Costco Company is a wholesale corporation that runs an international chain of membership warehouses, designed to help the small and medium sized businesses to reduce costs in purchasing for resale. Apart from reducing costs, these warehouses present one of the largest exclusive product category selections under one roof. Costco is known for profit making, and has grown from a zero to nearly over a three billion-dollar seller in less than six years span. The secret behind its success is its strategy of selling products at low prices but at high volumes. This paper analyses Costco annual reports for the year ended August 31, 2010 and gives reasons why an investor should make this firm his choice.
Summary of the CEO letter to shareholders
In this letter, the top officials are very optimistic about the year 2010, having been disappointed by the past two years. Though the year 2010 was characterized by fragile economic conditions in most of their markets, the year produced a record in terms of sales and earnings. This record sale is seen by Costco’s achievement of $7.63 billion sales in 2010 up from $69.9 billion sales in 2009, a net earning of $1.3 billion, and an eighteen percent increase in earning per share.
Despite the uncertainty in the economy in 2010, members who shopped in the Costco warehouses increased by four percent spending three percent more than they did in 2009. Most of the members shop in their fifty-six stores, which recorded over two hundred million dollars in sales in 2010 with two of them giving more than three hundred million dollars. In terms of expenditures, the letter estimates Costco’s costs to be nearly one billion dollars on capital expenditures. This big capital expenditure is justified in Costco’s plan to open nearly five hundred and eighty two warehouses in operation around the world to meet the increasing strong demand.
Costco management is among the most experience in warehouse retail business, as they compose of people who have worked with the company for a number of years. This experience makes them at a proper position to accomplish the firm’s objectives. This pool of professionals enables Costco to remain a dominant warehouse club operator with over six hundred million loyal members and ninety percent of them renewing their membership annually. The renewal has enabled Costco raise nearly $1.7 billion in renewal fees.
The CEO affirms that Costco continuously adjusts its product mix to meet the various needs of the unique customers they continue to serve. This adjustment is achieved partly by their efficient merchant and operator services that facilitate efficient sourcing, shipping and selling of their quality goods and services. Apart from these, their sales have been increased by the e-commerce business option which realized two billion dollars in sales.
The top officials promised to work harder to keep up the pace of success, with a major focus on expanding operations, increasing sales,...