Costco B Write-Up

Amber Arriaga, Tracy Connor, and Shawn Garza

Vipin Agrawal

FIN 3023.002

February 8, 2017

Costco B Write-Up

        The five factors that Torres use to determine the future performance are appropriate firstly, when determining the number of warehouses operating in the U.S was a good strategy because Costco management announced their expansion between 500 and 600 stores in the US by 2010. Amongst the other competitors like Walmart were doing the same; by comparing the two she can see where they stand in the market. Secondly, the factor of sales per store is adequate because it raises the question of the fact is it possible to generate sales up to 125 million per store or even 150 million and keep up with operations and competition. This is where membership base ties in because it’s a huge part of Costco’s performance and sustainability of profits. Lastly, Costco management stated they plan to opening 4 to 8 warehouses per year internationally over the next five years this is a range where they could do so profitably. An international expansion is a good indicator of growing profits for the company.

The relevant factor in quantitative checks of the forecast includes the sales growth and the Member count as a percentage. The value of calculating sales growth ties in with the performance of the company. If Costco is able maintain high percentages in sales in the U.S this can factor into to their international expansion. This can determine if they should venture in that direction. When Torres does the member count as a percentage she is checking to see how many people are actually buying memberships. Since Costco expects to sign up approximately 10% of a population of around 500,000.

When viewing Torres’ assumption we agree with the change in Costco’s historical performance, for instances starting with Merchandise sales her assumptions about number of US stores at the end of the years is constant with the data that Costco management provided. Torres’s forecast at the end of 2010 is 526 stores, which fall into the range of Costco’s average between 500 and 600 store openings. Secondly, looking at the Membership Revenue assumption of the total member’s value, she forecast the total member growth to about 10% each year until 2010. I feel that the assumptions of the number of US stores year end count and the total members value are appropriate for Torres’s forecast because she was concerned with the numbers of openings among competitors like Wal-Mart and if Costco can maintain the 10% members value of a population of 500,000.

We feel that the results from Torres’ forecasted income statements are achievable for Costco. We can analyze each growth factor as it pertains to the forecasted income statements. Torres projected a sales growth of 10% year over year.  Her assumption for new stores opening in the U.S. falls in line with Costco’s management expectations as well as their plans to open warehouses internationally. The membership fees as a percentage of sales is decreasing very slightly which is in line with membership renewal rates and predicted upcharge. We can now look at the operating margin which may be the most important factor of Torres’ forecasted income statement. The operating margin is projected to increase very slightly from 2.91% in 2001 to 3.53% in 2010. This seems like a safe assumption considering that Costco wanted to increase their pretax margin to around 3.5% over the next 5 years. This goal would be difficult to obtain from operating margins considering Costco already operates at a very high efficiency so Torres doesn’t predict that operating margins would change much.