The Critical Evaluation of Costco's Financial Statements

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The Critical Evaluation of Costco’s Financial Statements

Costco Wholesale Corporation has performed well over the last five fiscal years (2015 through 2019). Net sales have increased by 30 per cent over the last 5 years. Comparable sales growth is accomplished by increasing the frequency of shopping from both new and existing members. Comparable sales growth is accomplished by increasing the frequency of shopping from both new and existing customers and the amount they spend on each visit to any of Costco’s outlet across the globe. The higher comparable sales exclusively of such products, the greater the leverage to sales. General and administrative expenditure, reducing it as a percentage of sales and improving profitability. Another important factor in growth of sales is the health of economies in which the business is carried out. Competition which is vigorous and persuasive also affects the sales growth and gross margins. A wide range of global and regional wholesalers and distributors including those with e-commerce operations, are also impacted with intense and widespread business rivalry.

The financial performance of the company primarily depends on the ability to control cost. With respect to cost related to employee’s compensation, the policy of the company is not to try to minimize their salaries and benefits. Rather, the company believes that achieving long-term organization goals of reducing employee turnover and improving employee satisfaction and employee growth require maintaining the level of compensation that is better for company’s than the industry average. This can result for instance, in the absorption cost that the other employers may seek to pass to their workforce. Since Costco business operates on very low margin improvements in various items in income statement, including product and sales price, general and administrative expenses, may have significant implications.

Key Highlights for 2019

The organization has opened 25 new warehouses including 5 relocations, 16 net new locations in United States and 4 in other international divisions, including 1st warehouse in China.
Net sales increased 8 percent to $149,351, driven by increase in comparable sales and sales in new warehouse in 2018 and 2019 of 6 percent in total. Excluding the effect of new revenue recognition policies on net sales, the gross margin as a percentage of net sales rose by 8 basis points.
Net income increased from $3,659 to $3,314, or $8.26 per diluted share, or $7.09 per diluted share in 2018.
The governing body and the directors of board has approved a increase in quarterly cash dividend from $0.57 to $0.65 per share in April 2019, and authorized a new $4,000 share repurchase program.

Management Biases in Report

Yes, the company faces few challenges in its IT systems which tracks and manages financial transactions. Management is at fault in this particular situation because it has failed to maintain business ethics. The company relies heavily on information technology to process its financial transactions and other control activities. With the very large volume of transactions Costco conducts, it’s crucial that they keep their business-critical system running uninterrupted.

It was found that a significant deficiency in internal control related to inadequate general control in information technology, and if there company fails to sustain an effective system of internal control in the future, this could result In loss of trust of investors and stock price of the company may be impacted. As of September 2, 2018 the company reported the information in annual report.

The company completed the remediation measure related to material weakness in 2019 and concluded that as of September 1, 2019, the internal control over financial reporting was effective. The company also claims that the remediation not provide guarantee that the remediation or the other control will continue to work properly. If the company failed to maintain its efficiency over the period of time then there will be a negative impact on its brand name and market reputation.

Recommendation to investors and Creditors

Costco revenue a positive boost: Net sales for the quarter rose to $36.24 billion, a rise of 5.6 percent over $34.31 billion earned in the beginning quarter of 2019.
Costco pays dividend: It’s always nice to own the stock when an otherwise sound investment pays you too. For almost 20 years now Costco has paid a rising quarterly dividend. The company was committed to returning shareholders money.
The Current, Quick and Cash ratio indicates that Costco’s current assets have a strong coverage of its current liabilities. A current ratio above 1 shows a company will be its liabilities in the near future.
The efficacy ratio details how Costco runs its business. In other words, the calculation in this report shows how efficiently Costco uses its assets or equities to achieve maximum revenues. Costco has been successful in using its assets to make profits on a year-over- year basis.
The shares of Costco have performed well on the NASDAQ through a consistent growth over time. The share price chart shows that the price trend is bullish and investors are relatively willing to pay more to purchase the shares because it is been believed that the company will continue to grow in future.

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Key Highlights for 2019

Management Biases in Report

Recommendation to investors and Creditors

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