DBRS Confirms Costco Wholesale Corporation at A (high) with Stable Trend

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debt rating of Costco Wholesale Corporation (Costco or the Company) at A (high) and its Short-Term Issuer Rating at R-1 (low), all with Stable trends. The confirmations reflect Costco’s steady revenue and EBITDA growth and incorporate higher leverage as a result of the Company’s recently debt-funded special dividend. The ratings continue to be supported by the Company’s large size, strong market position, efficient operations, relative resilience to economic cycles and the benefits associated with its warehouse membership business model. The ratings also consider the increasingly competitive retail industry, risks associated with geographic expansion and the potential for less conservative financial management.

Costco’s earnings and financial profiles remained supportive of the current rating category during the nine months ended May 7, 2017 (9M F2017). Revenues during 9M F2017 grew to $87 billion from $82 billion during 9M F2016, driven by 3% comparable net sales growth (excluding changes in foreign currency and gasoline prices), 24 net new store openings and 5% growth in membership fee revenues. EBITDA margins remained steady at 4.1% and consequently, EBITDA increased to $3.6 billion from $3.3 billion during the period. Free cash flow (after dividend and before changes in working capital) increased to $1.0 billion from $0.8 billion, as cash flow from operations tracked higher operating income. Costco used its free cash flow primarily to repay $1.1 billion in long-term debt and repurchase $0.4 billion of shares. Consequently, key credit metrics over the period improved and further strengthened the rating. Subsequent to 9M F2017, Costco paid a special dividend totaling approximately $3.1 billion, in addition to the Company’s regular dividend. To fund the special dividend and additional debt repayments of $1.1 billion, Costco used a combination of cash and $3.8 billion in new debt issuances. Pro forma the net $2.7 billion in new debt issuances and factoring in EBITDA growth, DBRS estimates Costco’s leverage will be below 1.5 times (x) lease-adjusted debt-to-EBITDAR at the end of F2017, which DBRS views as appropriate for the Company’s rating.

DBRS believes Costco’s earnings and financial profiles will remain supportive of the current rating category for F2018. Revenues are expected to grow in the mid-single-digits, driven by comparable net sales growth in the low-single-digits (excluding changes in foreign currency and gasoline prices), new warehouse openings and membership fee revenue growth, with a significant portion of overall growth coming from the Company’s international operations. DBRS expects management to maintain EBITDA margins at approximately 4% and expects EBITDA to grow in the mid-single digits to approximately $5.5 billion in F2018. DBRS expects Costco’s leverage to decrease further below 1.5x during F2018, based primarily on operating income growth. Should Costco’s leverage rise toward 2.0x for an extended period, as a result of further material debt-funded shareholder returns or a material deterioration in operating performance, the ratings could come under pressure.

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.

The principal methodology is Rating Companies in the Merchandising Industry, which can be found on dbrs.com under Methodologies.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.