Costco Wholesale Corporation is an American based multinational corporation that conducts its business activities as Costco. The Corporation deals which membership chains. That is warehouse clubs only. The corporation was established on September 15th in the year 1983 in the United States at a place known as Seattle, Washington. The corporation founders named Jeffrey H. Brotman and James Sinegal. The chief executive officer of the corporation is W. Craig Jelinek who took over the business entity in 1st January 2012. The corporation headquarters is in Issaquah situated in Washington, America. The subsidiaries of the corporation include the Costco Travel, the Canada Costco wholesale amongst others. The corporation runs seven hundred and sixty-two membership warehouse situated in Spain, America, Puerto Rico, Mexico, and the United Kingdom. The organization takes pride in that it provides a low maintenance experience while shopping. The experience includes lower prices on several private label commodities and its name brand. The corporation currently operates with Kirkland Signature as its brand.
Walmart is known to have started in the year 1950 at a moment when Sam Walton, a businessman, bought from Luther E. Harrison a store in Arkansas and Bentonville. Then the company is, therefore, a discount department store chain situated in the United States. In 1962 he Walmart chain proper was established as a single store that in 1968 expanded outside Arkansas and to the rest of Southern America in the 1980s. In 1995 the Walmart marked its initial stores in Canada. The company in 1983 introduced Sam’s Club, its warehouse chain. In 1988 it launched its first Supercenter warehouses. The chain had owned 11,000 stories in 28 nations by the decade of the 21st century conducting activities under 55 different names. The Walmart chief executive officer and the president is Carl Douglas McMillan. He became the firm’s CEO in the year 2014, having first worked with the institution as a summer associate in high school. Carl sits in the retailer’s directors board. It is right to record that Walmart is one of the largest membership store operator in America behind Costco.
The drivers of the developed thesis after analyzing the Costco corporation is: it’s expected to remain steady over the years as the economy continues to grow. I firmly believe that Costco will outperform over the years in comparison to its business competitor, Walmart, due to its unique market strategy. I would predict an increase in the Costco net sale by 7.6 percent annually. However, the Costco revenues on membership to grow 13 percent annually. This is a significant driver to the ultimate goal of the company’s prosperity. The company continues to enjoy an increment in the consumer confidence level. This provides a unique advantage to increase its membership revenue further. Even in the rise of Amazon, Costco has continually shown positive growth rates maintenance and outperforming of its competitors.
However, the Costco risk thesis is that its low gross margins continue to create a threat to the firm’s entire profit margin whereby its sales showed a significant decrease. Second, the rising industry competition in staples and food draws a faster growth rate from other non-indigenous retailers. This pressures and calls the Costco company to expand and modernize its technological space.
The business firm’s capability to meet its short-term duties is known as liquidity ratios. Some of the business ratios include the current, cash and quick ratio. A current ratio describes a liquidity ratio that is derived by dividing the current assets by current liabilities. In this case, Costco company current ratio continues to record an increase from the year 2016 to 2017 and from the year 2017 to 2018. The quick ratio is a liquidity ratio that derived by calculating (receivables added ash added short-term marketable investments) divided by current liabilities. The Costco enterprise quick ratio also recorded an increase from the year 2016 to 2017 and from the year 2017 to 2018. Lastly, the cash ratio refers to a liquidity ratio calculated by taking (short-term marketable investments plus cash) divided by current liabilities.
Similarly, Costco’s cash ratio calculations depicted an improvement from the year 2016 to 2017 and from the year 2017 to 2018. The Costco company recorded 0.98, 0.99 and 1.02 current ratios for the years 2016, 2017 and 2018 respectively. The Walmart company filed 0.93, 0.86 and 0.76 current ratios for the years 2016, 2017 and 2018. Generally, the current ratios of the Costco company increased over the three years while Walmart’s recorded a decrease over the three years consecutively. This is a clear indication that the Walmart business firm continues to have difficulties in meeting its current duties. The critical problem is, however, not indicated by the low values if Walmart has good long-term prospects, its capable of borrowing to meet current duties against those prospects.
A gross profit margin refers to the difference recorded between the cost of goods sold and sales divided by revenue. This is an indicator of each dollar percentage of an organization’s revenue that is available after the cost of goods sold accounting. The Costco company recorded 3.0 percent, 3.1 percent, and 3.1 percent profit margin on sales for the years 2016, 2017 and 2018 respectively. The calculation improved by 0.1 percent from 2016 to 2017 and remained constant in the year 2017 and 2018. The Walmart company recorded 4.5 percent, 4.2 percent and 3.0 percent profit margins on sales in the year 2016, 2017 and 2018. Therefore, the Walmart company recorded a significant decrease in the sales profit margin over the three years. An overall decrease of 1.5 percent. The Costco profit margin is higher than Walmart’s. Therefore, the Costco revenue percentage that retained as income after expenses deduction depicts an essential beginning point toward a healthy net profit achievement. The Costco company which has a high gross profit margin than Walmart’s is in a better position to record a stronger net income and a stronger operating profit margin.
The Total Asset Turnover was 3.58, 3.55 and 3.47 for the Costco company in the years 2016, 2017 and 2018. The Walmart recordings were 2.42, 2.44 and 2.45 for the years 2016, 2017 and 2018. It is true that the Costco company showed an overall decrease of 0.11 for the three years while the Walmart company recorded an overall increase of 0.03 for the three years. The asset turnover ratio is used to evaluate a company’s value of revenues and sales relative to the company’s assets value. Therefore, a clear indicator of the efficiency with which a business firm is utilizing its available assets to generate more revenue. Companies that have a high asset turnover tend to have profit margins that a low while the ones with a low assets turnover have high-profit margins. Previously, calculations have shown that Walmart has a lower profit margin compared to Costco. This particular measure is an assumption that additional sales are essential. However, the actual performance measure is the capability to generate profits from sales. Generally, a high turnover ratio does not guarantee huge profits recordings.
Return on assets (ROA) refers to a financial ratio that demonstrates the percentage profit a business firm gets concerning its available resources. Derived by taking the net income then divide by total assets. Net income, in this case, is calculated from the company’s income statement and is the profit earned after taxation. The overall return on total assets for the Costco company is 10.9 percent, 11.1 percent, and 10.9 percent for the years 2016, 2017 and 2018 while for the Walmart is 10. 8 percent, 10.3 percent, and 7.4 percent for the same years. The Walmart company records an overall decrease of 3.4 percent on return on total assets for the three years. However, the Costco company an increase of 0.2 percent from 2016 to 2017 and a decrease of 0.2 percent from 2017 to 2018, but overall there is no decrease on the return on total assets for the three years. The ROA calculations provide local and external investors a clue of the company’s effectiveness when it comes to converting its invested capital into net income. The higher the ROA, the better, since the firm gains more fund on less investment. In the Costco vs. Walmart case, Costco has more advantage than the later.
Return on investment (ROI) aims at evaluating the loss or gain accumulated after an investment relative to the money quantity invested. Therefore, it is generally represented in a percentage. ROI is commonly used for individual commercial decisions, to make a comparison in the profitability of a company or an efficiency comparison amongst different investments. The Costco ROI has improved over the previous ten years by 14.99 percent that is between 2006 to 2018. Generally, an ROI that is high shows that the invested capital continues to earn better to its cost. ROI has a measure on performance, and it is used to calculate an investment’s efficiency or to make a comparison of several but different firms’ investment efficiencies. It is purely an economical way of relating profits earned to the capital invested.
In conclusion, evaluating the hard calculations on dividend and valuation produced over the discussed information above, the winner is Walmart. The Walmart stock as per now trades at a P/E of 20 in comparison to 33.7 for the Costco company. The income investors continue to report that Walmart looks like the better options as it provides a dividend yield of 2.2 percent compared to the 1 percent of Costco (Corona, 2009). However, the Costco company dividend produce is effectively bigger, as the firm has a history of making unique dividend payments which are significantly higher as compared to the firm’s regular payouts made quarterly. However, evaluating the two firms’ current earnings growth and same-store sales indicates why the shares belong to Costco warrant a higher valuation. As shown below, the Costco company comparable growth in sales has consistently outperformed Walmart’s.
Corona, R. (2009). Is Costco better than Walmart? A comparative analysis based on enterprise marketing efficiency.
Gitman, L. J., & Zutter, C. J. (2012). Principles of Managerial Finance. Boston (Estados Unidos): Prentice Hall.
Yahoo Finance. (2019, February 25). COST: Summary for Costco Wholesale Corporation. Retrieved February 25, 2019, from https://finance.yahoo.com/quote/COST?p=COST
Yahoo Finance. (2019, February 25). WMT: Summary for Walmart Inc. Retrieved February 25, 2019, from https://finance.yahoo.com/quote/WMT/?p=WMT
(Yahoo Finance, 2019)