COSTCO WHOLESALE CORPORATION FINANCIAL STATEMENT ANALYSIS (A) INTRODUCTION Margarita Torres first purchased shares in Costco Wholesale Corporation in...

INDUSTRY OVERVIEW – RETAIL

The retail industry in the United States was transformed in the late 1800s by the rise of department stores and general merchants. Companies such as R.H. Macy & Company (founded in 1858) and Bloomingdale Brothers, Inc. (1872) opened stores in New York City and subsequently began to expand across the country. Department stores became famous not only as places to shop, but also as destinations for the new pastime of window-shopping. These stores revolutionized retailing by offering a variety of products in one location and by developing a reputation for excellent customer service. Other innovations included free delivery of purchases and the ability for customers to make purchases using store credit.

The most dominant department store for most of the 20th century was Sears, Roebuck and Company. Founded in 1893 as a mail-order company, Sears opened its first retail store in 1925. By 1945, Sears achieved $1 billion in sales. Throughout the 1950s and 1960s, the company expanded aggressively across the country, selling everything from clothing to appliances to televisions and home repair items. Trying to find success in ventures beyond retailing, the company had owned at one point Allstate Insurance (home, life and auto insurance), Coldwell Banker (real estate broker), and Dean Witter Reynolds (stock brokerage). Sears also launched the Discover credit card. From the mid-1970s through 2002, however, the company struggled, and all of these companies were been sold off. In 2001, Sears had sales of $41 billion and Federated Department Stores, which owns Macy’s and Bloomingdales, had sales of $16 billion.1

The 1960s witnessed a new breed of retailer, the mass discounter. These companies originally targeted lower income consumers with a broad product line similar to that of Sears and other department stores. Discounters, however, differentiated themselves by de-emphasizing the shopping experience and instead focused on delivering items at the lowest price. In 1960, discounters had combined sales of $2 billion. Over the next four decades, discounters prospered.

In mid-2002, the largest discounter was Wal-Mart, founded by Sam Walton. Walton started his career as a management trainee at J.C. Penney and later as a franchiser of five-and-dime stores. In 1962, he opened the first Wal-Mart store in Rogers, Arkansas. The operating philosophy of Wal-Mart was simple: offer products to customers at the lowest price possible, locate stores in rural locations, where they can serve the average American, maintain a clean store environment where customers will want to shop, hire energetic employees who provide outstanding customer service, treat employees as “associates” and manage them with an open-door policy where they can express complaints or make suggestions freely. In fact, Walton was famous for allowing employees at any level to walk into his office with comments on how to improve Wal-Mart.

Wal-Mart’s subsequent growth was unprecedented. Sales were $44 million in 1970. They had grown to $1.2 billion by 1980 and to $26 billion by 1989 when Walton retired as CEO. For the fiscal year ended January 31, 2001, Wal-Mart had sales of $218 billion. The company operated over 4,400 locations worldwide.

1 Federated sales for fiscal year ended February 2, 2002.

Wal-Mart also expanded its product offerings. Wal-Mart stores sold clothing, health and beauty products, prescriptions, electronics, sporting goods, music, and toys. In 1983, Wal-Mart opened its first SAM’S wholesale club to compete with Price Club. In 1987, Wal-Mart opened its first Supercenter, which included a full-sized grocery store along with the complete product line of a traditional Wal-Mart store. By 2000, Wal-Mart was also selling its products online through Walmart.com.

During this era of Wal-Mart expansion, another type of discounter developed, specializing in the sale of only one category of product, such as electronics, hardware, or furniture. Dubbed “category killers,” these companies looked to beat discounters at their own game by achieving even greater efficiencies of scale. Although not all specialty discounters gained lasting success, several continued to dominate their respective categories, including Home Depot, Circuit City, and Walgreens.

Discounters and specialty discounters had been very successful stealing sales from department stores. As a result, general merchandisers from Sears to J.C. Penney have been forced to reinvent themselves in order to stay in business. Whether they would succeed, however, was still in question. Montgomery Ward, a once-formidable competitor to Sears, was forced to shut down its stores in 2000 after 128 years of operations.

The early 1980s saw the introduction of a new trend in retailing – the wholesale club. Wholesale clubs are based on the same premise as discounters: offer the best value to shoppers. They delivered that value, however, in a different way. First, customers purchased an annual membership in order to shop in the stores. Second, the clubs carried a very limited selection of goods, generally 4,000 SKUs compared to 40,000 SKUs at most grocery stores. Whereas discounters and specialty discounters carried a broad product line, clubs generally carried one or two brands in each category. Third, the clubs sold items in bulk. By limiting the selection of goods and selling in bulk, clubs were able to negotiate discounts from vendors and pass on those discounts to customers in the form of lower prices. These two factors also allowed clubs to turn inventory over faster. Fourth, the clubs kept operating expenses to a minimum. Low operating expenses were essential in order for them to maintain profitability, because they worked on very low gross margins. Clubs achieved low operating expenses by running their stores in warehouse-style facilities and by reducing stocking costs. Wholesale clubs saw annual revenue and earnings growth of 12 - 15 percent during the 1990s compared to 5 - 6 percent annual growth for general retailers.

Wholesale clubs expanded internationally with limited success. They gained traction in Canada and Mexico, but growth was not as effective in Europe, South America, and Asia. Although prices of wholesale clubs were attractive to international consumers, there were many challenges in growing internationally, including differences in consumer purchasing behavior, less space at home for consumers to store bulk items, high real estate costs for warehouses, government regulations, and difficulties in implementing a distribution system (see Exhibit 1).

In 2000, online retailers were thought to be the next dominant player in retailing. Shipping items from centralized distribution centers, online retailers were thought to have a fundamental cost

advantage over brick-and-mortar retailers. However, consumers did not change behavior to make a substantial portion of their purchases online. As a result, by 2002, online retailers had not gained the sales volume necessary to realize efficiencies of scale. The high cost of shipping and the inability of customers to inspect goods before purchasing were thought to be two main impediments. Although customers adapted to purchasing certain categories through the Internet, such as electronics, software, books, and music, online retailers had not yet become a major threat to traditional retailers or discounters.

INDUSTRY GROWTH

Despite the fabulous growth in revenue for discounters and warehouse clubs, sales for the retail industry as a whole grew roughly in line with GDP. According to Survey of Current Business, retail and wholesale trade activities in the United States totaled $1.6 trillion or 16 percent of GDP in 20012. In 1960, retail and wholesale trade were substantially smaller ($68.8 billion) but still represented approximately 15 percent of GDP3. In this sense, retail was a mature industry with companies achieving growth in excess of GDP only by stealing sales from competitors or by expanding beyond the United States. GDP growth over the forty-year period 1960 to 2000 was 8 percent per year in nominal dollars. GDP growth from 1990 to 2000, when inflation was low, at 5.9 percent per year (see Exhibits 2 and 3).

COSTCO AND THE COMPETITION

In 1975, Sol Price opened the first wholesale club, named Price Club, in San Diego, California. Operating on a membership basis, the club sold goods in bulk to small business owners. Business owners could buy staple items including consumer product, canned foods and beverages, and tobacco products for resale in their own stores. Customers typically purchased products at Price Club for their personal use as well.

Going public in 1980, Price Club expanded rapidly throughout California and the West, as well as select locations in Canada and Mexico. The company merged with Costco in 1993.

Operating under the same business model as Price Club, Costco Wholesale was founded in 1983 by Jeffrey Brotman and James Sinegal. The company went public in 1985 and used proceeds to fund expansion in the Pacific Northwest and Canada. In 1985, merchandise sales were $336 million and membership fees just over $4 million.

With the success of the wholesale club concept, competition soon followed. Wal-Mart entered the industry by creating SAM’S Club, Kmart opened Pace Clubs, and BJ’s Wholesale began operations in the Northeast. By the early 1990’s, the industry had too many players. In 1993, a wave of consolidation took place, as SAM’S purchased Pace Club and Costco purchased Price Club (creating Price/Costco, which later simplified its name to just Costco). The two main survivors, Costco and SAM’S, were left with 85 percent of the market.

2 U.S. Census Bureau, Statistical Abstract of the United States: 2001 (Washington, DC, 2001), p. 418.

3 U.S. Census Bureau, Statistical Abstract of the United States: 1962 (Washington, DC, 1962), p. 317.

In 2001, Costco was the largest wholesale club in the industry with sales of $34 billion. The company, however, was smaller than SAM’S in number of warehouses (365 for Costco vs. 528 for SAM’S). Costco differentiated itself from SAM’S by targeting a wealthier clientele of small business owners and middle class shoppers (see Exhibit 4).

Costco, through its history with Price Club, took great pride in having invented and developed the club warehouse concept. The company demonstrated its value to customers by refusing to mark up products more than 14 percent over the distributor’s price. By comparison, a typical retailer marked up products 25 percent to 40 percent. Although selling items in bulk allowed for many operating efficiencies, management’s main focus was on delivering the lowest per unit price on the products it sold. For example, a 100 fl. ounce container of Tide liquid detergent would sell at a general retailer for $8.99, or $0.0899 per fl. ounce. At Wal-Mart, a 100 fl. ounce container sold for $7.44, or $0.0744 per fl. ounce. Costco sold the same detergent in a 300 fl. ounce container at a price of $17.99, or $0.06 fl. per ounce. Costco was able to sell at such a low per unit cost precisely because of its bulk packaging. The size of the container, however, was not maximized in order to compel consumers to purchase more goods. Costco had a policy of not increasing the size of a container unless it resulted in a lower per unit cost. That is, they would not sell Tide detergent in containers greater than 300 fl. ounces unless the resulting price was less than $0.06 per fl. ounce. They believed that lowering the unit price of goods was what allowed them to deliver value to the customer.

Selling through Costco was a mixed blessing for product manufacturers. On the one hand, Costco offered a broad distribution channel that brought increased revenues. In addition, Costco only purchased a handful of SKUs from its vendors. This allowed manufacturers to greatly reduce production costs. For example, when Costco ordered toilet paper from Kimberly Clark, it ordered one color, one print, and one ply. This allowed Kimberly Clark to set up the production line only once and run continuous batches of the same product, lowering per unit production costs. On the other hand, because Costco was a powerful purchaser, it could demand that production savings be passed on to itself in the form of lower prices. As a result, the manufacturer would see increased revenues, but increases in profits would be limited. Costco passed these savings on to its own customers. The result was lower profits throughout the supply chain.

Costco created value for the customer through these savings. This drove the value of its membership and allowed Costco to raise fees over time. In 1986, Costco’s membership fee was

$25. By 2002, it was $45. The more savings Costco was able to pass on to customers, the more it would be able to increase its membership fee over time.

Costco also delivered value to customers by expanding its selection of name-brand products and by adding ancillary services. Costco offered such items as Levi’s jeans, Polo bed comforters, and Compaq computers. Through its proprietary brand, Kirkland, the company offered everything from cheese and ice cream to cookware and vitamins. Kirkland products were developed wherever Costco recognized a need for high quality, low cost items that did not exist in the market. In addition, Costco added photo development services, pharmacies, gas stations, and tire changing stations in many of its stores. The company also increased its fresh food department and added high-end wines and jewelry in an attempt to serve the needs of its

customers. In fact, with $500 million in wine sales in 2001, Costco was the largest retailer of wine in the United States.

All of these services were aimed at increasing the number of visits that members made to Costco stores per year and increasing the total dollars spent per customer per year. Increased sales per customer translated into increased sales per store.

Besides offering the lowest cost products, Costco claimed to have the best operating efficiency in the business.4 Operating efficiency was essential, given the company’s low gross margin. This efficiency was the result of a very cost-conscious culture. In fact, the company reported operating margins down to the basis point in its annual report.

Expenses were minimized through various methods. Stores were run in no-frills warehouse facilities, reducing capital expenditures. Whenever possible, goods were not individually stocked on shelves; instead, a forklift delivered a pallet directly onto the warehouse floor, reducing labor costs. The company distributed goods to its stores through a cross-docking procedure, in an effort to reduce transportation costs. Instead of paying for half-full trucks to deliver products directly from the manufacturer to the warehouse, trucks met at distribution hubs called cross-docks. The manufacturers unloaded full truckloads of products at the cross-dock locations. Costco employees then consolidated and reloaded products into trucks bound for each specific store location. This ensured that trucks were always operating at full capacity, from the manufacturer to the store. Cross-docks never stored inventory, so that all of the items delivered were reloaded and shipped that same day.

Costco profited richly from this strategy. In 1985, the company had a net loss of $3 million on product sales of $336 million. By 2001, the company’s profit had soared to $602 million on product sales of $34 billion (see Exhibit 5).5

SAM’S Club, operated by Wal-Mart, was Costco’s largest wholesale club competitor. SAM’S outnumbered Costco in terms of number of warehouses and worldwide members. However, Costco had larger total revenues, sales per store, and operating income.

A few factors limited SAM’S performance. First, SAM’S traditionally catered to a lower income customer than Costco. As a result, SAM’S customers tended to spend less per visit than Costco’s.

Second, until 2000, SAM’S lacked a differentiated operating strategy in the Wal-Mart Corporation. Most SAM’S clubs were located adjacent to a Wal-Mart store, offering the same products at the same prices. Many shoppers patronized Wal-Mart without seeing the need to pay a membership fee to enter SAM’S. As a result, many of the cost savings that the two companies enjoyed in real estate development, product purchasing, and delivery were more than offset by decreased sales at SAM’S.

4 Wal-Mart would not break out detailed operating information on SAM’S for comparison.

5 Fiscal year ended September 2, 2001.

Third, SAM’S suffered large amounts of management turnover during the 1990s. SAM’S saw four different presidents come and go between 1994 and 1998. In contrast, James Sinegal and Jeff Brotman had been in charge of Costco since the company’s founding.

In 2001, SAM’S began undergoing transformation. Its president, Thomas Grimm, was providing stronger leadership to the organization. He was pursuing an aggressive push to regain the lead from Costco by increasing the rate of expansion in warehouse stores. In fiscal year 2002, SAM’S was planning to open 80 new warehouses. The company had also outlined new plans to renovate older warehouses, add higher-end merchandise to appeal to wealthier clientele, and introduce ancillary product lines similar to Costco’s in order to increase customer visits.

Most importantly, SAM’S and Costco’s expansion plans would pit the two warehouse clubs directly against each other in local markets. Traditionally, SAM’S and Costco did not have a large number of stores competing in the same markets. The majority of SAM’S Clubs were located in the South and most Costco’s were in the West. With plans for both clubs to enter each other’s markets, it was unclear how much cannibalism would take place. One indication came from a recent Costco store, which opened in the Dallas market in 2000. Although SAM’S already had 14 warehouses in Dallas, Costco claimed that their own first-year sales were in line with historical averages, approximately $55 million (see Exhibit 7).

BJ’s Wholesale Club was a small but efficient competitor to Costco. BJ’s was founded in 1984 in Medford, Massachusetts. By 2002, the company had 130 warehouses, all located in the United States. 2001 sales were $5 billion, on a membership of 6.7 million. BJ’s strategy was similar to Costco’s: to target small business owners and middle-class customers, include high-value goods in the product line to increase sales per customer, and increase store visits through ancillary products.

BJ’s strategy diverged from Costco’s in that its stores were smaller (110,000 square feet versus 148,000 square feet), it carried more SKUs (6,000 per store versus 4,000 per store), and it marked up select items more than 14 percent, which was Costco’s limit. Also, BJ’s spent more money on flooring, lighting, and signage in its warehouse facilities in an attempt to improve the shopping atmosphere.

The results were mixed. In more recent years, BJ’s had achieved sales and profit growth greater than Costco’s. BJ’s customers visited its stores 12 times per year versus 9 times for Costco and SAM’S. BJ’s also reported gross margins of 9.2 percent, which allowed it to claim that its operations were even more efficient than Costco’s6. On the other hand, sales per store were only

$55 million versus $101 million at Costco, and its membership fee was not as high as Costco’s ($40 for a basic membership versus $45) (see Exhibit 8).

6 A direct comparison of gross margins between the two companies is misleading in that BJ’s cost of goods sold figure includes procurement expenses. Costco excludes such expenses from cost of goods sold. Both methods are acceptable under GAAP. BJ’s accounting method results in shifting costs from operating expenses to cost of goods sold, decreasing its reported gross margins, decreasing operating expenses, but leaving operating profits the same. Information is not available in the BJ’s annual report to allow us to quantify the company’s procurement expenses.

REVIEW OF COSTCO OPERATIONS

Torres had been following Costco’s progress for five years, but decided that it was time to run a more thorough analysis. From an operational standpoint, Costco had seen tremendous growth during this period. But how had the company been affected by growth? Had its operational efficiency changed? How had it financed the growth and how had its capital structure evolved?

Torres typically evaluated her investments using two methods: ratio analysis and cash flow analysis. Ratio analysis involved comparing different line items in public financial statements to see how they change over time or how they compare to similar companies. Cash flow analysis involved analyzing a company in terms of the cash it generates from operating activities, investment activities and financing activities. The objective of cash flow analysis was to understand what cash requirements are needed to fund the business, the sources of that cash, and the use management makes of free cash flow.

First, she decided to focus on ratio analysis and leave cash flow analysis for another time. She decided to organize her analysis into three parts: common-size financial statements for Costco over the past five years, a sustainable growth model of Costco over the same period, and a benchmark of Costco against its competitors in important industry ratios.

Common-size income statements expressed the line items of a company’s income statement as a percent of revenues. Looking at Costco’s income statement, Torres noticed that there were two revenue lines: net sale of goods and membership fees. In creating her common-size income statement, she decided to use net sales of goods as the point of comparison (100 percent) and express other line items, including membership fees, as a percentage of net sales. Her rationale was that this allowed for a clearer reflection of gross and operating margins. Using this format, she was able to analyze the profit structure of Costco over time.

Common-size balance sheets expressed the line items of a company’s balance sheet as a percent of total assets. Using this format, she was able to analyze the asset structure of Costco over time and understand how its assets were funded (see Exhibit 9).

The sustainable growth rate was the rate at which a firm could grow while keeping its profitability and financial policies unchanged7. The sustainable growth model allowed an analyst to isolate the drivers that have led to changes in historical growth in order to isolate causes of change. This model could be decomposed into four steps.

At the end of each year, the return that a company realized on equity capital could either be reinvested back in the business or paid out to investors in the form of dividends and common stock repurchases. If no dividends or share repurchases were made and earnings were reinvested back into the business at the same incremental rate of return, the company’s return on equity

7 Sustainable growth model taken from: Palepu et al., Business Analysis & Valuation: Using Financial Statements

(South-Western College Publishing, Cincinnati, 2000), Chapter 9.

would hold constant over time. In reality, however, companies frequently experienced changes in their return on equity, and most companies distributed some portion of earnings to investors. As a result, at the highest level, the company’s sustainable growth rate could be expressed as the product of the following two ratios:

• Earnings Retention Ratio = 1 – Dividend Payout Ratio

• Return on Equity (ROE) = Net Income / Owner’s Equity

If a company retained all of its earnings, its dividend payout ratio was 0 and its earnings retention ratio was 1. As it paid out more of its earnings in dividends, its earnings available for reinvestment in the business necessarily go down. Return on equity measured how much profit is generated in net income for every dollar invested in equity capital.

The ROE component could be expressed as the product of two ratios: financial leverage and return on assets. Issuing debt allowed a company to increase its return on equity, so long as the return on invested capital is greater than the cost of debt. For example, if a company’s core business earned 15 percent return on invested capital and it could borrow debt at 10 percent, financial leverage would increase its ROE. Financial leverage was expressed as the ratio

• Financial Leverage = Assets / Owner’s Equity

Assets represented the sum of capital employed in the business at any given time. Likewise, return on assets was a measure of the business’ overall profitability, making no distinction between funds due to shareholders and funds due to creditors. Return on assets was expressed as the ratio

• Return on Assets (ROA) = Net Income / Assets

By breaking down Costco’s ROE into these components, Torres could better understand how leverage influenced its return on equity. She could also analyze how the increased asset base from warehouse expansion was affecting the company’s profitability.

A company’s return on assets could be further broken down into two components to determine whether increased sales or increased margins accounted for changes in profitability. The first ratio was asset turnover. Asset turnover measured how many dollars in sales were made for each dollar in assets. The second component was net income margin, which measured how much profit was generated per dollar of sales.

• Asset Turnover = Sales / Assets

• Net Income Margin = Net Income / Sales

Relating this to Costco, she could see how an increase in the asset base affected both sales and net margin.

The fourth step was to decompose the net income margin into pretax return on sales and the tax effect.

• Pretax Return on Sales = Pretax Income / Sales

• Tax Effect = 1 – Tax Rate

This last step allowed her to determine whether changes in the net margin were driven by operating efficiencies or the ability of Costco management to influence its tax rate.

Reviewing these ratios together, she was able to pinpoint which aspects drove the profitability of Costco over time. She was most interested in determining whether Costco had grown at a sustainable rate, or whether growth had been too fast or too slow. She could determine this by finding a deterioration in certain ratios. Finally, she considered how new store openings impacted the ratios (see Exhibit 10).

As the third step in her ratio analysis, Torres wanted to get a better sense for how Costco compared to main competitors in operational efficiency. She decided to use a competitive set of Sears, Wal-Mart, and BJ’s Wholesale.

In a retail setting, the gross margin was a reflection of how much the retailer marked up items for resale. This ratio reflected roughly the pricing strategy of each company.

• Gross Margin = (Sales – Cost of Goods Sold) / Merchandise Sales

Operating margin was a reflection of how much profit a retailer generated from selling its items after paying all operating expenses. For Costco and BJ’s, she included membership fees in revenues.

• Operating Margin = (Revenues – Cost of Goods Sold – Operating Expenses) / Revenues

Net margin, described above, was a bottom-line reflection of profitability taking into account all sources of revenue and expenses from continuing operations.

• Net Margin = Net Income / Revenues

The current ratio was a reflection of a company’s short-term liquidity. A ratio greater than 1 indicated that short-term assets were sufficient to service short-term liabilities. Historically, a company with a high current ratio was thought to be secure. However, managers came to realize that tying up too many funds in short-term assets was an inefficient use of capital. Subsequently, many companies sought to maintain a current ratio closer to 1. As a result, whether a company with current ratio equal to 1 was operating efficiently is open to an analyst’s interpretation.

• Current Ratio = Current Assets / Current Liabilities

Inventory turnover was a reflection of how long inventory remains in the store before sale. Companies with high inventory turnover were at a competitive advantage because they tied less money up in unsold inventory and because they had the flexibility to adjust their product mix more frequently.

• Inventory Turns = Cost of Goods Sold / [(Opening Inventory + Ending Inventory) / 2]

Average collection period for receivables measured how many days, on average, it took for a company to receive collections from customers.

• Average Receivables Period = 365 Days * Accounts Receivables / Sales

Average payables period measured how many days, on average, it took a company to pay suppliers.

• Average Payables Period = 365 * Accounts Payable / Cost of Goods Sold

In reviewing these numbers, Torres considered how they reflected the differences in strategies between Costco and its competitors. She also wondered what they implied about competitive differences in the companies (see Exhibit 11).

Sales Revenue for Major Retailers, Logarithmic Scale (1955 – 2000)

1,000,000

100,000

Sales Revenue ($millions)

10,000

1,000

100

10

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Federated Department Stores Sears, Roebuck

Wal-Mart BJ’s Wholesale

Costco Wholesale

Company CAGR of Sales, 1990 – 2000

Federated 9.9%

Sears, Roebuck - 3.1%

Wal-Mart 19.4%

BJ’s† NA

Costco†† 22.8%

Gross Domestic Product 5.9%

NB: Federated Department Store sales 1987-1989 estimated. Company operated in bankruptcy during this period.

† BJ’s growth rate from 1994 to 2000 was 13.6%.

†† Costco merged with Price Club during this period, which greatly increased sales. In 1992, the year before the merger, Costco had sales of $6.6 billion. In 1993, the combined companies reported sales of

$15.5 billion.

Sources: Value Line Company Reports on Federated Department Stores, 1955 - 2000 Value Line Company Reports on R.H. Macy, 1955 - 1985

Value Line Company Reports on Sears, Roebuck, 1955 – 2000 Value Line Company Reports on Wal-Mart, 1965 – 2000 Value Line Company Reports on Costco, 1985 – 2000

Value Line Company Reports on BJ’s Wholesale, 1994 - 2000

Retail and Wholesale Trade as a Percentage of GDP†

Source: U.S. Bureau of Economic Analysis, Survey of Current Business, 1952, 1962, 1972, 1982, 1992, 2001

Per Capita Income†

Source: U.S. Bureau of Economic Analysis, Survey of Current Business, 1952, 1962, 1972, 1982, 1992, 2001

Number of Warehouse: Costco, SAM’S, BJ’s (1997 – 2001)

Sources: Costco Annual Reports, 1997 – 2001. Fiscal years ended Sunday nearest to August 28. Wal-Mart Annual Reports, 1997 – 2001. Fiscal years ended Sunday nearest January 31.

BJ’s Wholesale Annual Reports, 1997 – 2001. Fiscal years ended Sunday nearest January 31.

Financial Statements for Costco Wholesale Corp. (1997 – 2001)

Exhibit 5 (Continued)

Source: Costco Annual Reports, 1997 – 2001. Fiscal years ended Sunday nearest to August 28.

Financial Statements for Sears, Roebuck (1997 – 2001)

Credit and financial products revenues 5,235 4,571 4,343 4,618 4,925

Total revenues 41,078 40,937 41,071 41,322 41,296

Special charges and impairments 542 251 41 352 475

Total costs and expenses 39,900 38,750 38,658 39,467 39,302

Operating income 1,178 2,187 2,413 1,855 1,994

Other income, net 45 36 6 28 144

Minority interest 21 49 62 45 38

Net Income Before Extraordinary Loss 735 1,343 1,453 1,072 1,188

Extraordinary loss on extinguishment of debt 0 0 0 24 0

Net Income 735 143 1,453 1,048 1,188

Net income per common share:

Capitalized leases 544 522 496 530 498

Gross property and equipment 13,137 12,585 11,912 11,326 11,324

Less accumulated depreciation 6,313 5,932 5,462 4,946 4,910

Other assets 973 1,278 1,470 1,452 1,377

Total assets 44,317 36,899 36,954 37,675 38,700

Liabilities Current liabilities

Other taxes 558 562 584 524 554

Total current liabilities 15,584 15,796 13,701 14,109 15,790

Accumulated other comprehensive loss (831) (249) (287) (424) (311)

Total shareholder’s equity 6,119 6,769 6,839 6,066 5,862

Total liabilities and shareholder’s equity 44,317 36,899 36,954 37,675 38,700

Source: Sears Roebuck Annual Reports, 1997 – 2001. Fiscal years ended Sunday nearest to December 31.

Financial Statements for Wal-Mart Corp. (1997 – 2001)

Cumulative Effect of Accounting Change 10,116 9,083 7,323 5,719 4,877

Number of common shares for calculation

Prepaid Expenses and Other 1,291 1,366 1,059 432 368

Total Current Assets 26,555 24,356 21,132 19,352 17,993

Other Assets and Deferred Charges 10,641 10,024 2,891 2,426 1,287

Total Assets 78,130 70,349 49,996 45,384 39,604

Total Shareholder’s Equity 31,343 25,834 21,112 18,503 17,143

Total Liabilities and Shareholder’s Equity 78,130 70,349 49,996 45,384 39,604

Source: Wal-Mart Annual Reports, 1997 – 2001. Fiscal years ended Sunday nearest to January 31.

Financial Statements for BJ’s Wholesale Corp. (1997 – 2001)

Exhibit 8 (continued)

Prepaid expenses 17,406 15,967 15,482 12,607 14,050

Total current assets 752,818 694,571 638,254 456,590 404,185 Property at cost

Less accumulated depreciation 259,562 239,198 201,486 168,957 140,216

634,375 523,914 480,062 435,847 392,071

Property under capital leases 3,319 3,319 3,319 6,219 6,219

Less accumulated amortization 2,447 2,281 2,115 1,949 1,784

872 1,038 1,204 4,270 4,435

Treasury stock, at cost (113,602) (59,940) (26,356) 0 0

Total stockholder’s equity 686,567 664,915 577,398 485,042 446,257

Total liabilities and shareholder’s equity 1,421,884 1,233,734 1,131,019 907,630 811,636

Source: BJ’s Wholesale Annual Reports, 1997 – 2001. Fiscal years ended Sunday nearest to January 31.

Margarita Torres: Common-Size Financial Statements for Costco (1997 – 2001)

Provision for merger and restructuring 0.00% 0.00% 0.00% 0.00% 0.00%

Income continuing ops before taxes 2.94% 3.33% 3.18% 3.21% 2.42%

Provision for income taxes 1.17% 1.33% 1.28% 1.28% 0.97%

Income before cumulative effect of accting 1.76% 2.00% 1.91% 1.93% 1.45%

Cumulative effect of accting, net of tax 0.00% 0.00% -0.44% 0.00% 0.00%

Loss on disposal 0.00% 0.00% 0.00% 0.00% 0.00%

Net Income (loss) 1.76% 2.00% 1.47% 1.93% 1.45%

Total stockholder’s equity 48.39% 49.11% 47.06% 47.38% 45.07%

Total liabilities and shareholder’s equity 100.00% 100.00% 100.00% 100.00% 100.00%

Margarita Torres: Sustainable Growth Model for Costco (1997 – 2001)

†1999 net income figures used for calculation are before cumulative effect of account change.

Margarita Torres: Other Ratios for Costco and Competitors (2001)