Costco’s year end numbers are due in the next few days. With that, it is a great time to dig in to understand their LT historical track record.
The attached document speaks to Costco’s success in executing their strategic plan to build an effective organization. While pure numbers in isolation can never tell a company’s complete story, the numbers viewed in the context of the Costco’s actions tell volumes about its direction.
In today’s financial environment, too much focus is placed on the metrics of the current quarter. This singular focus can have many unintended consequences. If a person or entity is pushed excessively to achieve a goal, they’ll achieve the goal, but at what cost? For example, are they managing to their plan or are they manipulating the scoreboard (accounting results)? One is true and the other is a misrepresentation.
All signs point to a robust fourth quarter to be reported in a few days. Oh yeah!
Here is what I see with Costco's trends from their 10K’s and 10Q’s (see attachment):
Sales – With the exception of a slight drop in 2009, their annual sales have increased surely and steadily for 19 years.
4th quarter sales – The trend was an increase (exception again 2009), but they moderated their sales increases to build a loyal customer base at times. This moderation resulted in nice step ups in future sales. For example between 2016 and 2017.
Gross Margin – While Costco has resisted Wall Street’s pressures to take big jumps in gross margin, they are slowly increasing it. But on the other hand, in 2012, 2018 and 2019, they reduced them. I perceive this as an adjustment to build customer base. Value sells. Sam Walton and Ross Stores showed how effective this can be..
Operating Margin – The trend is to drive more financial discipline. Their margins are becoming less variable and more consistent allowing Costco to increase operating margins.
Return on sales – Financial discipline is enabling them to consistently drive them up.
Net Income – The three quarters of 2019’s net income almost eclipsed 2017’s entire four quarters of net income. This is an indicator of the traction Costco is achieving.
Debt to Equity – They have opportunistically added debt to benefit from low interest rates, but the level is very reasonable given their industry position and company strength. They are not feeding at the trough of debt as many companies are doing in the current environment.
Return on Assets – With the exception of 2014 and 2016, they are nicely improving since 2009. Sometimes stepping back is the best way to move forward.
Return on Capital – Nice use of debt to improve returns since 2009. Again 2014 and 2016 were the exceptions.
Return on Equity – This captures the whole picture. Since 2009, Costco is “stepping in high cotton”.
Share Earnings – Surely and steadily increasing since 2009.
Dividends – Three special dividends just put them in a class of their own.
Costco is a textbook case study on how to manage a company from a strategic, operational and financial perspective. I couldn't ask for more.
