a general merchandise chain– Including electronics, clothing, auto parts, Including electronics, clothing, auto parts,

food, gift cards, financial services, food, gift cards, financial services, pharmaceutical products pharmaceutical products

Moving into food products within Moving into food products within North AmericaNorth America– Through SuperCenters and Neighborhood Through SuperCenters and Neighborhood

MarketsMarkets

WAL-MART’SWAL-MART’Sgrowth Strategygrowth Strategy

Continue to diversify the product Continue to diversify the product line offered at domestic locationsline offered at domestic locations

Wal-Mart’s DivisionsWal-Mart’s Divisions

Discount centersDiscount centers– Sales general merchandise and food Sales general merchandise and food

productsproducts Sam’s ClubSam’s Club

– A business to business operationA business to business operation International operationsInternational operations

– Focuses is on South America and AsiaFocuses is on South America and Asia

WAL-MARTWAL-MARTDomestic MarketDomestic Market

Four Major Store typesFour Major Store types1.1. Discount stores -1,209Discount stores -1,209

– Sq. ft. 102,000Sq. ft. 102,000

2.2. Supercenters – 1980Supercenters – 1980– Sq. ft. 187,000Sq. ft. 187,000

3.3. Sam’s Club – 567Sam’s Club – 567– Sq. ft. 129,000Sq. ft. 129,000

4.4. Neighborhood Markets – 100Neighborhood Markets – 100sq. ft. 42,000sq. ft. 42,000

SALES BREAKDOWN

2006 2005 2004

  Net Sales

Percent of

totalPercent Increase   Net Sales

Percent of total

Percent Increase   Net Sales

Percent of total

Wal-Mart Stores $ 209,910 67% 9%

$191,826 67% 10% $174,220 68%

Sam's Club 39,798 13% 7%

37,119 13% 8%

34,537 14%

International 62,719 20% 11%

56,277 20% 18%

47,572 19%

Total $ 312,427 100% 10% $285,222 100% 11% $256,329 100%

Wal-Mart’s salesWal-Mart’s sales

Net sales Increase

-

5.00

10.00

15.00

20.00

25.00

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

% I

ncr

ease

Same Store SalesSame Store Sales

-123456789

10

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

% In

crea

se

Sales Per Square Feet

273 288 293318 341

369 388 405 423 433 415

0

100

200

300

400

500

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

$ p

er s

q. f

t.

Key RatioKey Ratio

9.0

7.4

9.2

7.3

9.6

7.1

9.6

7.2

9.7

7.3

0.01.0

2.03.04.0

5.06.07.0

8.09.0

10.0

2002 2003 2004 2005 2006

Inventory Turnover

WAL-MART

Industry

Key RatiosKey Ratios

0%

10%

20%

30%

40%

50%

60%

70%

2001 2002 2003 2004 2005 2006

Debt to Equity Ratio

WALMART

Industry

Key RatiosKey Ratios

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

2001 2002 2003 2004 2005 2006

P/E Ratio

P/E WALMART

P/E Industry

WAL-MARTWAL-MART2007 Expansion Plan

Conversions35%

Discount stores5%

Sam's Club8%

International expansion

50%

Neighborhood stores

2%

WAL-MARTWAL-MARTInternational expansionInternational expansion

Has had troubleHas had trouble– In the process of selling off store in GermanyIn the process of selling off store in Germany– Selling operations in KoreaSelling operations in Korea

WAL-MARTWAL-MARTInternational expansion 2006International expansion 2006

Has been very aggressive in South Has been very aggressive in South America & AsiaAmerica & Asia

– In 2004 Acquired Supermercados in Brazil adding another In 2004 Acquired Supermercados in Brazil adding another 118 stores118 stores

– Bought a controlling share of Sonae in Brazil adding another Bought a controlling share of Sonae in Brazil adding another 139 locations139 locations

– Seiyu in Japan added 398 new locationsSeiyu in Japan added 398 new locations

New International Locations Sq. Ft.

Brazil

Japan

other

WAL-MARTWAL-MARTDomestic LocationsDomestic Locations

Traditionally located in small towns and in Traditionally located in small towns and in suburban areassuburban areas

Now trying to move into more urban areas Now trying to move into more urban areas and creating larger stores with a greater and creating larger stores with a greater selection of productsselection of products

Experimenting with food only locationsExperimenting with food only locations

WAL-MARTWAL-MARTSupply ChainSupply Chain

Over 60,000 suppliersOver 60,000 suppliers

Shares vital information with suppliersShares vital information with suppliers Owns the worlds largest privately held satellite Owns the worlds largest privately held satellite

system used to track inventory and store sales system used to track inventory and store sales Most advanced distribution centersMost advanced distribution centers

WAL-MARTWAL-MARTSupply Chain HighlightsSupply Chain Highlights

One of America’s Largest truck FleetOne of America’s Largest truck Fleet

SuggestionSuggestion

Hold for long-term slow growthHold for long-term slow growth

Reasons: Solid fundamentalsReasons: Solid fundamentals

Understands what needs to Understands what needs to be changed be changed

Planning for the future by Planning for the future by becoming more sustainable becoming more sustainable

Company OverviewCompany Overview

Listed on NasdaqListed on Nasdaq Part of the S&P Part of the S&P

500, Russell 1000500, Russell 1000 Ticker Symbol: Ticker Symbol:

COSTCOST Industry: Discount Industry: Discount

Variety StoreVariety Store

Company OverviewCompany Overview

Stock Price: $53.40 Stock Price: $53.40 Day High: $53.62Day High: $53.62 Day Low: $52.88Day Low: $52.88 52 Week High: $57.9452 Week High: $57.94 52 Week Low: $4652 Week Low: $46

*as of November 17*as of November 17thth, 2006, 2006

EPS: 2.30EPS: 2.30 P/E: 23.25 P/E: 23.25 Market Cap: 24.99B Market Cap: 24.99B Dividend Yield: 1%Dividend Yield: 1% Shares Outstanding: Shares Outstanding:

467.97M 467.97M

Stock Price HistoryStock Price History

Costco Stock Price vs S&P 500Costco Stock Price vs S&P 500

Company OverviewCompany Overview

No. 28 in Fortune 500No. 28 in Fortune 500 44thth largest retailer in USA largest retailer in USA 77thth largest in the world largest in the world 82 fewer stores than Sam’s Club but 82 fewer stores than Sam’s Club but

generate $20 B more in salesgenerate $20 B more in sales

Company HistoryCompany History 1948: Sol Price opened Fed Mart 1948: Sol Price opened Fed Mart 1976: Opened first store as Price Club in 1976: Opened first store as Price Club in

San Diego San Diego 1983: Founders James Sinegal and 1983: Founders James Sinegal and

Jeffrey Brotman opened first Jeffrey Brotman opened first warehouse in Seattlewarehouse in Seattle

1993: Costco and Price Club merged to 1993: Costco and Price Club merged to PriceCostco PriceCostco

1994: Founders of Price Club left Costco1994: Founders of Price Club left Costco 1997: Company name was changed to 1997: Company name was changed to

Costco Wholesaler Costco Wholesaler

James Sinegal, CEO & co-founderJames Sinegal, CEO & co-founder CEO from start of the CEO from start of the

companycompany Earned $583,000 in Earned $583,000 in

salary and bonusessalary and bonuses Business Administration Business Administration

graduate of San Diego graduate of San Diego State University State University

Leads low-cost lifestyleLeads low-cost lifestyle Named one of 100 most Named one of 100 most

influential people in Time influential people in Time MagazineMagazine

James Sinegal Salary Composition

350

200

28

Salary

Bonus

Stock Gain

Retailing Median

1045

1335

333

Salary

Bonus

Stock Gain

Jeffrey BrotmanJeffrey Brotmanco-founder & chairmanco-founder & chairman

Undergraduate degree Undergraduate degree in Political Science and in Political Science and law degree from law degree from University of University of WashingtonWashington

33rdrd generation of generation of family participating in family participating in wholesaling and retail wholesaling and retail merchandisingmerchandising

Former director of Former director of Starbucks and Sweet Starbucks and Sweet FactoryFactory

Costco TodayCostco Today

Aug 2006: 451 locations in North Aug 2006: 451 locations in North AmericaAmerica

Several locations in South Korea, Several locations in South Korea, Japan, Taiwan, UKJapan, Taiwan, UK

Employs approximately 118,000 full-Employs approximately 118,000 full-time and part-time stafftime and part-time staff

Net Sales by CategoryNet Sales by Category

30

30

16

1410

31

29

161311

31

29

161212

0%

20%

40%

60%

80%

100%

2003 2004 2005

Date

Sales Breakdown by Category

•Other

•Softlines

•Hardlines

•Sundries

•Food

Average P/E RatioAverage P/E Ratio

5 Year Trend

29.525

21.6 23.120.8

34.9

24.2 23.820.9

17.8

05

10152025303540

2001 2002 2003 2004 2005

Date

Costco

Industry

Sales per square foot (Annual)Sales per square foot (Annual)CompanyCompany

TargetTarget $307$307

NordstromNordstrom $369$369

Home DepotHome Depot $377$377

Wal-Mart*Wal-Mart* $438$438

BJ'sBJ's $445$445

Sam's Club*Sam's Club* $552$552

CostcoCostco $918$918

Best BuyBest Buy $941$941

050

100150200250300350400450

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Warehouses in Operation

5%

9%8%

10%11%

4%

6%5%

10%

7%

0%

2%

4%

6%

8%

10%

12%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Comparable Sales Growth

Inventory TurnoverInventory Turnover

5 Year Trend

12.4711.50 11.40 11.90 12

6.57.4 7.3 7.1 7.2

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

2001 2002 2003 2004 2005

Date

Costco

Industry

Dividend Yield Per ShareDividend Yield Per Share

5 Year Trend

$- $- $-

$0.20

$0.43

$0.24 $0.25$0.29

$0.39

$0.49

$-

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

2001 2002 2003 2004 2005

Date

Costco

Industry

Debt to Equity RatioDebt to Equity Ratio

5 Year Trend

0.22 0.23 0.20 0.170.09

0.63 0.630.57 0.55

0.59

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2001 2002 2003 2004 2005

Date

Costco

Industry

Gross Profit MarginGross Profit Margin

5 Year Trend

12.1 12.3 12.5 12.5 12.4

23.6 23.9 24.8 24.6 24.6

0

5

10

15

20

25

30

2001 2002 2003 2004 2005

Date

Costco

Industry

Driving factorsDriving factors

1) Low cost of goods1) Low cost of goods

achieved throughachieved through

distribution anddistribution and

supply chainsupply chain

2) Image2) Image

3) Location3) Location

4) Product line4) Product line

Low cost of goods achieved through Low cost of goods achieved through distribution and supply chaindistribution and supply chain

Volume purchasing Volume purchasing Purchasing directly from Purchasing directly from

manufacturersmanufacturers Pre-paying vendors to receive Pre-paying vendors to receive

payment discounts payment discounts Minimizing stocking feesMinimizing stocking fees

LocationLocation

No elaborate No elaborate facilities and rent is facilities and rent is lower since it is not lower since it is not in a prime locationin a prime location

No lights on most No lights on most days to save days to save electricity. electricity.

ImageImage

Known as the big box retailer that Known as the big box retailer that treats employees welltreats employees well

Return policyReturn policy– No deadlinesNo deadlines

Product lineProduct line

Limiting products to fast selling Limiting products to fast selling models, sizes and colours models, sizes and colours – Carry only 4000 items Carry only 4000 items

Rapid inventory turnoverRapid inventory turnover No-name products can be marked by No-name products can be marked by

more than 14%; private items 15%more than 14%; private items 15%

EmploymentEmployment

Average pay is $17 Average pay is $17 per hour per hour – 42% higher than 42% higher than

rivalsrivals– 3rd lowest turnover 3rd lowest turnover

rate in retail rate in retail industryindustry

92% of health care 92% of health care costs covered costs covered

Low ShrinkageLow Shrinkage

(under 0.20% for 2005)(under 0.20% for 2005) Entrances and Exits are controlledEntrances and Exits are controlled Membership format limits theftMembership format limits theft Good relations among employees Good relations among employees

limits internal theftlimits internal theft

Cost Minimizing StrategyCost Minimizing Strategy

Minimal advertising expensesMinimal advertising expenses• Reduces costs by 2% per yearReduces costs by 2% per year• Limited to advertising new warehouse Limited to advertising new warehouse

openingsopenings• direct mail marketing to prospective direct mail marketing to prospective

new membersnew members• direct marketing programs to existing direct marketing programs to existing

members promoting selected members promoting selected merchandisemerchandise

Cost Minimizing StrategyCost Minimizing Strategy

No FrillsNo Frills– No signs saying what's in what aisle. No signs saying what's in what aisle. – No bags. No bags. – No Visas or MasterCards are accepted No Visas or MasterCards are accepted

(avoiding service charges) (avoiding service charges)

Plans for the FuturePlans for the Future

Opening 25-30 more stores across Opening 25-30 more stores across the USA in fiscal 2006the USA in fiscal 2006

Opening 7 more stores in England Opening 7 more stores in England and Mexicoand Mexico

Expanding to several hundred more Expanding to several hundred more Kirkland Signature items in the next Kirkland Signature items in the next 5 years to include diapers, 5 years to include diapers, cosmetics, etc.cosmetics, etc.

Open Costco Home storesOpen Costco Home stores

Current NewsCurrent News

Glass Ceiling for Women?Glass Ceiling for Women?– Suit filed in 2004 claims discrimination Suit filed in 2004 claims discrimination

against womenagainst women– Company discourages women from Company discourages women from

applying for mgmt positions and are not applying for mgmt positions and are not considered for promotionconsidered for promotion

– Nov 15, 2006: class action suit filed to Nov 15, 2006: class action suit filed to represent 700 women.represent 700 women.

RecommendationRecommendation

HoldHold large amounts of cash on handlarge amounts of cash on hand Paying off a large portion of debtPaying off a large portion of debt Dividends being paid outDividends being paid out Shares being repurchased Shares being repurchased