The Costco case study strives to analyze the ratios and how they compare to Costco's competitors. The case study doesn't have direct questions but what is needed is: background, SWOT analysis, ratio/financial analysis, competitive/benchmark analysis/ratios, recommendations for Costco and for Maria Torres.

COSTCO WHOLESALE CORPORATION FINANCIAL STATEMENT ANALYSIS (A) INTRODUCTION Margarita Torres first purchased shares in Costco Wholesale Corporation in 1997 as part of her personal investment portfolio. Between 1997 and 2002, she added slightly to her holdings from time to time when the company sold stock for what she felt was a reasonable valuation, and up to that time she did not sell any of her shares. Having watched Costco grow from 265 warehouses to 365 worldwide, and from sales revenue of $21.8 billion to $34.1 billion, she wondered what factors led to such successful growth. She also wanted to determine whether those factors would hold consistent going forward. At this point, Costco was one of a special breed of retailers called wholesale clubs. Unlike other retailers, wholesale clubs required that customers purchase annual memberships in order to shop at their stores. Costco operated a chain of warehouses that sold food and general merchandise at large discounts to member customers. The company was able to maintain low margins by selling items in bulk, keeping operating expenses to a minimum, and turning inventory over rapidly. Costco's closest competitors were SAM'S Club (a division of Wal-Mart) and BJ's Wholesale, which both operated as wholesale clubs. Other competitors included general discounters (such as Wal-Mart), general retailers (such as Sears), grocery store chains (such as Safeway), and specialty discounters (such as Best Buy). Torres first considered investing in Costco because she herself was a member. She was impressed by the company's low prices and noticed in particular that her local Costco was always crowded. She decided to research the company and started, as always, with their annual reports. She discovered a company with tremendous growth potential, strong operational efficiency, and a dedicated management team - and a stock selling at a reasonable price. Now, in July 2002, having profited well from her investment, she decided it was time to update her analysis and determine whether the company was still operating efficiently. Brian Tayan prepared this case under the supervision of Professor Maureen McNichols as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. 2 INDUSTRY OVERVIEW - RETAIL Department Stores The retail industry in the United States was transformed in the late 1800s by the rise of department stores and general merchants. Companies such as R.H. Macy & Company (founded in 1858) and Bloomingdale Brothers, Inc. (1872) opened stores in New York City and subsequently began to expand across the country. Department stores became famous not only as places to shop, but also as destinations for the new pastime of window-shopping. These stores revolutionized retailing by offering a variety of products in one location and by developing a reputation for excellent customer service. Other innovations included free delivery of purchases and the ability for customers to make purchases using store credit. th The most dominant department store for most of the 20 century was Sears, Roebuck and Company. Founded in 1893 as a mail-order company, Sears opened its first retail store in 1925. By 1945, Sears achieved $1 billion in sales. Throughout the 1950s and 1960s, the company expanded aggressively across the country, selling everything from clothing to appliances to televisions and home repair items. Trying to find success in ventures beyond retailing, the company had owned at one point Allstate Insurance (home, life and auto insurance), Coldwell Banker (real estate broker), and Dean Witter Reynolds (stock brokerage). Sears also launched the Discover credit card. From the mid-1970s through 2002, however, the company struggled, and all of these companies were been sold off. In 2001, Sears had sales of $41 billion and 1 Federated Department Stores, which owns Macy's and Bloomingdales, had sales of $16 billion. Discount Stores The 1960s witnessed a new breed of retailer, the mass discounter. These companies originally targeted lower income consumers with a broad product line similar to that of Sears and other department stores. Discounters, however, differentiated themselves by de-emphasizing the shopping experience and instead focused on delivering items at the lowest price. In 1960, discounters had combined sales of $2 billion. Over the next four decades, discounters prospered. In mid-2002, the largest discounter was Wal-Mart, founded by Sam Walton. Walton started his career as a management trainee at J.C. Penney and later as a franchiser of five-and-dime stores. In 1962, he opened the first Wal-Mart store in Rogers, Arkansas. The operating philosophy of Wal-Mart was simple: offer products to customers at the lowest price possible, locate stores in rural locations, where they can serve the average American, maintain a clean store environment where customers will want to shop, hire energetic employees who provide outstanding customer service, treat employees as \"associates\" and manage them with an open-door policy where they can express complaints or make suggestions freely. In fact, Walton was famous for allowing employees at any level to walk into his office with comments on how to improve Wal-Mart. Wal-Mart's subsequent growth was unprecedented. Sales were $44 million in 1970. They had grown to $1.2 billion by 1980 and to $26 billion by 1989 when Walton retired as CEO. For the 3 fiscal year ended January 31, 2001, Wal-Mart had sales of $218 billion. The company operated over 4,400 locations worldwide. 1 Federated sales for fiscal year ended February 2, 2002. Wal-Mart also expanded its product offerings. Wal-Mart stores sold clothing, health and beauty products, prescriptions, electronics, sporting goods, music, and toys. In 1983, Wal-Mart opened its first SAM'S wholesale club to compete with Price Club. In 1987, Wal-Mart opened its first Supercenter, which included a full-sized grocery store along with the complete product line of a traditional Wal-Mart store. By 2000, Wal-Mart was also selling its products online through Walmart.com. During this era of Wal-Mart expansion, another type of discounter developed, specializing in the sale of only one category of product, such as electronics, hardware, or furniture. Dubbed \"category killers,\" these companies looked to beat discounters at their own game by achieving even greater efficiencies of scale. Although not all specialty discounters gained lasting success, several continued to dominate their respective categories, including Home Depot, Circuit City, and Walgreens. Discounters and specialty discounters had been very successful stealing sales from department stores. As a result, general merchandisers from Sears to J.C. Penney have been forced to reinvent themselves in order to stay in business. Whether they would succeed, however, was still in question. Montgomery Ward, a once-formidable competitor to Sears, was forced to shut down its stores in 2000 after 128 years of operations. Wholesale Clubs The early 1980s saw the introduction of a new trend in retailing - the wholesale club. Wholesale clubs are based on the same premise as discounters: offer the best value to shoppers. They delivered that value, however, in a different way. First, customers purchased an annual membership in order to shop in the stores. Second, the clubs carried a very limited selection of goods, generally 4,000 SKUs compared to 40,000 SKUs at most grocery stores. Whereas discounters and specialty discounters carried a broad product line, clubs generally carried one or two brands in each category. Third, the clubs sold items in bulk. By limiting the selection of goods and selling in bulk, clubs were able to negotiate discounts from vendors and pass on those discounts to customers in the form of lower prices. These two factors also allowed clubs to turn inventory over faster. Fourth, the clubs kept operating expenses to a minimum. Low operating expenses were essential in order for them to maintain profitability, because they worked on very low gross margins. Clubs achieved low operating expenses by running their stores in warehousestyle facilities and by reducing stocking costs. Wholesale clubs saw annual revenue and earnings growth of 12 - 15 percent during the 1990s compared to 5 - 6 percent annual growth for general retailers. Wholesale clubs expanded internationally with limited success. They gained traction in Canada and Mexico, but growth was not as effective in Europe, South America, and Asia. Although prices of wholesale clubs were attractive to international consumers, there were many challenges in growing internationally, including differences in consumer purchasing behavior, less space at home for consumers to store bulk items, high real estate costs for warehouses, government regulations, and difficulties in implementing a distribution system (see Exhibit 1). Online Retailers In 2000, online retailers were thought to be the next dominant player in retailing. Shipping items from centralized distribution centers, online retailers were thought to have a fundamental cost advantage over brick-and-mortar retailers. However, consumers did not change behavior to make a substantial portion of their purchases online. As a result, by 2002, online retailers had not gained the sales volume necessary to realize efficiencies of scale. The high cost of shipping and the inability of customers to inspect goods before purchasing were thought to be two main impediments. Although customers adapted to purchasing certain categories through the Internet, such as electronics, software, books, and music, online retailers had not yet become a major threat to traditional retailers or discounters. INDUSTRY GROWTH Despite the fabulous growth in revenue for discounters and warehouse clubs, sales for the retail industry as a whole grew roughly in line with GDP. According to Survey of Current Business, retail and wholesale trade activities in the United States totaled $1.6 trillion or 16 percent of 2 GDP in 2001 . In 1960, retail and wholesale trade were substantially smaller ($68.8 billion) but 3 still represented approximately 15 percent of GDP . In this sense, retail was a mature industry with companies achieving growth in excess of GDP only by stealing sales from competitors or by expanding beyond the United States. GDP growth over the forty-year period 1960 to 2000 was 8 percent per year in nominal dollars. GDP growth from 1990 to 2000, when inflation was low, at 5.9 percent per year (see Exhibits 2 and 3). COSTCO AND THE COMPETITION Costco History In 1975, Sol Price opened the first wholesale club, named Price Club, in San Diego, California. Operating on a membership basis, the club sold goods in bulk to small business owners. Business owners could buy staple items including consumer product, canned foods and beverages, and tobacco products for resale in their own stores. Customers typically purchased products at Price Club for their personal use as well. Going public in 1980, Price Club expanded rapidly throughout California and the West, as well as select locations in Canada and Mexico. The company merged with Costco in 1993. Operating under the same business model as Price Club, Costco Wholesale was founded in 1983 by Jeffrey Brotman and James Sinegal. The company went public in 1985 and used proceeds to fund expansion in the Pacific Northwest and Canada. In 1985, merchandise sales were $336 million and membership fees just over $4 million. With the success of the wholesale club concept, competition soon followed. Wal-Mart entered the industry by creating SAM'S Club, Kmart opened Pace Clubs, and BJ's Wholesale began operations in the Northeast. By the early 1990's, the industry had too many players. In 1993, a wave of consolidation took place, as SAM'S purchased Pace Club and Costco purchased Price Club (creating Price/Costco, which later simplified its name to just Costco). The two main survivors, Costco and SAM'S, were left with 85 percent of the market. 2 3 U.S. Census Bureau, Statistical Abstract of the United States: 2001 (Washington, DC, 2001), p. 418. U.S. Census Bureau, Statistical Abstract of the United States: 1962 (Washington, DC, 1962), p. 317. Costco Strategy In 2001, Costco was the largest wholesale club in the industry with sales of $34 billion. The company, however, was smaller than SAM'S in number of warehouses (365 for Costco vs. 528 for SAM'S). Costco differentiated itself from SAM'S by targeting a wealthier clientele of small business owners and middle class shoppers (see Exhibit 4). Costco, through its history with Price Club, took great pride in having invented and developed the club warehouse concept. The company demonstrated its value to customers by refusing to mark up products more than 14 percent over the distributor's price. By comparison, a typical retailer marked up products 25 percent to 40 percent. Although selling items in bulk allowed for many operating efficiencies, management's main focus was on delivering the lowest per unit price on the products it sold. For example, a 100 fl. ounce container of Tide liquid detergent would sell at a general retailer for $8.99, or $0.0899 per fl. ounce. At Wal-Mart, a 100 fl. ounce container sold for $7.44, or $0.0744 per fl. ounce. Costco sold the same detergent in a 300 fl. ounce container at a price of $17.99, or $0.06 fl. per ounce. Costco was able to sell at such a low per unit cost precisely because of its bulk packaging. The size of the container, however, was not maximized in order to compel consumers to purchase more goods. Costco had a policy of not increasing the size of a container unless it resulted in a lower per unit cost. That is, they would not sell Tide detergent in containers greater than 300 fl. ounces unless the resulting price was less than $0.06 per fl. ounce. They believed that lowering the unit price of goods was what allowed them to deliver value to the customer. Selling through Costco was a mixed blessing for product manufacturers. On the one hand, Costco offered a broad distribution channel that brought increased revenues. In addition, Costco only purchased a handful of SKUs from its vendors. This allowed manufacturers to greatly reduce production costs. For example, when Costco ordered toilet paper from Kimberly Clark, it ordered one color, one print, and one ply. This allowed Kimberly Clark to set up the production line only once and run continuous batches of the same product, lowering per unit production costs. On the other hand, because Costco was a powerful purchaser, it could demand that production savings be passed on to itself in the form of lower prices. As a result, the manufacturer would see increased revenues, but increases in profits would be limited. Costco passed these savings on to its own customers. The result was lower profits throughout the supply chain. Costco created value for the customer through these savings. This drove the value of its membership and allowed Costco to raise fees over time. In 1986, Costco's membership fee was $25. By 2002, it was $45. The more savings Costco was able to pass on to customers, the more it would be able to increase its membership fee over time. Costco also delivered value to customers by expanding its selection of name-brand products and by adding ancillary services. Costco offered such items as Levi's jeans, Polo bed comforters, and Compaq computers. Through its proprietary brand, Kirkland, the company offered everything from cheese and ice cream to cookware and vitamins. Kirkland products were developed wherever Costco recognized a need for high quality, low cost items that did not exist in the market. In addition, Costco added photo development services, pharmacies, gas stations, and tire changing stations in many of its stores. The company also increased its fresh food department and added high-end wines and jewelry in an attempt to serve the needs of its customers. In fact, with $500 million in wine sales in 2001, Costco was the largest retailer of wine in the United States. All of these services were aimed at increasing the number of visits that members made to Costco stores per year and increasing the total dollars spent per customer per year. Increased sales per customer translated into increased sales per store. Besides offering the lowest cost products, Costco claimed to have the best operating efficiency in 4 the business. Operating efficiency was essential, given the company's low gross margin. This efficiency was the result of a very cost-conscious culture. In fact, the company reported operating margins down to the basis point in its annual report. Expenses were minimized through various methods. Stores were run in no-frills warehouse facilities, reducing capital expenditures. Whenever possible, goods were not individually stocked on shelves; instead, a forklift delivered a pallet directly onto the warehouse floor, reducing labor costs. The company distributed goods to its stores through a cross-docking procedure, in an effort to reduce transportation costs. Instead of paying for half-full trucks to deliver products directly from the manufacturer to the warehouse, trucks met at distribution hubs called cross-docks. The manufacturers unloaded full truckloads of products at the cross-dock locations. Costco employees then consolidated and reloaded products into trucks bound for each specific store location. This ensured that trucks were always operating at full capacity, from the manufacturer to the store. Cross-docks never stored inventory, so that all of the items delivered were reloaded and shipped that same day. Costco profited richly from this strategy. In 1985, the company had a net loss of $3 million on product sales of $336 million. By 2001, the company's profit had soared to $602 million on 5 product sales of $34 billion (see Exhibit 5). SAM'S Club SAM'S Club, operated by Wal-Mart, was Costco's largest wholesale club competitor. SAM'S outnumbered Costco in terms of number of warehouses and worldwide members. However, Costco had larger total revenues, sales per store, and operating income. A few factors limited SAM'S performance. First, SAM'S traditionally catered to a lower income customer than Costco. As a result, SAM'S customers tended to spend less per visit than Costco's. Second, until 2000, SAM'S lacked a differentiated operating strategy in the Wal-Mart Corporation. Most SAM'S clubs were located adjacent to a Wal-Mart store, offering the same products at the same prices. Many shoppers patronized Wal-Mart without seeing the need to pay a membership fee to enter SAM'S. As a result, many of the cost savings that the two companies enjoyed in real estate development, product purchasing, and delivery were more than offset by decreased sales at SAM'S. 4 5 Wal-Mart would not break out detailed operating information on SAM'S for comparison. Fiscal year ended September 2, 2001. Third, SAM'S suffered large amounts of management turnover during the 1990s. SAM'S saw four different presidents come and go between 1994 and 1998. In contrast, James Sinegal and Jeff Brotman had been in charge of Costco since the company's founding. In 2001, SAM'S began undergoing transformation. Its president, Thomas Grimm, was providing stronger leadership to the organization. He was pursuing an aggressive push to regain the lead from Costco by increasing the rate of expansion in warehouse stores. In fiscal year 2002, SAM'S was planning to open 80 new warehouses. The company had also outlined new plans to renovate older warehouses, add higher-end merchandise to appeal to wealthier clientele, and introduce ancillary product lines similar to Costco's in order to increase customer visits. Most importantly, SAM'S and Costco's expansion plans would pit the two warehouse clubs directly against each other in local markets. Traditionally, SAM'S and Costco did not have a large number of stores competing in the same markets. The majority of SAM'S Clubs were located in the South and most Costco's were in the West. With plans for both clubs to enter each other's markets, it was unclear how much cannibalism would take place. One indication came from a recent Costco store, which opened in the Dallas market in 2000. Although SAM'S already had 14 warehouses in Dallas, Costco claimed that their own first-year sales were in line with historical averages, approximately $55 million (see Exhibit 7). BJ's Wholesale Club BJ's Wholesale Club was a small but efficient competitor to Costco. BJ's was founded in 1984 in Medford, Massachusetts. By 2002, the company had 130 warehouses, all located in the United States. 2001 sales were $5 billion, on a membership of 6.7 million. BJ's strategy was similar to Costco's: to target small business owners and middle-class customers, include high-value goods in the product line to increase sales per customer, and increase store visits through ancillary products. BJ's strategy diverged from Costco's in that its stores were smaller (110,000 square feet versus 148,000 square feet), it carried more SKUs (6,000 per store versus 4,000 per store), and it marked up select items more than 14 percent, which was Costco's limit. Also, BJ's spent more money on flooring, lighting, and signage in its warehouse facilities in an attempt to improve the shopping atmosphere. The results were mixed. In more recent years, BJ's had achieved sales and profit growth greater than Costco's. BJ's customers visited its stores 12 times per year versus 9 times for Costco and SAM'S. BJ's also reported gross margins of 9.2 percent, which allowed it to claim that its 6 operations were even more efficient than Costco's . On the other hand, sales per store were only $55 million versus $101 million at Costco, and its membership fee was not as high as Costco's ($40 for a basic membership versus $45) (see Exhibit 8). 6 A direct comparison of gross margins between the two companies is misleading in that BJ's cost of goods sold figure includes procurement expenses. Costco excludes such expenses from cost of goods sold. Both methods are acceptable under GAAP. BJ's accounting method results in shifting costs from operating expenses to cost of goods sold, decreasing its reported gross margins, decreasing operating expenses, but leaving operating profits the same. Information is not available in the BJ's annual report to allow us to quantify the company's procurement expenses. REVIEW OF COSTCO OPERATIONS Torres had been following Costco's progress for five years, but decided that it was time to run a more thorough analysis. From an operational standpoint, Costco had seen tremendous growth during this period. But how had the company been affected by growth? Had its operational efficiency changed? How had it financed the growth and how had its capital structure evolved? Torres typically evaluated her investments using two methods: ratio analysis and cash flow analysis. Ratio analysis involved comparing different line items in public financial statements to see how they change over time or how they compare to similar companies. Cash flow analysis involved analyzing a company in terms of the cash it generates from operating activities, investment activities and financing activities. The objective of cash flow analysis was to understand what cash requirements are needed to fund the business, the sources of that cash, and the use management makes of free cash flow. First, she decided to focus on ratio analysis and leave cash flow analysis for another time. She decided to organize her analysis into three parts: common-size financial statements for Costco over the past five years, a sustainable growth model of Costco over the same period, and a benchmark of Costco against its competitors in important industry ratios. Common-Size Statements Common-size income statements expressed the line items of a company's income statement as a percent of revenues. Looking at Costco's income statement, Torres noticed that there were two revenue lines: net sale of goods and membership fees. In creating her common-size income statement, she decided to use net sales of goods as the point of comparison (100 percent) and express other line items, including membership fees, as a percentage of net sales. Her rationale was that this allowed for a clearer reflection of gross and operating margins. Using this format, she was able to analyze the profit structure of Costco over time. Common-size balance sheets expressed the line items of a company's balance sheet as a percent of total assets. Using this format, she was able to analyze the asset structure of Costco over time and understand how its assets were funded (see Exhibit 9). Sustainable Growth Model The sustainable growth rate was the rate at which a firm could grow while keeping its 7 profitability and financial policies unchanged . The sustainable growth model allowed an analyst to isolate the drivers that have led to changes in historical growth in order to isolate causes of change. This model could be decomposed into four steps. Step 1: Profitability and Earnings Retention At the end of each year, the return that a company realized on equity capital could either be reinvested back in the business or paid out to investors in the form of dividends and common stock repurchases. If no dividends or share repurchases were made and earnings were reinvested back into the business at the same incremental rate of return, the company's return on equity 7 Sustainable growth model taken from: Palepu et al., Business Analysis & Valuation: Using Financial Statements (South-Western College Publishing, Cincinnati, 2000), Chapter 9. would hold constant over time. In reality, however, companies frequently experienced changes in their return on equity, and most companies distributed some portion of earnings to investors. As a result, at the highest level, the company's sustainable growth rate could be expressed as the product of the following two ratios: * Earnings Retention Ratio = 1 - Dividend Payout Ratio * Return on Equity (ROE) = Net Income / Owner's Equity If a company retained all of its earnings, its dividend payout ratio was 0 and its earnings retention ratio was 1. As it paid out more of its earnings in dividends, its earnings available for reinvestment in the business necessarily go down. Return on equity measured how much profit is generated in net income for every dollar invested in equity capital. Step 2: Leverage The ROE component could be expressed as the product of two ratios: financial leverage and return on assets. Issuing debt allowed a company to increase its return on equity, so long as the return on invested capital is greater than the cost of debt. For example, if a company's core business earned 15 percent return on invested capital and it could borrow debt at 10 percent, financial leverage would increase its ROE. Financial leverage was expressed as the ratio * Financial Leverage = Assets / Owner's Equity Assets represented the sum of capital employed in the business at any given time. Likewise, return on assets was a measure of the business' overall profitability, making no distinction between funds due to shareholders and funds due to creditors. Return on assets was expressed as the ratio * Return on Assets (ROA) = Net Income / Assets By breaking down Costco's ROE into these components, Torres could better understand how leverage influenced its return on equity. She could also analyze how the increased asset base from warehouse expansion was affecting the company's profitability. Step 3: Turnover and Margins A company's return on assets could be further broken down into two components to determine whether increased sales or increased margins accounted for changes in profitability. The first ratio was asset turnover. Asset turnover measured how many dollars in sales were made for each dollar in assets. The second component was net income margin, which measured how much profit was generated per dollar of sales. * Asset Turnover = Sales / Assets * Net Income Margin = Net Income / Sales Relating this to Costco, she could see how an increase in the asset base affected both sales and net margin. Step 4: Pretax Income and Tax Effect The fourth step was to decompose the net income margin into pretax return on sales and the tax effect. * Pretax Return on Sales = Pretax Income / Sales * Tax Effect = 1 - Tax Rate This last step allowed her to determine whether changes in the net margin were driven by operating efficiencies or the ability of Costco management to influence its tax rate. Reviewing these ratios together, she was able to pinpoint which aspects drove the profitability of Costco over time. She was most interested in determining whether Costco had grown at a sustainable rate, or whether growth had been too fast or too slow. She could determine this by finding a deterioration in certain ratios. Finally, she considered how new store openings impacted the ratios (see Exhibit 10). Benchmarking Ratios As the third step in her ratio analysis, Torres wanted to get a better sense for how Costco compared to main competitors in operational efficiency. She decided to use a competitive set of Sears, Wal-Mart, and BJ's Wholesale. In a retail setting, the gross margin was a reflection of how much the retailer marked up items for resale. This ratio reflected roughly the pricing strategy of each company. * Gross Margin = (Sales - Cost of Goods Sold) / Merchandise Sales Operating margin was a reflection of how much profit a retailer generated from selling its items after paying all operating expenses. For Costco and BJ's, she included membership fees in revenues. * Operating Margin = (Revenues - Cost of Goods Sold - Operating Expenses) / Revenues Net margin, described above, was a bottom-line reflection of profitability taking into account all sources of revenue and expenses from continuing operations. * Net Margin = Net Income / Revenues The current ratio was a reflection of a company's short-term liquidity. A ratio greater than 1 indicated that short-term assets were sufficient to service short-term liabilities. Historically, a company with a high current ratio was thought to be secure. However, managers came to realize that tying up too many funds in short-term assets was an inefficient use of capital. Subsequently, many companies sought to maintain a current ratio closer to 1. As a result, whether a company with current ratio equal to 1 was operating efficiently is open to an analyst's interpretation. * Current Ratio = Current Assets / Current Liabilities Inventory turnover was a reflection of how long inventory remains in the store before sale. Companies with high inventory turnover were at a competitive advantage because they tied less money up in unsold inventory and because they had the flexibility to adjust their product mix more frequently. * Inventory Turns = Cost of Goods Sold / [(Opening Inventory + Ending Inventory) / 2] Average collection period for receivables measured how many days, on average, it took for a company to receive collections from customers. * Average Receivables Period = 365 Days * Accounts Receivables / Sales Average payables period measured how many days, on average, it took a company to pay suppliers. * Average Payables Period = 365 * Accounts Payable / Cost of Goods Sold In reviewing these numbers, Torres considered how they reflected the differences in strategies between Costco and its competitors. She also wondered what they implied about competitive differences in the companies (see Exhibit 11). Sales Revenue ($millions) Exhibit 1 Sales Revenue for Major Retailers, Logarithmic Scale (1955 - 2000) 1,000,000 100,000 10,000 1,000 100 10 1955 1960 1965 1970 1975 1980 1985 1990 Federated Department Stores Sears, Roebuck Wal-Mart BJ's Wholesale 1995 2000 Costco Wholesale Company Federated Sears, Roebuck Wal-Mart BJ's Costco Gross Domestic Product CAGR of Sales, 1990 - 2000 9.9% - 3.1% 19.4% NA 22.8% 5.9% NB: Federated Department Store sales 1987-1989 estimated. Company operated in bankruptcy during this period. BJ's growth rate from 1994 to 2000 was 13.6%. Costco merged with Price Club during this period, which greatly increased sales. In 1992, the year before the merger, Costco had sales of $6.6 billion. In 1993, the combined companies reported sales of $15.5 billion. Sources: Value Line Company Reports on Federated Department Stores, 1955 - 2000 Value Line Company Reports on R.H. Macy, 1955 - 1985 Value Line Company Reports on Sears, Roebuck, 1955 - 2000 Value Line Company Reports on Wal-Mart, 1965 - 2000 Value Line Company Reports on Costco, 1985 - 2000 Value Line Company Reports on BJ's Wholesale, 1994 - 2000 Exhibit 2 Retail and Wholesale Trade as a Percentage of GDP Gross domestic product, $bn Retail & wholesale trade, $bn Retail & wholesale trade, as % of GDP 1950 241 1960 415 1970 801 1980 2,708 1990 5,546 2000 9,873 41 64 121 437 884 1568 17% 15% 15% 16% 16% 16% In current dollars Source: U.S. Bureau of Economic Analysis, Survey of Current Business, 1952, 1962, 1972, 1982, 1992, 2001 Exhibit 3 Per Capita Income Gross domestic product, $bn Personal income, $ Disposable personal income, $ Personal consumption exp., $ 1950 1,892 1960 2,918 1970 5,069 1980 12,276 1990 23,215 2000 36,174 1,502 2,283 4,101 10,205 19,614 30,069 1,369 2,026 3,591 8,869 17,176 25,379 1,270 1,838 3,164 7,741 15,327 24,534 In current dollars Source: U.S. Bureau of Economic Analysis, Survey of Current Business, 1952, 1962, 1972, 1982, 1992, 2001 Exhibit 4 Number of Warehouse: Costco, SAM'S, BJ's (1997 - 2001) 1997 1998 1999 2000 2001 Costco Number of stores - US - Canada - Mexico - Other international 274 200 54 13 7 292 211 56 14 11 308 221 58 16 13 331 237 59 18 17 365 264 60 20 21 SAM'S Club Number of stores - US - Canada - Mexico - Other international 475 436 0 28 11 483 443 0 28 12 497 451 0 31 15 512 463 0 34 15 528 475 0 38 15 BJ's Wholesale Number of stores - US - Canada - Mexico - Other international 84 84 0 0 0 96 96 0 0 0 107 107 0 0 0 118 118 0 0 0 130 130 0 0 0 Sources: Costco Annual Reports, 1997 - 2001. Fiscal years ended Sunday nearest to August 28. Wal-Mart Annual Reports, 1997 - 2001. Fiscal years ended Sunday nearest January 31. BJ's Wholesale Annual Reports, 1997 - 2001. Fiscal years ended Sunday nearest January 31. Exhibit 5 Financial Statements for Costco Wholesale Corp. (1997 - 2001) Warehouses in Operation Beginning of year (including Mexico) Openings Closings End of year Members at Year End (thousands) Business (primary cardholders) Gold Star Income Statement (millions) Revenue Net sales Membership fees and other Total revenues Operating expenses Merchandise costs SG&A Preopening expenses Provision for impaired assets / closings Total operating expenses Operating income Other income (expenses) Interest expense Interest income and other Provision for merger and restructuring Income continuing ops before taxes Provision for income taxes Income before cumulative effect of accting Cumulative effect of accting, net of tax Income from continuing operations Discontinued operations Income (loss), net of tax Loss on disposal Net Income (loss) Net income per common share: Basic, before accounting change Cumulative effect of accounting changes Basic Diluted Number of common shares for calculation Basic Diluted 2001 331 41 (7) 365 2000 308 27 (4) 331 1999 292 23 (7) 308 1998 274 19 (1) 292 1997 265 17 (8) 274 4,358 12,737 4,170 10,521 3,887 9,555 3,676 8,654 3,537 7,845 2001 2000 1999 1998 1997 34,137 660 34,797 31,621 543 32,164 26,976 480 27,456 23,830 440 24,270 21,484 390 21,874 30,598 3,129 60 18 33,805 992 28,322 2,756 42 7 31,127 1,037 24,170 2,338 31 57 26,596 860 21,380 2,070 27 6 23,483 787 19,314 1,877 27 75 21,293 581 (32) 43 0 1,003 401 602 0 602 (39) 54 0 1,052 421 631 0 631 (45) 44 0 859 344 515 (118) 397 (48) 27 0 766 306 460 0 460 (76) 15 0 520 208 312 0 312 0 0 602 0 0 631 0 0 397 0 0 460 0 0 312 1.34 0.00 1.34 1.41 0.00 1.41 1.17 (0.27) 0.90 1.07 0.00 1.07 0.76 0.00 0.76 1.29 1.35 0.86 1.01 0.73 449,631 475,827 446,255 475,737 439,253 471,120 431,012 463,371 414,758 449,336 Exhibit 5 (Continued) Balance Sheet (thousands) Current assets Cash and equivalents Short-term investments Receivables, net Merchandise inventories, net Other current assets Total current assets Property and equipment Land and rights Building, leaseholds and land improvements Equipment and fixtures Construction in process Subtotal Less accumulated depreciation Net property plant and equipment Other assets Total assets Current liabilities Short-term borrowing Accounts payable Accrued salaries and benefits Accrued sales and other tax Deferred membership income Other current liabilities Total current liabilities Long-term debt Deferred income taxes and other liabilities Total liabilities Minority interest Stockholder's Equity Preferred Common Additional paid in Other accumulated Retained earnings Total stockholder's equity Total liabilities and shareholder's equity 2001 2000 1999 1998 1997 602,585 4,999 324,768 2,738,504 211,601 3,882,457 524,505 48,026 174,375 2,490,088 233,124 3,470,118 440,586 256,688 168,648 2,210,475 239,516 3,315,913 361,974 75,549 171,613 1,910,751 108,343 2,628,230 175,508 0 147,133 1,686,525 100,784 2,109,950 1,877,158 1,621,798 1,264,125 1,119,663 1,094,607 3,834,714 1,529,307 133,995 7,375,174 (1,548,589) 5,826,585 380,744 10,089,786 3,007,752 1,311,110 200,729 6,141,389 (1,307,273) 4,834,116 329,706 8,633,940 2,444,640 1,138,568 176,824 5,024,157 (1,117,269) 3,906,888 282,200 7,505,001 2,170,896 948,515 91,901 4,330,975 (935,603) 3,395,372 236,218 6,259,820 1,933,740 840,578 81,417 3,950,342 (795,708) 3,154,634 211,730 5,476,314 194,552 2,727,639 483,473 152,864 322,583 231,078 4,112,189 859,393 119,434 5,091,016 115,830 9,500 2,197,139 422,264 159,717 262,249 353,490 3,404,359 790,053 90,391 4,284,803 108,857 0 1,912,632 414,276 122,932 225,903 190,490 2,866,233 918,888 66,990 3,852,111 120,780 0 1,605,533 352,903 102,367 0 136,139 2,196,942 930,035 61,483 3,188,460 105,474 25,460 1,394,309 302,681 90,774 0 150,823 1,964,047 917,001 38,967 2,920,015 88,183 0 2,259 1,125,543 (173,610) 3,928,748 4,882,940 10,089,786 0 2,236 1,028,414 (117,029) 3,326,659 4,240,280 8,633,940 0 2,214 952,758 (118,084) 2,695,222 3,532,110 7,505,001 0 2,176 817,628 (151,842) 2,297,924 2,965,886 6,259,820 0 2,136 706,324 (78,426) 1,838,082 2,468,116 5,476,314 Source: Costco Annual Reports, 1997 - 2001. Fiscal years ended Sunday nearest to August 28. Exhibit 6 Financial Statements for Sears, Roebuck (1997 - 2001) Stores Full-line stores Specialty stores Total 2001 867 1318 2185 2000 863 2158 3021 1999 858 2153 3011 1998 845 2198 3043 1997 833 2697 3530 Income Statement (millions) 2001 2000 1999 1998 1997 Revenues Merchandise sales and services Credit and financial products revenues Total revenues 35,843 5,235 41,078 36,366 4,571 40,937 36,728 4,343 41,071 36,704 4,618 41,322 36,371 4,925 41,296 Costs and Expenses Cost of sales, buying and occupancy Selling and administrative Provision for uncollectible accounts Provision for previously securitized receivables Depreciation and amortization Interest Special charges and impairments Total costs and expenses Operating income Other income, net 26,322 8,892 1,344 522 863 1,415 542 39,900 1,178 45 26,721 8,807 884 0 839 1,248 251 38,750 2,187 36 27,212 8,418 871 0 848 1,268 41 38,658 2,413 6 27,257 8,318 1,287 830 1,423 0 352 39,467 1,855 28 26,779 8,322 1,532 0 785 1,409 475 39,302 1,994 144 1,223 467 21 735 0 735 2,223 831 49 1,343 0 143 2,419 904 62 1,453 0 1,453 1,883 766 45 1,072 24 1,048 2,138 912 38 1,188 0 1,188 2.25 3.89 3.83 2.70 3.03 2.24 3.88 3.81 2.68 2.99 326.4 328.5 345.1 346.3 379.2 381.0 388.6 391.7 391.6 397.8 Income before income taxes and minority interest Income taxes Minority interest Net Income Before Extraordinary Loss Extraordinary loss on extinguishment of debt Net Income Net income per common share: Basic Diluted Number of common shares for calculation Basic Diluted Exhibit 6 (continued) Balance Sheet (millions) Assets Cash and equivalents Retained interest in transferred credit card Receivables Credit card receivables Less allowance for uncollectible accounts Net credit card receivables Other receivables Merchandise inventories Prepaid expenses and deferred charges Deferred income taxes Total current assets Property and equipment Land Buildings and improvements Furniture, fixtures, and equipment Capitalized leases Gross property and equipment Less accumulated depreciation Total property plant and equipment, net Deferred income taxes Other assets Total assets 2001 2000 1999 1998 1997 1,064 842 729 495 358 0 29,321 1,166 28,155 658 4,912 458 858 36,105 3,105 18,003 686 17,317 506 5,618 486 920 28,794 3,211 18,793 760 18,033 404 5,069 512 709 28,667 4,294 18,946 974 17,972 397 4,816 506 791 29,271 3,316 20,956 1,113 19,843 335 5,044 517 830 30,243 434 6,539 5,620 544 13,137 6,313 6,824 415 973 44,317 408 6,096 5,559 522 12,585 5,932 6,653 174 1,278 36,899 370 5,837 5,209 496 11,912 5,462 6,450 367 1,470 36,954 395 5,530 4,871 530 11,326 4,946 6,380 572 1,452 37,675 487 5,420 4,919 498 11,324 4,910 6,414 666 1,377 38,700 Liabilities Current liabilities Short-term borrowings Current portion of long-term debt and capital lease obligations Accounts payable and other liabilities Unearned revenue Other taxes Total current liabilities 3,557 4,280 2,989 4,624 5,208 3,157 7,176 1,136 558 15,584 2,560 7,336 1,058 562 15,796 2,165 6,992 971 584 13,701 1,414 6,732 815 524 14,109 2,561 36,637 830 554 15,790 Long-term debt and capitalized lease obligations Post-retirement benefits Minority interest and other liabilities Total liabilities 18,921 1,732 1,961 38,198 11,020 1,951 1,363 30,130 12,884 2,180 1,350 30,115 13,631 2,346 1,523 31,609 13,071 2,564 1,413 32,838 Shareholder's equity Common shares Capital in excess of par Retained earnings Treasury stock - at cost Deferred ESOP expenses Accumulated other comprehensive loss Total shareholder's equity Total liabilities and shareholder's equity 323 3,500 7,413 (4,223) (63) (831) 6,119 44,317 323 3,538 6,979 (3,726) (96) (249) 6,769 36,899 323 3,554 5,952 (2,569) (134) (287) 6,839 36,954 323 3,583 4,848 (2,089) (175) (424) 6,066 37,675 323 3,598 4,158 (1,702) (204) (311) 5,862 38,700 Source: Sears Roebuck Annual Reports, 1997 - 2001. Fiscal years ended Sunday nearest to December 31. Exhibit 7 Financial Statements for Wal-Mart Corp. (1997 - 2001) Stores in Operation Wal-Mart stores Supercenters SAM'S Clubs Other Total Income Statement (millions) Revenue Net sales Other income-net Total revenues Costs and Expenses Cost of sales Operating: SG&A Interest Costs Debt Capital leases Income Before Taxes, Minority Interest, and Cumulative Effect of Accounting Change Provision for Income Taxes Current Deferred Income Before Minority Interest and Cumulative Effect of Accounting Change Minority Interest Income Before Cumulative Effect of Accounting Change Cumulative Effect of Accounting Change, Net of Tax Benefit of $119 Net Income Net income per common share: Basic, before accounting change Cumulative effect of accounting changes Basic Diluted Number of common shares for calculation Basic Diluted 2001 2,348 1,294 528 19 4,189 2000 2,373 1,104 512 7 3,996 1999 2,389 713 497 4 3,603 1998 2,421 502 483 0 3,406 1997 2,209 370 475 0 3,054 2001 2000 1999 1998 1997 191,329 1,966 193,295 165,013 1,796 166,809 137,634 1,574 139,208 117,958 1,341 119,299 104,859 1,319 106,178 150,255 31,550 129,664 27,040 108,725 22,363 93,438 19,358 83,510 16,946 1,095 279 183,179 756 266 157,726 529 268 131,885 555 229 113,580 629 216 101,301 10,116 9,083 7,323 5,719 4,877 3,350 342 3,692 3,476 (138) 3,338 3,380 (640) 2,740 2,095 20 2,115 1,974 (180) 1,794 6,424 (129) 5,745 (170) 4,583 (153) 3,604 (78) 3,083 (27) 6,295 5,575 4,430 3,526 3,056 0 6,295 (198) 5,377 0 4,430 0 3,526 0 3,056 1.41 0.00 1.41 1.25 (0.04) 1.21 0.99 0.00 0.99 0.78 0.00 0.78 0.67 0.00 0.67 1.40 1.20 0.99 0.78 0.67 4,465 4,484 4,451 4,474 4,464 4,485 4,516 4,533 4,585 4,592 Exhibit 7 (continued) Balance Sheet (millions) Assets Cash and Equivalents Receivables Inventories Prepaid Expenses and Other Total Current Assets 2001 2000 1999 1998 1997 2,054 1,768 21,442 1,291 26,555 1,856 1,341 19,793 1,366 24,356 1,879 1,118 17,076 1,059 21,132 1,447 976 16,497 432 19,352 883 845 15,897 368 17,993 Less Accumulated Depreciation Net Property Plant and Equipment 9,433 24,537 12,964 879 47,813 10,196 37,617 8,785 21,169 10,362 747 41,063 8,224 32,839 5,219 16,061 9,296 553 31,129 7,455 23,674 4,691 14,646 7,636 403 27,376 5,907 21,469 3,689 12,724 6,390 379 23,182 4,849 18,333 Property Under Capital Lease Less Accumulated Amortization Net Property Under Capital Lease 4,620 1,303 3,317 4,285 1,155 3,130 3,335 1,036 2,299 3,040 903 2,137 2,782 791 1,991 Other Assets and Deferred Charges Total Assets 10,641 78,130 10,024 70,349 2,891 49,996 2,426 45,384 1,287 39,604 Liabilities and Shareholder's Equity Commercial Paper Accounts Payable Accrued Liabilities Accrued Income Taxes Long-Term Debt Due Within One Year Short -Term Obligations Under Capital Leases Total Current Liabilities Long-Term Debt Long-Term Debt Under Capital Leases Deferred Income Taxes and Other Minority Interest 2,286 15,092 6,355 841 4,234 141 28,949 12,501 3,154 1,043 1,140 3,323 13,105 6,161 1,129 1,964 121 25,803 13,672 3,002 759 1,279 0 10,257 4,998 501 900 106 16,762 6,908 2,699 716 1,799 0 9,126 3,628 565 1,039 102 14,460 7,191 2,483 809 1,938 0 7,628 2,413 298 523 95 10,957 7,709 2,307 463 1,025 Common Stock Capital In Excess of Par Retained Earnings Other Accumulated Comprehensive Income Total Shareholder's Equity Total Liabilities and Shareholder's Equity 447 1,411 30,169 (684) 31,343 78,130 446 714 25,129 (455) 25,834 70,349 445 435 20,741 (509) 21,112 49,996 224 585 18,167 (473) 18,503 45,384 228 547 16,768 (400) 17,143 39,604 Land Building and Improvements Fixtures and Equipment Transportation Equipment Source: Wal-Mart Annual Reports, 1997 - 2001. Fiscal years ended Sunday nearest to January 31. Exhibit 8 Financial Statements for BJ's Wholesale Corp. (1997 - 2001) Warehouses in Operation Beginning of year Openings Closings End of year 2001 118 12 0 130 2000 107 11 0 118 1999 96 11 0 107 1998 84 12 0 96 1997 81 4 (1) 84 Members at Year End (thousands) Business (primary cardholders) Gold Star 1,552 5,322 1,575 5,021 1,435 4,379 1,296 3,763 1,132 3,465 2001 2000 1999 1998 1997 5,161,164 118,566 5,279,730 4,828,273 103,822 4,932,095 4,115,825 90,422 4,206,247 3,476,846 75,335 3,552,181 3,159,786 67,556 3,227,342 4,686,429 350,000 10,343 0 232,958 3,934 (106,359) 130,533 48,185 82,348 0 82,348 4,376,451 339,305 8,471 0 207,868 5,955 0 213,823 82,322 131,501 0 131,501 3,725,638 293,538 9,536 0 177,535 3,785 0 181,320 70,171 111,149 0 111,149 3,154,017 255,087 7,743 1,521 133,813 956 0 134,769 52,964 81,805 (19,326) 62,479 2,872,303 231,203 3,190 0 120,646 (8,733) 0 111,913 43,646 68,267 0 68,267 1.14 0.00 1.14 1.80 0.00 1.80 1.51 0.00 1.51 1.09 (0.26) 0.83 0.91 0.00 0.91 1.11 1.77 1.47 0.82 0.90 72,519,032 73,981,148 72,870,668 74,380,544 73,657,016 75,391,489 74,804,538 76,095,876 74,962,346 75,487,798 Income Statement (thousands) Revenue Net sales Membership fees and other Total revenues Operating expenses Cost of sales, including buying and occupancy SG&A Preopening expenses Pension termination costs Operating income Interest income (expense), net Loss on contingent lease obligations Income before income taxes Provision for income taxes Income before cumulative effect of accounting principle Cumulative effect of accounting changes Net income Net income per common share: Basic, before accounting change Cumulative effect of accounting changes Basic Diluted Number of common shares for calculation Basic Diluted Exhibit 8 (continued) Balance Sheet (thousands) Current assets Cash and equivalents Accounts receivable Merchandise inventories Current deferred income taxes Prepaid expenses Total current assets Property at cost Land and buildings Leasehold costs and improvements Furniture, fixtures, and equipment Less accumulated depreciation Property under capital leases Less accumulated amortization Deferred income taxes Other assets Total assets Current liabilities Accounts payable Accrued expenses and other current Accrued income taxes Short-term obligations under capital leases Short-term contingent lease obligations Total current liabilities Long-term debt Long-term obligations under capital leases Long-term contingent lease obligations Other noncurrent liabilities Deferred income taxes Commitments and contingencies Stockholder's equity Common stock Additional paid in capital Retained earnings Treasury stock, at cost Total stockholder's equity Total liabilities and shareholder's equity 2001 2000 1999 1998 1997 87,158 61,027 560,001 27,226 17,406 752,818 120,392 55,250 495,285 7,677 15,967 694,571 118,008 51,998 446,771 5,995 15,482 638,254 12,250 51,134 372,740 7,859 12,607 456,590 12,713 38,322 332,274 6,826 14,050 404,185 449,619 74,647 369,671 893,937 259,562 634,375 3,319 2,447 872 12,571 21,248 1,421,884 364,418 67,565 331,129 763,112 239,198 523,914 3,319 2,281 1,038 0 14,211 1,233,734 342,817 59,350 279,381 681,548 201,486 480,062 3,319 2,115 1,204 0 11,499 1,131,019 322,712 45,861 236,231 604,804 168,957 435,847 6,219 1,949 4,270 0 10,923 907,630 282,619 42,541 207,127 532,287 140,216 392,071 6,219 1,784 4,435 0 10,945 811,636 381,112 166,183 33,352 285 44,068 625,000 0 1,558 62,142 46,617 0 0 335,060 147,536 31,807 240 0 514,643 0 1,828 0 44,453 7,895 0 346,111 137,641 20,806 220 0 504,778 0 2,050 0 38,431 8,362 0 213,702 121,951 11,757 201 0 347,611 30,000 2,249 0 34,928 7,800 0 200,386 71,648 7,009 185 0 279,228 42,500 2,430 0 36,396 4,825 0 744 68,574 730,851 (113,602) 686,567 1,421,884 744 75,583 648,528 (59,940) 664,915 1,233,734 744 85,958 517,052 (26,356) 577,398 1,131,019 738 78,376 405,928 0 485,042 907,630 375 102,408 343,474 0 446,257 811,636 Source: BJ's Wholesale Annual Reports, 1997 - 2001. Fiscal years ended Sunday nearest to January 31. Exhibit 9 Margarita Torres: Common-Size Financial Statements for Costco (1997 - 2001) Income Statement Revenue Net sales Membership fees and other Total revenues Operating expenses Merchandise costs SG&A Preopening expenses Provision for impaired assets / closings Total operating expenses Operating income Other income (expenses) Interest expense Interest income and other Provision for merger and restructuring Income continuing ops before taxes Provision for income taxes Income before cumulative effect of accting Cumulative effect of accting, net of tax Income from continuing operations Discontinued operations Income (loss), net of tax Loss on disposal Net Income (loss) 2001 2000 1999 1998 1997 100.00% 1.93% 101.93% 100.00% 1.72% 101.72% 100.00% 1.78% 101.78% 100.00% 1.85% 101.85% 100.00% 1.82% 101.82% 89.63% 9.17% 0.18% 0.05% 99.03% 2.91% 89.57% 8.72% 0.13% 0.02% 98.44% 3.28% 89.60% 8.67% 0.11% 0.21% 98.59% 3.19% 89.72% 8.69% 0.11% 0.03% 98.54% 3.30% 89.90% 8.74% 0.13% 0.35% 99.11% 2.70% -0.09% 0.13% 0.00% 2.94% 1.17% 1.76% 0.00% 1.76% 0.00% 0.00% 0.00% 1.76% -0.12% 0.17% 0.00% 3.33% 1.33% 2.00% 0.00% 2.00% 0.00% 0.00% 0.00% 2.00% -0.17% 0.16% 0.00% 3.18% 1.28% 1.91% -0.44% 1.47% 0.00% 0.00% 0.00% 1.47% -0.20% 0.11% 0.00% 3.21% 1.28% 1.93% 0.00% 1.93% 0.00% 0.00% 0.00% 1.93% -0.35% 0.07% 0.00% 2.42% 0.97% 1.45% 0.00% 1.45% 0.00% 0.00% 0.00% 1.45% Exhibit 9 (continued) Balance Sheet Current assets Cash and equivalents Short-term investments Receivables, net Merchandise inventories, net Other current assets Total current assets Property and equipment Land and rights Building, leaseholds and land improvements Equipment and fixtures Construction in process Subtotal Less accumulated depreciation Net property plant and equipment Other assets Total assets Current liabilities Short-term borrowing Accounts payable Accrued salaries and benefits Accrued sales and other tax Deferred membership income Other current liabilities Total current liabilities Long-term debt Deferred income taxes and other liabilities Total liabilities Minority interest Stockholder's Equity Preferred Common Additional paid in Other accumulated Retained earnings Total stockholder's equity Total liabilities and shareholder's equity 2001 2000 1999 1998 1997 5.97% 0.05% 3.22% 27.14% 2.10% 38.48% 6.07% 0.56% 2.02% 28.84% 2.70% 40.19% 5.87% 3.42% 2.25% 29.45% 3.19% 44.18% 5.78% 1.21% 2.74% 30.52% 1.73% 41.99% 3.20% 0.00% 2.69% 30.80% 1.84% 38.53% 18.60% 38.01% 15.16% 1.33% 73.10% -15.35% 57.75% 3.77% 100.00% 18.78% 34.84% 15.19% 2.32% 71.13% -15.14% 55.99% 3.82% 100.00% 16.84% 32.57% 15.17% 2.36% 66.94% -14.89% 52.06% 3.76% 100.00% 17.89% 34.68% 15.15% 1.47% 69.19% -14.95% 54.24% 3.77% 100.00% 19.99% 35.31% 15.35% 1.49% 72.14% -14.53% 57.61% 3.87% 100.00% 1.93% 27.03% 4.79% 1.52% 3.20% 2.29% 40.76% 8.52% 1.18% 50.46% 1.15% 0.11% 25.45% 4.89% 1.85% 3.04% 4.09% 39.43% 9.15% 1.05% 49.63% 1.26% 0.00% 25.48% 5.52% 1.64% 3.01% 2.54% 38.19% 12.24% 0.89% 51.33% 1.61% 0.00% 25.65% 5.64% 1.64% 0.00% 2.17% 35.10% 14.86% 0.98% 50.94% 1.68% 0.46% 25.46% 5.53% 1.66% 0.00% 2.75% 35.86% 16.74% 0.71% 53.32% 1.61% 0.00% 0.02% 11.16% -1.72% 38.94% 48.39% 100.00% 0.00% 0.03% 11.91% -1.36% 38.53% 49.11% 100.00% 0.00% 0.03% 12.69% -1.57% 35.91% 47.06% 100.00% 0.00% 0.03% 13.06% -2.43% 36.71% 47.38% 100.00% 0.00% 0.04% 12.90% -1.43% 33.56% 45.07% 100.00% Exhibit 10 Margarita Torres: Sustainable Growth Model for Costco (1997 - 2001) 1999 1998 1997 631 3,532 17.9% 515 2,966 17.4% 460 2,468 18.6% 312 NA NA 0 602 0.0% 100% 0 631 0.0% 100% 0 515 0.0% 100% 0 460 0.0% 100% 0 312 0.0% 100% Net Income Assets Return on Assets (ROA) 602 8,634 7.0% 631 7,505 8.4% 515 6,260 8.2% 460 5,476 8.4% 312 NA NA Assets Owner's Equity Financial Leverage 8,634 4,240 2.04 7,505 3,532 2.12 6,260 2,966 2.11 5,476 2,468 2.22 NA NA NA Net Income Sales Net Margin (Return on Sales) 602 34,797 1.73% 631 32,164 1.96% 515 27,456 1.88% 460 24,270 1.90% 312 21,874 1.43% Sales Assets Asset Turnover 34,797 8,634 4.03 32,164 7,505 4.29 27,456 6,260 4.39 24,270 5,476 4.43 21,874 NA NA Pretax Income (continuing operations) Sales Pretax Return on Sales 1,003 34,797 2.88% 1,052 32,164 3.27% 859 27,456 3.13% 766 24,270 3.16% 520 21,874 2.38% Pretax Income (continuing operations) Taxes Tax Rate Tax Effect (1 - Tax Rate) 1,003 401 40.0% 60.0% 1,052 421 40.0% 60.0% 859 344 40.0% 60.0% 766 306 39.9% 60.1% 520 208 40.0% 60.0% Sustainable Growth Model (millions) 2001 2000 Net Income Owner's Equity Return on Equity (ROE) 602 4,240 14.2% Dividend Net Income Dividend Payout Earnings Retention Ratio 1999 net income figures used for calculation are before cumulative effect of account change. Exhibit 11 Margarita Torres: Other Ratios for Costco and Competitors (2001) Other Ratios (millions) Costco Sears Wal-Mart BJ's Cost of Goods Sold Merchandise Sales COGS Gross Margin 30,598 34,137 89.6% 10.4% 26,322 35,843 73.4% 26.6% 150,255 191,329 78.5% 21.5% 4,686 5,161 90.8% 9.2% Operating Income Sales Operating Margin 992 34,797 2.85% 1,178 41,078 2.87% 11,490 193,295 5.94% 233 5,280 4.41% Net Income Sales Net Margin 602 34,797 1.73% 735 41,078 1.79% 6,295 193,295 3.26% 82 5,280 1.56% 3,882 4,112 0.94 36,105 15,584 2.32 78,130 28,949 2.70 753 625 1.20 Cost of Goods Sold Average inventory Inventory Turnover 30,598 2,614 11.7 26,322 5,265 5.0 150,255 20,618 7.3 4,686 527 8.9 Accounts receivable Merchandise Sales Average Receivables Period 325 34,137 3 28,155 35,843 287 1,768 191,329 3 61 5,161 4 Accounts payable Cost of Goods Sold Average Payable Period 2,728 30,598 33 7,176 26,322 100 15,092 150,255 37 381 4,686 30 Current assets Current liabilities Current Ratio