DBRS Morningstar Confirms Ratings on Costco Wholesale Corporation at AA (low) and R-1 (middle) with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Costco Wholesale Corporation’s (Costco or the Company) Issuer Rating and Senior Unsecured Debt rating at AA (low) and also confirmed the Company’s Short-Term Issuer Rating at R-1 (middle). All trends are Stable. Although DBRS Morningstar acknowledges Costco’s stronger-than-expected operating performance over the last 12 months, the confirmations and Stable trends reflect strengthening within the rating category and the expectations that Costco’s earnings profile will continue to remain supportive of the current ratings, despite ongoing inflation-driven pressures on operating margins and a likely moderation in retail volumes from the elevated levels. The ratings continue to be supported by the Company’s large size, strong market position, and relative resilience to economic cycles, while also accounting for the intense competition and risks associated with geographic expansion.

Going forward, DBRS Morningstar expects Costco’s earnings profile to continue to underpin the AA (low) rating category. Earnings benefit from continued comparable sales growth that is primarily led by price increases but partially offset by volume moderation, more so in the non-food merchandising category, and takes into account ongoing inflationary pressures on the operating margins. DBRS Morningstar expects revenue growth to moderate to mid-to-high single digits in F2023 and F2024, compared with high double-digit growth in the last two fiscal years, and increase toward $245 billion in F2023 and higher than $255 billion by F2024. DBRS Morningstar’s assumptions for revenue growth include comparable sales growth caused by inflation-driven price increases; approximately 25 net new warehouse openings annually; and, to a lesser extent, higher membership revenues based on a likely increase in membership fees later this year and relatively stable membership renewal rates. DBRS Morningstar expects operating margins to remain pressured in the near term but to improve moderately by F2024 as inflationary pressure starts to ease. DBRS Morningstar believes Costco will be able to pass on a large part of the inflation-driven input cost and wage increases through pricing, especially on the food and essential categories, and benefit from meaningfully lower Coronavirus Disease (COVID-19) pandemic-related expenses; however, DBRS Morningstar also expects Costco to continue to experience margin pressure on more discretionary general merchandising categories, at least in the near term. As such, DBRS Morningstar expects EBITDA to grow modestly to $10.0 billion in F2023, and between $10.5 billion and $11.0 billion by F2024.

In terms of financial profile, DBRS Morningstar expects Costco’s operating cash flow to continue to track operating income and increase to the $8.5 billion to $9.0 billion range in F2023 and F2024. DBRS Morningstar expects capital expenditure spending to remain in the $3.8 billion to $4.0 billion range, as Costco continues to invest in new warehouse openings and augment its technological capabilities. DBRS Morningstar expects the Company to use its free cash flow for shareholder returns, including a likelihood of intermittent debt-financed special returns to shareholders, which could result in a marginal increase in leverage metrics. DBRS Morningstar expects the Company's leverage ratio to continue to remain appropriate for the current ratings (i.e., lease adjusted debt-to-EBITDA below 1.50 times), adequately supported by operating income growth. Although DBRS Morningstar views it highly unlikely in the near term, should Costco's credit metrics deteriorate beyond this level for a prolonged period as a result of weaker-than-expected operating results and/or more aggressive financial management, the ratings could be pressured. Conversely, any positive rating action would require a meaningful improvement in the Company’s business risk profile.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodology is Global Methodology for Rating Companies in the Merchandising Industry (September 2, 2022; https://www.dbrsmorningstar.com/research/402334), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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 under Related Documents or by contacting us at [email protected].

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

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

This is an unsolicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577