Costco Wholesale Case Study Essay

1704 Words May 10th, 2010 7 Pages
Stakeholders invest money with the intent to gain return in the future. It is important for stakeholders to gain access to information and evaluate the firm’s performance before they put money in it. On the other hand, it is the firm’s management team job to make decisions that would maximize the long term value of the firm’s common stock. The intent of this paper is to analyze Costco Wholesale Corporation’s financial performance and to assess how efficient the business has been over a five year period as well as to provide recommendation for financial management strategy.

The problem identified in this paper is the low margins in the industry. Because margins are low, the profitability of individual companies depends on high
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Costco’s ratio is consistent with the industry average, but appears to be on the decline. A look at Costco’s ROE since 1997 shows a steady decline. Consistent reinvestment into the company has occurred in the form of new store construction and efficient modifications of old stores during these years. Such capital investments would take time to generate profits. Even though Costco’s ROE in 2001 is lower than in 1997 it still remains a large positive figure. As long as Costco’s management team continues demonstrates ability to successfully reinvest and improve efficiencies, stock price would most likely increase in the future and stockholder would be satisfied with long term returns on their investment.

Economic factors should be considered when determining the future of the retail business. Economic factors include the economic growth, interest rates, exchange rates and the inflation rate. Economic downturns have forced customers to cut back on expenses. . Any significant decrease to consumer spending has to be considered as a threat. In 2000/ 2001 tough economic environment Costco has shown the ability to persevere and continue growing their business. Passing cost savings to customers is even more important in times of economic slowdowns when businesses and individuals are trying to do more with less. Economic constraints play a major role in wholesale business by forcing companies to be more creative and come up with higher efficiencies in

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