DBRS Confirms Costco Wholesale Corporation at A (high) and R-1 (low), Stable Trends

DBRS Limited (DBRS) has confirmed the Issuer Rating and Senior Unsecured Debt rating of Costco Wholesale Corporation (Costco or the Company) at A (high) and its Short-Term Rating at R-1 (low), all with Stable trends. The ratings continue to reflect Costco’s large size, efficient operations, strong market position and the benefits associated with its warehouse membership business model as well as its modest sensitivity to economic cycles. The ratings also consider intense competition in the retail industry, risks associated with a more ambitious geographic expansion and the potential for less conservative financial management.

Costco’s total revenue increased by 4.3% to $80.4 billion in the first nine months of F2015 (9M F2015) compared with $77.1 billion in the same period in F2014. The growth was driven by the opening of new warehouses and growth in comparable warehouse sales (2%). Comparable sales benefited from higher shopping frequency, but were negatively affected by the decrease in gasoline prices and foreign currency fluctuations.

Cash flow from operations grew in line with earnings, increasing to $2.6 billion in 9M F2015 compared with $2.3 billion in the same period of F2014. Costco opened ten new warehouses in 9M F2015 and, as a result, its capital expenditure (capex) in the period amounted to $1.6 billion, modestly higher than $1.4 billion in 9M F2014. The Company paid a special dividend of approximately $2.3 billion in February 2015. Consequently, Costco’s cash balance decreased to $5.0 billion as of the end of 9M F2015 (from $5.7 billion in F2014) while balance-sheet debt increased to $6.0 billion over the same period (from $5.0 billion in F2014). As such, lease-adjusted debt-to-EBITDAR rose to 1.59 times (x) at the end of 9M F2015 from 1.41x in F2014.

Going forward, DBRS expects comparable warehouse sales growth to be in the low- to mid-single digit range over the medium term. DBRS also anticipates a 3.0% to 4.0% annual increase in new selling space in the same period, much of which will come from new warehouse openings in international markets. Consequently, DBRS forecasts revenue growth of approximately 5.0% per year over the medium term. DBRS believes that Costco will maintain EBITDA margins of around 3.8%.

Cash flow from operations should track operating income, growing to approximately $3.8 billion in F2016 from $3.3 billion in F2014. DBRS expects that a steady program of new warehouse openings and accelerated spending on information technology will hold the Company’s capex budget at approximately $2.5 billion per year through F2016. DBRS believes that, following the special dividend paid in F2015, the Company will maintain its regular dividend policy and increase regular dividends per share at a rate of approximately 15% per year, as a result of which the dividend outlay is likely to increase to approximately $700 million in F2016. DBRS expects Costco to use its free cash flow, cash on hand and additional debt to repurchase shares while maintaining lease-adjusted debt-to-EBITDAR below 2.0x, which is appropriate for the current rating category.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Merchandising Industry (January 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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