DBRS Morningstar Confirms Costco Wholesale Corporation’s Issuer Rating at AA (low), Stable; Discontinues and Withdraws Short-Term Issuer Rating and Senior Unsecured Notes Credit Rating

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Costco Wholesale Corporation (Costco or the Company) at AA (low) with a Stable trend. DBRS Morningstar also discontinued and withdrew Costco's Short-Term Issuer Rating and Senior Unsecured Debt credit rating. These discontinuations are not reflective of a change in the Company's credit risk profile. The credit rating confirmation and Stable trend reflect DBRS Morningstar's expectation that, as more than half of Costco's total revenue is generated by a relatively inelastic product offering combined with stable membership renewal rates, the Company's earnings profile will remain supportive of the current credit rating category, notwithstanding the near-term pressure of the challenging macroeconomic backdrop on consumer purchasing power. The credit rating continues 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.

DBRS Morningstar expects comparable sales growth in the mid-single digits, led by increased shopping frequency and volume growth in Costco's food and sundries and fresh food segments, partially offset by moderating nonfood volumes. Combined with the contribution from approximately 25 net new warehouse openings annually, higher membership revenues based on DBRS Morningstar’s expectation of a likely increase in membership fees in F2024, and relatively stable annual membership renewal rates, DBRS Morningstar forecasts revenue to increase to more than $250 billion in F2024 from $242 billion in F2023 and to reach approximately $270 billion in F2025. DBRS Morningstar expects the Company to maintain EBITDA margins above 4.0% in F2024 as price increases and the increased penetration of higher-margin private label products should more than offset the inflationary pressure from operating costs and higher wages. EBITDA margins should improve modestly in F2025, largely benefitting from improving operating leverage. As such, DBRS Morningstar forecasts EBITDA to increase toward $11.0 billion in F2024 from approximately $10.2 billion in F2023 and to reach more than $12.0 billion in F2025.

In terms of the financial profile, DBRS Morningstar expects cash flow from operations to continue to trend in line with operating income, growing toward $11.0 billion by F2025 compared with more than $10.0 billion in F2023. DBRS Morningstar believes that the Company will take a balanced approach to capital allocation, applying these cash flows to capital expenditure, net debt repayment, and returns to shareholders, potentially including special dividends, such that key credit metrics will remain appropriate for the current credit rating category.

Although unlikely, should key credit metrics deteriorate (i.e., debt-to-EBITDA increases above 1.5 times) for a sustained period as a result of a weaker-than-expected operating performance and/or more aggressive financial management, the credit rating could be pressured. Conversely, DBRS Morningstar could take a positive credit rating action should Costco's business risk profile meaningfully strengthen without necessarily requiring an improvement in key credit metrics.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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/416784 (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology: Global Methodology for Rating Companies in the Merchandising Industry (https://www.dbrsmorningstar.com/research/417461; July 21, 2023).

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

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].

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

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

This is a solicited 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 credit ratings are under regular surveillance.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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