Value Drivers Analysis
for Costco
NOVA School Of Business And Economics
Financial Statement Analysis - Group 25
Professor Francisco Antunes da Cunha Martins
Bernardo Santos; Federico Donati; Gonçalo Sousa; Madalena Sena-Lino; Marta Carvalhal
Evolution of Sales’ Value Drivers
Costco Wholesale Corporation is a well-known worldwide retailing company best recognized for its membership-based business strategy, which provides a diverse choice of high-quality items at low costs through its
warehouse club shops. The evolution of sales drivers for a company like Costco can be influenced by various factors over time.
Dollars ($) in Million 2022 2021 2020
The total sales are a culmination of both membership fees and net sales, both of which have seen notable growth over the analyzed years, leading
Total revenues $ 226 954 $ 195 929 $ 166 761
to an overall increase in total sales. The primary contributor to this surge in total sales is attributed to net sales, accounting for a substantial 98.14%
%change from previous year 15,83% 17,49% -
of the total. Notably, net sales witnessed a remarkable 16% upswing in 2022. This boost can be attributed to a 14% increase in comparable sales,
Net Sales $ 222 730 $ 192 052 $ 163 220
alongside the performance of new warehouses that were opened in 2021 and 2022. Among these sales, the category that stands out is 'Food and
Share of total revenue 98,14% 98,02% 97,88%
Sundries,' which commanded the largest share. We can observe a $15,830 surge in core merchandise categories (comprising foods, sundries, non-
%change from previous year 15,97% 17,66% -
$ 4 $ 3 $ 3 food items, and fresh foods), and a substantial $14,848 uptick in warehouse ancillary and other businesses. This latter category boasted the highest
Membership fees 224 877 541
Share of total revenue 1,86% 1,98% 2,12%
growth rate from 2021 to 2022. Furthermore, membership fee revenue also experienced a notable 9% uptick in 2022, primarily driven by the
%change from previous year 8,95% 9,49% - influx of new members and an increase in upgrades to Executive memberships.
Net Sales by category 2022 2021 2020
The first sales' value drivers is the total number of members associated with the company (total Paid members) is directly related to the volume
Foods and Sundries $ 85 629 $ 77 277 $ 68 659
of sales. The increase in number of paid members is also an indicator of brand loyalty and member trust, justifying the positive relation with sales
%change from previous year 10,81% 12,55% -
volume. Thus, as the total number of members increased; sales also increased. The membership format is an integral part of the business and the
Non-Foods $ 61 100 $ 55 966 $ 44 807
extent to which the organization expands its membership base and maintains strong renewal rates significantly impacts its profitability.
%change from previous year 9,17% 24,90% -
Fresh Foods $ 29 527 $ 27 183 $ 23 204
%change from previous year 8,62% 17,15% - The average of total sales per employee, using the number of workers employed in each year and total sales amount. The result obtained showed
Warehouse Ancillary and Other that in 2022 each employee generated an average of 750.000$, and as expected, these values have kept increasing since 2020, pointing to an
Businesses $ 46 474 $ 31 626 $ 26 550
increase in efficiency as the company increases the number of employees worldwide.
%change from previous year 46,95% 19,12% -
Sales' Value Drivers ($) Million 2022 2021 2020
# total paid members 65 800 61 700 58 100 The number of warehouses is related to the revenues being generated by each space in which company stores its products. Costco can achieve
$ $ $
Total sales per paid member 3,45 3,18 2,87
net sales growth by opening new warehouses. Knowing the number of warehouses in which the company operates, an estimation of to the average
# total employees 304 000 288 000 273 000 total sabes per warehouse can be made, assuming here that the only point of revenues for the company comes from warehouses. This assumption
$ $ $
Total sales per employee 0,75 0,68 0,61
was made because these are the core of Costco's business. In 2022 opened 23 net new locations, which may be explained by the slowing of the
# warehouses 838 815 795 pandemic that increased the pace of opening warehouses and business centers domestically and internationally.
Total sales per warehouse $ 270,83 $ 240,40 $ 209,76
Evolution of Costs’ Value Drivers
This slide presents an examination of the evolution of costs’ value drivers of the company for the financial years 2020, 2021 and 2022, focusing on the analysis of its costs’ evolution and its value drivers.
Dollars ($) in Million 2022 2021 2020
Total costs $ 219 161 $ 189 221 $ 161 326 It is clear how the total costs have increased both in 2021 and 2022, respectively by 17,29% and 15,82%. While,
% change from previous years 15,82% 17,29% - looking at the percentage of total costs over total revenue in the three years, it is possible observe a slight decrease
% of total revenue 96,57% 96,58% 96,74% of the ratio. This gives a higher EBITDA margin, driven mainly by higher sales, both at warehouses and the E-
Merchandise costs $ 197 482 $ 168 827 $ 143 239 commerce, probably influenced by COVID-19 relief measures.
% change from previous years 16,97% 17,86% -
Share of total costs 90,11% 89,22% 88,79% In 2022, more than 90% of total costs were built upon Merchandise costs, and less than 10% upon SG&A. It is
- $ 76 $ 55 relevant to keep a look at the different increases in these two variables in the year analysed. The first increase, in
Preopening expenses
- 38,18% -36,05% the first breakdown was very significant with 17.86% form the year earlier, while the latter slightly smaller. In
% change from previous years
- 0,05% 0,04% 2021 warehouse operations were lower by 24 basis points, largely attributable to payroll leveraging increased
Share of total costs
$ 1 900 $ 1 781 $ 1 645 sales, also due to COVID there were incremental wages, and sanitation costs. These extras costs that came with
Depreciation and Amortization
6,68% 8,27% - the pandemic terminated in 2022, for this the increase between the year is smaller.
% change from previous years
Share of total costs 0,87% 0,94% 1,02%
$ 19 779 $ 18 537 $ 16 387 To examine the factors influencing costs, we can categorize them into three main areas: costs per warehouse, costs
SG&A
6,70% 13,12% - per square foot, and costs per employee. As Costco expanded its operations and business footprint, it's evident that
% change from previous years
9,02% 9,80% 10,16% its costs escalated, and what's noteworthy is that these cost increases outpaced the growth in the business. This
Share of total costs
2022 2021 2020 situation sheds light on the fact that the company didn't improve its cost efficiency; rather, it experienced a
Costs' Value Drivers ($) Million
838 815 795 deterioration in its cost-effectiveness.
Number of Warehouse
Costs per warehouse 262 232 203
In the past three years and across all three aspects, we've observed a concentration of costs within Costco's
Average Square feet per warehouse 146181,38 145889,57 146037,74
company assets. It's important to note that this doesn't necessarily indicate a decline in cost efficiency.
Total cost per square feet 1,50 1,30 1,10
It is common to witness an increase in the overall costs, as the company expands its operations, primarily due to
Number of employees 304000 288000 273000
rising revenue. Even though, the costs’ value drivers showed a worsening of its condition throughout the years, it's
Total cost per employee 0,72 0,66 0,59
crucial not to solely focus on margins; one must also consider the profitability of the company in other aspects.
Evolution of Invested Capital’s Value Drivers
This slide presents an examination of the invested capital value drivers of the company for the financial years 2020-2022, focusing on the analysis of the core ROIC, ROIC, ROE and gearing ratio of Costco Wholesale Corp.
Desconstructing core ROIC
Ratios 2022 2021 2020 Core ROIC: Between 2020 and 2022, Costco observed a continuous increase in its Core ROIC, suggesting that the company has
Core Operational increased its profitability in its main operations for each unit invested in the core business. In 2020 the value was 19,60% and in 2022
Margin 2.58% 2.56% 2.45%
COGS/Revenues 87.85% 87.12% 86.91% it was 22,75% and the intuition behind this numbers is that, in 2020, for each dollar invested in its core business, it generated a result
SGA/Revenues 8.71% 9.46% 9.83% of 0,1960 dollars whereas in 2022 for each unit of dollar invested in its core business it generated a core operations result of 0,2275
Taxes/Revenues 0.85% 0.86% 0.81% dollars. When breaking down the Core ROIC, we see that the increase can be attributed both to continuous increases in its Core
Core Assets Turnover 8.82 8.76 8.00 Operations Margin and on the Core Assets Turnover however, the main driver of core ROIC is the core asset turnover given the low
PP&E/Revenues 10.86% 11.99% 13.08%
(Goodwill + values of core operational margins that are common in the retail industry.
Intagibles)/Revenues 1.22% 1.48% 1.67%
NWC/Revenues -2.53% -3.77% -3.96% Core Operational Margin: In one hand, the increase in the Core Operations Margin means that the firm has enhanced its ability to
Other Long-Term
Assets/Revenues 1.78% 1.73% 1.70% generate profits from its sales. Going more in dept, we observe that this was mainly due to the decrease in selling, general and
Core ROIC 22.75% 22.41% 19.60% administrative costs as a percentage of revenues (decrease of 1,12 percentual points) which more than offsets the increase in the cost
of goods sold as percentage of revenues (increase of 0,94 percentual points). This cost reduction highlights how Costco has become
2022 2021 2020 more efficient in managing its SGA expenses. For instance, Costco does not allocate funds to advertising activities, a core aspect of
ROIC 19.87% 22.75% 19.50% the business that can be expensive, which helps in keeping its SGA expenses low. Advertising can be costly, and Costco's decision to
Core ROIC 22.75% 22.41% 19.60%
Non-Core ROIC not invest in it contributes to their cost-effective approach
-2.88% 0.34% -0.10%
ROE 24.99% 29.42% 22.65% .
Core Asset Turnover: On the other hand, this metric gauges the effectiveness with which a company deploys its core assets to
generate sales. The increase in this period of the Core assets turnover, suggests that Costco has been more efficient in generating sales
from the invested capital in its core business. Notably, Costco’s Core asset turnover stands high. In 2022, for every dollar allocated to
core assets, Costco can generate, on average, $8.82 in sales. This is a result of a 10,25% increase in its value (compared to 2020). By
breaking down this value, we can say that this increasing trend has its roots on the decrease on the plant, property and equipment
value as a percentage of revenues (mainly due to depreciations) and on the decrease in intangible assets as a percentage of revenue.
Once again, this improvement underscores an enhanced efficiency in the management of core assets, leading to a notable
augmentation in sales.
Overall Analysis of the Evolution of the Profitability of the Company
Profitability Ratios 2022 2021 2020
Costco experienced a gradual decline in its gross margin over the past three years, dropping from 13.1% in 2020 to 12.1% in 2022. This decline
Gross Margin 12,1% 12,9% 13,1%
%variation -0,7% -0,2% mirrors challenges faced by many retailers due to rising input costs and supply chain disruptions. Moreover, we observe that Costco’s gross margin is
EBITDA Margin 4,3% 4,3% 4,2% low which is something common in the retail business. In one hand, there is high elasticity of demand meaning that it is better for companies to set
%variation -0,1% 0,1%
lower prices in line with its competitors. On the other hand, in this sector, companies are at the tail end of the line or, in other words, is not involved
EBIT Margin 3,5% 3,4% 3,2%
%variation 0,0% 0,2% in production process, only distributing products and consequently there are many costs associated with each unit sold. Furthermore, companies in
Net Margin 2,6% 2,6% 2,4% this sector live form volume of sales which means that for a company to be more profitable in this sector, it needs to sell high volumes because the
%variation 0,0% 0,2%
price for each unit sold is not much higher than its cost and therefore each unit sold does not add much to the company’s profit.
However, the company maintained stable operating margins, with a slight increase in EBITDA margin in 2022 when compared with 2020. This
2022 2021 2020 was mainly due to the decrease in the selling, general and administrative costs as a percentage of revenue which were 11% in 2020 and were 8% in
Revenues 226,954 195,929 166,761 2022. This decrease means that the company has become more efficient controlling its costs and the decrease in the SG&A counterbalanced the
COGS (% revenues) -88% -87% -87% increase in the COGS as a percentage of revenues. Moreover, EBIT margins continuously improved from 3.2% in 2020 to 3.5% in 2022. This also
SG&A (% revenues) -8% -10% -11%
reflects the previously mentioned effective cost control, vital in the retail.
Depreciations (% revenues) -0.84% -0.91% -0.99%
Costco's net margin remained steady at 2.6% in 2021 and 2022, showcasing its ability to sustain profitability despite lower gross margins. This
Income Taxes (% revenues) -0.85% -0.82% -0.78%
strategy aligns with successful companies like Amazon, known for operational efficiency and diversified revenue streams.
ROE measures shareholder returns concerning their investment in the company, accounting for the company's financial structure. Between 2020
and 2022 the ROE has fluctuated, increasing in 2021 6 percentual points and decreasing 4 percentual points in 2022 meaning that, overall, we
Equity's Profitability 2022 2021 2020
ROIC 20% 23% 20% observed an increase of 2 percentual points from 2020 to 2022. It is important to notice that, during this period, the ROE has always been higher
0.20 than the ROIC, which means that financing decisions are adding value to shareholders. This is a result of the fact that the ROIC has been
D/E 0.29 0.33
Cost of External continuously higher than the cost of external financing which has been 2% in the past 3 years. Keeping this in mind, the increase in return on
2% 2% 3%
Financing equity in 2021 is a result of debt relatively to equity in absolute terms (D/E increased) which, combined with the fact that the return on invested
ROE 25% 29% 23%
capital is higher than external financing, led to an increase in ROE. By the same reasoning, in 2022, the decrease in the D/E ratio was the main
reason why the ROE also decreased.
Appendix - Reformulated Income Statement
Core Operations 2022 2021 2020
$226 954,00 $195 929,00 $166 761,00 Assumptions:
Revenues
-$199 382,00 -$170 684,00 -$144 939,00 (1) OCI (Other
Merchandise costs
Comprehensive Income)
SG&A (4) -$19 779,00 -$18 537,00 -$16 387,00
includes Net Foreign-
Core Result Before Taxes $7 793,00 $6 708,00 $5 435,00
currency translation
Statutory Taxes -$1 636,53 -$1 408,68 -$1 141,35 adjustment and other
Tax Adjustments -$301,72 -$285,84 -$209,24
Result $5 854,75 $5 013,48 $4 084,41 (2) Tax adjustments for the
core business include foreign
Non Core taxes since we considered
Financial Gains (3) $205,00 $143,00 $92,00 they were related to the
Non Core Result Before Taxes $205,00 $143,00 $92,00 companies' core business.
Statutory Taxes -$43,05 -$30,03 -$19,32 Employee stock ownership
Tax Adjustments (2) $21,77 $82,74 $24,84 plan (ESOP) taxes are
OCI (1) -$757,00 $88,00 $82,00 included in tax adjustments
Result -$573,28 $283,71 $179,52 for the non-core business.
(3) Financial gains are
Financial related to investments made
Financial Costs -$158,00 -$171,00 -$160,00 by the company and
therefore are included in the
Financial Result Before Taxes -$158,00 -$171,00 -$160,00
non core business.
Statutory Taxes $33,18 $35,91 $33,60
(4) For simplicity reasons,
Tax adjustments $1,35 $4,90 $3,47
SGA include the
Result -$123,47 -$130,19 -$122,93 depreciations in the
reformulated income
statement.
Total Comprehensive Income $5 158,00 $5 167,00 $4 141,00
Appendix - Reformulated Balance Sheet
Core Business (million) 2022 2021 2020
Operating Cash $4 539,08 $3 918,58 $3 335,22
Accounts Receivable $2 241,00 $1 803,00 $1 550,00
Inventories $17 907,00 $14 215,00 $12 242,00
Prepaid Expenses - - -
Accounts Payable -$17 848,00 -$16 278,00 -$14 172,00
Deferred Revenues -$2 174,00 -$2 042,00 -$1 851,00
Accounts Payable to Employees -$6 292,00 -$5 761,00 -$4 998,00
PP&E $24 646,00 $23 492,00 $21 807,00
Intangible Assets $2 774,00 $2 890,00 $2 788,00 Assumptions:
Other current assets $1 499,00 $1 312,00 $1 023,00 (1) Operating cash is
Other current liabilities -$5 611,00 -$4 561,00 -$3 728,00 assumed to be 2% of sales.
Other Long-Term Assets 4 050 3 381 2 841
Invested Capital Core Business $25 731,08 $22 369,58 $20 837,22 (2) Other long-term assets
Non-Core Business (million) include goodwill and
Short-term investments 846 917 1 028 operating leasing and
Long Term Investments - - -
therefore are assumed to be
related to the core business
Invested Capital Non Core Business $846,00 $917,00 $1 028,00
Financial (million)
Excess of Cash $5 663,92 $7 339,42 $8 941,78
Debt -$11 594,00 -$12 548,00 -$12 102,00
Minority Interests -$5,00 -$514,00 -$421,00
Preferred Stock - - -
Net Financial Assets -$5 935,08 -$5 722,58 -$3 581,22
Equity $20 642,00 $17 564,00 $18 284,00
