DBRS Confirms Costco Wholesale at R-1 (middle) and A (high)

Dominion Bond Rating Service (DBRS) has today confirmed the ratings for Costco Wholesale Corporation (“Costco” or the “Company”), reflecting Costco’s continuing ability to generate excellent cash flow, the steady reduction in Costco’s debt, and the Company’s continued growth despite increased competitive pressure.

Cash flow has been sufficient to fund an aggressive expansion program (approximately US$1 billion annually), reduce debt, and institute dividend and share repurchase programs.

Costco has strengthened its position as the market leader in the warehouse club sector through expansion (domestic and international), and through same-warehouse sales growth including increasing penetration of value-added products. Costco has developed a more affluent membership base than primary discount competitors which should provide greater stability in an economic downturn.

The Company has substantial financial flexibility based on the strong cash position (in excess of US$3 billion), excellent working capital management and substantial ownership of real estate.

Despite these strengths, Costco faces several challenges: (1) Competition in the retail industry remains intense, with over 1,100 warehouse club sites (including Sam’s Club and BJ’s Wholesale Club) across North America. Each of the three major players has strong market leadership in certain geographic areas; however, increasing store development has led to two and sometimes three warehouse concepts existing in some markets. This may increase price competition or limit membership fee increases. (2) Competition from non-warehouse formats, including Wal-Mart Supercentres, and other discount formats continues to increase, eroding some of Costco’s price advantage.

Note:
Issuer ratings apply to all general senior unsecured obligations of the issuer in question.