March 14, 2012
US Retail Industry Research
Costco Wholesale Corporation
“The beat goes on”
Gregg Carlson
carlson.requests@...
Gregg Carlson is an independent researcher who
provides advisory and research services to
investors and corporations. Greg...
Costco Wholesale Corporation (COST)
“The beat goes on”
Since the 1980’s COST has developed into one of the largest and mos...
Table of Contents
Gregg Carlson 4
Page
Summary thesis 5
Industry store locations and comps 7
Comp comparison to major comp...
Summary thesis
 COST has expanded its base from 350 to 600 stores between December 2000 and December 2011 (a footprint CA...
Summary thesis (continued)
 COST’s co founder and CEO Jim Sinegal retired during January 2012 was replaced by Craig Jelin...
Industry store locations and comps
 We present COST and major competitor store counts by year and state
within the US.
 ...
COST US and international store base
89 90 95 98 100 103 107 109 112 116 118 119
98
103
111
115
119
128
137
144
151
157
16...
COST international store base
59 60 61 62 63 66
70 75 76 77 80 82
0
20
40
60
80
100
120
140
160
180
Dec00
Dec01
Dec02
Dec0...
US warehouse industry (BJ’s, COST and Sam’s Club)
115 119 125 130 133 138 143 146 149 149 151
0
50
100
150
200
250
300
350...
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Jan12
Nov11
Sep11
Jly11
May11
Mar11
Jan11
Nov10
Sep10
Jly10
May10
Mar10
Jan10
Nov0...
COST monthly comps (ex fuel and FX)
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Jan12
Dec11
Nov11
Oct11
Sep11
Aug11
Jly11
Jun11
May...
COST average annual sales by vintage year store groups
60
70
80
90
100
110
120
130
140
150
160
2002
2003
2004
2005
2006
20...
Comp comparison to major competitors
Our comparison of annual and recent quarterly COST comps to
its primary competitors a...
COST quarterly comp comparison to Sam’s Club and
BJ’s
-10%
-5%
0%
5%
10%
15%
20%
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1...
COST quarterly comp comparison to Wal Mart
-4%
-2%
0%
2%
4%
6%
8%
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4...
COST quarterly comp comparison to Target
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 ...
COST quarterly comp comparison to Best Buy
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q1...
COST quarterly comp comparison to grocery stores
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q...
COST annual comp comparison to discount retailers
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
2000 2001 2002 2003 2004 2005 2006 2007 2...
COST annual comp comparison to grocery stores
-10%
-5%
0%
5%
10%
15%
20%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009...
COST annual comp comparison to select retailers
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
2000 2001 2002 2003 2004 2005 2006 ...
COST annual comp comparison to select retailers
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
2000 2001 2002 2003 2004 2005 2006 2007...
COST annual comp comparison to discount retailers
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
2000 2001 2002 2003 2004 2005 2006 2007 2...
Warehouse industry performance
 The warehouse industry and COST have consistently grown
from inception of the industry/co...
Warehouse industry sales
32,164 34,797 38,762 42,546
48,107
52,952
60,151 64,400
72,483 71,423
77,946
86,514
93,010
4,144
...
Number of warehouse stores
313 345 374 397 417 433 458 488 512 527 540
582 606
107
118
130
140
150 155
163
172
177 180 187...
Sales per warehouse store
Sales per warehouse store have increased since 2000 while COST significantly leads the industry ...
Warehouse industry revenue market share
52.6% 52.4% 52.8% 53.1% 53.8% 54.3%
55.8% 56.3%
57.7%
55.2%
57.4%
58.9% 59.7%
6.8%...
COST - industry comps and key market industry
penetration rates
 Moderate recent increases in the store penetration rate ...
US comp & y/y change in store per capita within COST
markets
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Jly01
Jly02
Jly03
Jly04
Jly...
COST y/y change in major market penetration rate
In COST’s key U.S. markets the y/y change in penetration rate has general...
COST y/y change in CA penetration rate
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Jly 01 Jly 02 Jly 03 ...
Industry comps and overall y/y change in US
penetration rate
Industry comps have recovered post the 2008 to 2009 recession...
COST y/y change in industry penetration rate in major
company markets
Post recession ex Illinois, the y/y change in wareho...
Y/Y change in industry penetration rate in CA
The y/y industry penetration rate declined in CA during the recession and ha...
Y/Y change in industry penetration rate in all major
markets
Post recession the y/y change in major market store penetrati...
Detailed financial metrics
The following charts present key financial data for COST that
include:
 Sales by category
 Me...
COST sales by category
25% 24% 23% 22% 23% 23% 22%
20% 20% 21% 19% 19% 18% 17%
19% 19% 19%
20% 21% 21% 21%
12% 12% 11%
10%...
COST membership fee and operating income
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
2011
2010
2009
2008
2007
2006
2005
200...
COST inventory turns
10.5
11.0
11.5
12.0
12.5
13.0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
P...
Top line financial performance and US macro data
 We believe the eat at home trend that occurred as a result of
the most ...
% change in US food spend at home & away from home
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
2000
2001
2002
2003
2004
2005
2006
2007
...
US macro data – COST & US unemployment
0%
2%
4%
6%
8%
10%
12%
-10%
-5%
0%
5%
10%
15%
20%
Jan03
Mar03
May03
Jul03
Sep03
Nov...
US macro data – COST and consumer confidence
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
0
20
40
60
80
100
120
140
Dec11
Sep11
Ju...
COST and major competitor revenue growth
-5%
0%
5%
10%
15%
20%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Cost...
COST and key competitor financial metrics
 In the following charts we present a comparison of COST key
financial metrics ...
COST and major competitor financial model comparison
Gross margin
0%
5%
10%
15%
20%
25%
30%
35%
2000 2001 2002 2003 2004 2...
COST and major competitor financial model comparison
Operating margin
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2000 2001 2002 2003 20...
COST and major competitor leverage
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20...
COST and major competitor returns
ROA
0%
2%
4%
6%
8%
10%
12%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
C...
COST and major competitor ROIC and free cash flow
ROIC
0%
5%
10%
15%
20%
25%
2000 2001 2002 2003 2004 2005 2006 2007 2008 ...
COST and major competitor earnings, free cash flow,
ROIC and ROA/ROE
We present detailed financial models for COST, Wal Ma...
COST earnings, free cash flow, ROIC and ROA/ROE
We have provided the financial models of COST, Wal Mart, Target and Bj’s. ...
Wal Mart earnings, free cash flow, ROIC and ROA/ROE
Gregg Carlson 55
Wal Mart’s (WMT) overall growth strategy is focused o...
Target earnings, free cash flow, ROIC and ROA/ROE
Gregg Carlson 56
Source: company reports, Gregg Carlson
2000 2001 2002 2...
BJs earnings, free cash flow, ROIC and ROA/ROE
Gregg Carlson 57
Source: company reports, Gregg Carlson
2000 2001 2002 2003...
Forward growth rate and valuation assumptions
 We present forward store growth rate data and estimates for a potential
in...
COST forward store growth rate
Store count 3.5% 4.0% 5.0% 6.0% 7.0% Unit increase 3.5% 4.0% 5.0% 6.0% 7.0%
year 600 600 60...
COST and major competitor forward PE’s and long-term
EPS growth
Forward PE
0
5
10
15
20
25
30
35
2000 2001 2002 2003 2004 ...
COST forward PE, EPS growth, comp & store growth
23
20
16
17 17
19
20
26
17 17
23
20
-4%
15%
3%
21%
18%
6%
3%
22%
-15%
1%
...
COST EV/ebitda
0
2
4
6
8
10
12
14
16
18
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E
...
COST long-term forecast assumptions embedded in
current stock price
Gregg Carlson 63
To arrive at a $91 current stock pric...
COST long-term forecast assumptions embedded in
current stock price
Gregg Carlson 64
Our DCF model assumptions are based o...
COST future valuation estimates based on forward EPS
estimates and PE multiples
At the current forward PE of 20x applied t...
COST balance sheet
Gregg Carlson 66
COST’s balance sheet is unlevered as LTD plus the PV of store operating leases is less...
COST income statement
Our 2012 and 2013 revenue estimates of $98.2B and $104.5B are slightly ahead of current consensus es...
Disclosure and terms of use statement
Gregg Carlson 68
The analysis and opinions expressed in this report reflect the pers...
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Costco retail industry_analysis_mar_2012

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Costco, Wal Mart, Sam's Club, Target, Korger, Safeway, Dallar General, Dolar Tree, Ross Stores, Best Buy, Retail industry,Retail comps, EBITDA, EPS, market share, market penetration rate, valuation

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Costco retail industry_analysis_mar_2012

  1. 1. March 14, 2012 US Retail Industry Research Costco Wholesale Corporation “The beat goes on” Gregg Carlson carlson.requests@gmail.com
  2. 2. Gregg Carlson is an independent researcher who provides advisory and research services to investors and corporations. Gregg provides economic, market and company research of the gaming, lodging, real estate and retail industries. Gregg has worked on the buy side as a securities analyst and has also authored numerous articles and research reports that address economic, market and company issues in these industries.
  3. 3. Costco Wholesale Corporation (COST) “The beat goes on” Since the 1980’s COST has developed into one of the largest and most highly regarded retailers in the world. COST has grown its business and delivered solid financial results by using its purchasing power to provide value to a loyal growing membership base which is a significant key competitive advantage for the company. COST has also delivered value to shareholders as the stock has significantly outperformed the S&P 500 over the most recent 2 and 5 year periods. Since the 1980’s COST has built 600 stores out of free cash flow as the company remains in a negative net debt position. COST continues to generate a significant growing stream of free cash flow from membership fees driven by its high membership renewal rate. COST consistently grew comps for several years before the recessionary driven dip in FY2009. Since the FY2009 recession, COST’s comps have recovered as the company has experienced stronger than historical traffic patterns despite ongoing economic headwinds for US consumers. Better than peer comp performance also suggests that COST has taken market share from its competitors in recent years. We present our analysis of these results in this report. COST’s ability to deliver value to its customer base during the recent and ongoing challenging US economic environment has created value for shareholders. We also examine market penetration rates for COST and its key competitors in the US and abroad in light of COST’s stated goal of expanding its foot print from 600 to 1,000 stores over the next 10 to 12 years. Our COST and industry penetration analysis for the US suggests the market has not yet reached a point of maximum penetration despite COST’s and overall industry growth over the past two plus decades. Looking ahead, we will monitor this issue but based on our work, do not believe there is a serious risk of diminishing comp performance due to market saturation in the US at this juncture. We also believe that COST’s international business is not yet near a point of saturation as several key countries remain underpenetrated by COST. We also performed a detailed financial analysis of COST and its principal competitors as well as a valuation analysis of COST. At the current stock price of approximately $91, embedded forward company financial model assumptions appear to be reasonable based on historic, recent and current growth rate expectations. The bottom line is that we believe shareholders will benefit over time from COST’s ability to expand the business by delivering value to its current and future customers. COST remains one of the most well run retailers in the world today. COST is also one of the select large retailers that has the opportunity to organically grow its business at a level that would result a doubling earnings over the next five years. We continue to favor the shares over a multi year horizon.
  4. 4. Table of Contents Gregg Carlson 4 Page Summary thesis 5 Industry store locations and comps 7 Comp comparison to major competitors 14 Warehouse Industry performance 25 COST - industry comps and key market industry penetration rates 30 Detailed financial metrics 38 Top line financial performance and US macro data 42 COST and key competitor financial metrics 47 Cost and major competitor earnings, free cash flow, ROIC and ROA/ROE 53 Forward growth rate and valuation assumptions 58
  5. 5. Summary thesis  COST has expanded its base from 350 to 600 stores between December 2000 and December 2011 (a footprint CAGR of 5%) from free cash flow as the company is essentially debt free. COST has delivered positive comps in all years between 2000 and 2011 except for recession driven 2009.  COST recently reported a 8% (above consensus) comp for February 2012.  Post the 2009 recession, COST has taken market share from retail and other competitors as it has benefitted from value seeking consumer behavior evidenced by comps that have outperformed most retailers that are direct competitors.  COST’s customer shopping frequency increased between FY08 and FY09 - FY11 from 2.5% to 4.0% - 4.4%. COST’s frequency increase is well above the 2003 to 2007 average of 1.5%.  COST continues to maintain its cost/quality leadership competitive advantage as it focuses its supply chain purchasing power on approximately 4k SKU’s.  COST will continue its strategy of driving costs out of its system and passing the benefit to its members via reduced prices. COST has grown into the leader in the warehouse retail industry as it generates significantly more sales per store than Bj’s or Sam’s Club. COST is now the 2nd largest retailer in the US and 7th largest in the world.  Over the past decade COST has posted consistent strong results that have allowed it become the dominate player in the discount warehouse industry achieving market share gains.  COST has reiterated its plan to increase its base from 600 to 1,000 stores over the next decade. Our penetration rate analysis of COST’s existing US markets and the US as a whole suggest there is room to add additional store capacity. Comp results and existing penetration rates also suggest that COST can expand its footprint in international markets. COST’s culture is grounded in providing significant value to its customers and employees. This culture and the value provided to its customers from its supply chain is the key competitive advantage that we believe supports its ongoing expansion over the next several years.  COST is essentially a membership fee business with significant customer stickiness that is expected to provide ongoing free cash flow growth for the foreseeable future. Gregg Carlson 5
  6. 6. Summary thesis (continued)  COST’s co founder and CEO Jim Sinegal retired during January 2012 was replaced by Craig Jelinek, a 28 year veteran of the company. We expect COST’s long-term growth plan and overall strategy to be unchanged as the company remains one of the most well managed companies in the retail industry.  We view COST as a long-term duration bet-growth story driven by a disciplined longstanding management team that is supported by a stable stream of free cash flow and financial model that provides positive ROIC.  Current consensus revenue and EPS estimates for FY2012 and FY2013 are $97.2B (9.3% y/y)/$104.0B (7% y/y) and $3.85 (16.7% y/y)/$4.40 (14.3% y/y).  Based on an estimated 3% annual footprint expansion rate and a post FY12 average comp run rate of 3%, COST has the opportunity to double EPS and over the next five years followed by several more years of unit expansion based on a 1,000 store target. COST is one of the few large cap consumer enterprises that has a chance to nearly double its store base over the next 10 to 12 years. COST has continued to expand over two plus decades while continually increasing the productivity of its existing store base.  At $91 per share COST is currently valued at 10.4x and 9.5x 2012 and 2013 EV/EBITDA and 23x and 20x 2012 and 2013 EPS which is in line with historical valuation multiples. We arrive at a $91 equity value based on our DCF model supported by what we believe may be conservative assumptions.  COST recently reported solid 2Q12 results that were driven by traffic growth driven by ongoing market share gains. See our 2Q12 analysis for further details.  We view COST as a high quality long-term growth story and currently hold shares in the company. In addition to overall equity market volatility, we believe the most identifiable immediate risk for investors is valuation compression and earnings risk tied COST missing comp expectations in light of COST’s solid recent results and historic long term consistency. Volatility in gasoline and or merchandise costs may also pose risk as well as economic and or numerous other factors that may hurt performance in specific geographic markets or the company as a whole. Longer term risks regarding COST’s expansion strategy are also numerous and may include economic, legislative and political risks, among others. Upside risks include positive incremental customer spending trends tied to an ongoing US economic recovery and additional store traffic increases driven by high gasoline prices, among other factors. Gregg Carlson 6 Note: please see the accompanying disclosure and term of use statement
  7. 7. Industry store locations and comps  We present COST and major competitor store counts by year and state within the US.  We also present COST international store counts by year and location.  COST has consistently grown its store base both in the US and abroad for many years (we present the years 2000 to 2011 in our charts).  COST has also delivered consistent positive comps in the US and abroad during its recent multi-year and multi-decade expansion both in the US and abroad except during the depths of the 2008 to 2009 recession. Post the 2008 to 2009 recession driven comps trough, COST has again delivered consistent positive comps.  On a vintage store basis, COST has delivered consistent sequential subsequent year revenue growth between 2002 and 2011 except for 2009. Gregg Carlson 7
  8. 8. COST US and international store base 89 90 95 98 100 103 107 109 112 116 118 119 98 103 111 115 119 128 137 144 151 157 161 169 0 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 500 525 550 575 600 Dec00 Dec01 Dec02 Dec03 Dec04 Dec05 Dec06 Dec07 Dec08 Dec09 Dec10 Dec11 International Wisconsin Washington Virginia Vermont Utah Texas Tennessee South Carolina Pennsylvania Oregon Ohio North Carolina New York New Mexico New Jersey New Hampshire Nevada Nebraska Montana Missouri Minnesota Michigan Massachusetts Maryland Kentucky Kansas Iowa Indiana Illinois Idaho Hawaii Georgia Florida Delaware Connecticut Colorado California Arizona Alaska Between 2000 and 2011 COST’s store base has increased at a 5% CAGR from from 350 to 600. Approximately 2/3’s of COST’s future 400 store expansion is expected to be in the U.S. COST’s largest US market is CA which currently comprises approximately 20% of the US store base while international stores currently comprise approximately 28% of COST’s store base. Gregg Carlson 8 Source: company reports, Gregg Carlson
  9. 9. COST international store base 59 60 61 62 63 66 70 75 76 77 80 82 0 20 40 60 80 100 120 140 160 180 Dec00 Dec01 Dec02 Dec03 Dec04 Dec05 Dec06 Dec07 Dec08 Dec09 Dec10 Dec11 Mexico Taiwan Australia South Korea UK Japan Canada Puerto Rico Between 2000 and 2011 COST’s international store base grew at a 5% CAGR from 98 to 169. Approximately 1/3 of COST’s 400 store expansion is expected to be in international markets. Canada is COST’s largest international market at approximately 14% of the total store base. Gregg Carlson 9 Source: company reports, Gregg Carlson
  10. 10. US warehouse industry (BJ’s, COST and Sam’s Club) 115 119 125 130 133 138 143 146 149 149 151 0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800 850 900 950 1,000 1,050 1,100 1,150 1,200 1,250 Jan01 Jan02 Jan03 Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10 Jan11 Wyoming Wisconsin West Virginia Washington Virginia Vermont Utah Texas Tennessee South Dakota South Carolina Rhode Island Pennsylvania Oregon Oklahoma Ohio North Dakota North Carolina New York New Mexico New Jersey New Hampshire Nevada Nebraska Montana Missouri Mississippi Minnesota Michigan Massachusetts Maryland Maine Louisiana Kentucky Kansas Iowa Indiana Illinois Idaho Hawaii Georgia Florida Delaware Connecticut Colorado California Arkansas Arizona 8.1% 5.9% 3.8% 3.5% 3.6% 4.0% 3.1% 2.4% .9% 1.4% y/y chg California is the largest market in the industry within the US with approximately 12.5% - 13.5% of total industry stores over the past decade. COST’s fair share of stores in CA has been between 75% to 78% over the past decade. COST has posted strong comp performance in CA in recent quarters. Overall industry unit growth slowed in 2009 – 2011 while comps recovered which bodes well for the industry in an ongoing economic recovery. Gregg Carlson 10 Source: company reports, Gregg Carlson
  11. 11. -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% Jan12 Nov11 Sep11 Jly11 May11 Mar11 Jan11 Nov10 Sep10 Jly10 May10 Mar10 Jan10 Nov09 Sep09 Jly09 May09 Mar09 Jan09 Nov08 Sep08 Jly08 May08 Mar08 Jan08 Nov07 Sept07 July07 May07 Mar07 Jan07 Nov06 Sept06 July06 May06 Mar06 Jan06 Nov05 Sept05 July05 May05 Mar05 Jan05 Nov04 Sept04 July04 May04 Mar04 Jan04 total comps US comps intl comps COST total monthly comps Monthly comps were consistently positive between January 2004 and January 2012 (the period we present here) except for the recession driven period between October 2008 and August 2009. Annual comps have been positive since 1998 (the period we have tracked) while COST has expanded its domestic and international store base. COST’s average total comp over the period January 2004 to January 2012 period was 6%. Gregg Carlson 11 Source: company reports, Gregg Carlson
  12. 12. COST monthly comps (ex fuel and FX) -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% Jan12 Dec11 Nov11 Oct11 Sep11 Aug11 Jly11 Jun11 May11 Apr11 Mar11 Feb11 Jan11 Dec10 Nov10 Oct10 Sep10 Aug10 Jly10 Jun10 May10 Apr10 Mar10 Feb10 Jan10 Dec09 Nov09 Oct09 Sep09 Aug09 Jly09 Jun09 May09 Apr09 Mar09 Feb09 Jan09 Dec08 Nov08 Oct08 Sep08 Aug08 Jly08 Jun08 May08 Apr08 Mar08 Feb08 Jan08 Dec07 Nov07 Oct07 US comps intl comps International comps remained positive through the 2009 recession. US comps have sequentially improved since 2009. Gregg Carlson 12 Source: company reports, Gregg Carlson
  13. 13. COST average annual sales by vintage year store groups 60 70 80 90 100 110 120 130 140 150 160 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002 & before 2003 2004 2005 2006 2007 2008 2009 2010 2011 COST has consistently increased sales in its store base as average annual sales for stores by vintage years 2002 through 2011 (the period presented here) have increased in all subsequent years except for 2009 despite the steady overall increase in stores. Gregg Carlson 13 Source: company reports, Gregg Carlson
  14. 14. Comp comparison to major competitors Our comparison of annual and recent quarterly COST comps to its primary competitors along with traffic increases suggest that COST has taken market share since the 2008 to 2009 recession. Gregg Carlson 14
  15. 15. COST quarterly comp comparison to Sam’s Club and BJ’s -10% -5% 0% 5% 10% 15% 20% 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Costco Sam's Club BJs COST’s comps have been positive since 3Q09 and have consistently outperformed its most direct competitors since then. Gregg Carlson 15 Source: company reports, Gregg Carlson
  16. 16. COST quarterly comp comparison to Wal Mart -4% -2% 0% 2% 4% 6% 8% 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Costco Wal Mart COST’s comps have significantly outperformed Wal Mart since 4Q09 owing to a higher income customer profile, among other factors. In 3Q11,Wal Mart posted its first positive comp in nine quarters. Gregg Carlson 16 Source: company reports, Gregg Carlson
  17. 17. COST quarterly comp comparison to Target -8% -6% -4% -2% 0% 2% 4% 6% 8% 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Costco Target COST’s Comps have consistently outperformed Target’s. Gregg Carlson 17 Source: company reports, Gregg Carlson
  18. 18. COST quarterly comp comparison to Best Buy -8% -6% -4% -2% 0% 2% 4% 6% 8% 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Costco Best Buy COST’s comps have significantly outperformed Best Buy during 2010 and 2011. Gregg Carlson 18 Source: company reports, Gregg Carlson
  19. 19. COST quarterly comp comparison to grocery stores -6% -4% -2% 0% 2% 4% 6% 8% 10% 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Costco Safeway Kroger Whole Foods COST’s comps have outperformed Safeway’s comps and have been comparable to Kroger’s comps while falling below Whole Foods comp performance during 2010 and 2011. Gregg Carlson 19 Source: company reports, Gregg Carlson
  20. 20. COST annual comp comparison to discount retailers -4% -2% 0% 2% 4% 6% 8% 10% 12% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Costco Sam's Club Wal Mart BJs COST’s comps have outperformed its most direct competitors since the year 2000. Gregg Carlson 20 Source: company reports, Gregg Carlson
  21. 21. COST annual comp comparison to grocery stores -10% -5% 0% 5% 10% 15% 20% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Costco Whole Foods Kroger Safeway COST’s comps have outperformed Kroger and Safeway since the year 2000 while under performing Whole Foods. Gregg Carlson 21 Source: company reports, Gregg Carlson
  22. 22. COST annual comp comparison to select retailers -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Costco Kohl's Target COST’s comps have outperformed Kohl’s and Target’s comps since the year 2000. Gregg Carlson 22 Source: company reports, Gregg Carlson
  23. 23. COST annual comp comparison to select retailers -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Costco Best Buy Walgreen's COST’s comps modestly outperformed Best Buy’s between 2000 and 2009 but have significantly outperformed in 2010 and 2011. COST’s comps have outperformed Walgreen’s during 2010 and 2011 after underperforming between 2000 to 2009. Gregg Carlson 23 Source: company reports, Gregg Carlson
  24. 24. COST annual comp comparison to discount retailers -4% -2% 0% 2% 4% 6% 8% 10% 12% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Costco Family Dollar Stores Dollar Tree Ross Stores Dollar General COST’s comps outperformed discount retailers between 2000 and 2008. COST and discount retailer comps have been strong in 2009 (discounters) and 2010 – 2011 (discounters and COST)as consumers have exhibited value seeking behavior. Gregg Carlson 24 Source: company reports, Gregg Carlson
  25. 25. Warehouse industry performance  The warehouse industry and COST have consistently grown from inception of the industry/company through the year 2000 (the initial year we portray this analysis) and have continued grow through the year 2011.  COST’s stores have significantly outperformed their direct competitors since 2000 which has allowed COST to increase its overall market share in the warehouse retail industry over time. Gregg Carlson 25
  26. 26. Warehouse industry sales 32,164 34,797 38,762 42,546 48,107 52,952 60,151 64,400 72,483 71,423 77,946 86,514 93,010 4,144 4,869 5,223 5,860 6,693 7,371 7,914 8,363 8,886 9,884 10,050 10,877 11,584 24,801 26,798 29,395 31,702 34,537 37,119 39,798 41,582 44,357 47,976 47,806 49,459 51,200 $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 $180,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e Sam's club Bj's Costco $’s in billions Warehouse industry sales have consistently increased since 2000 following years of increases that go back to the 1980’s. Gregg Carlson 26 Source: company reports, Gregg Carlson
  27. 27. Number of warehouse stores 313 345 374 397 417 433 458 488 512 527 540 582 606 107 118 130 140 150 155 163 172 177 180 187 189 196 462 475 500 525 538 551 567 588 600 611 605 609 615 0 200 400 600 800 1,000 1,200 1,400 1,600 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e Sam's club Bj's Costco The warehouse retail industry grew throughout the past decade following continuous growth since the 1980’s. Gregg Carlson 27 Source: company reports, Gregg Carlson
  28. 28. Sales per warehouse store Sales per warehouse store have increased since 2000 while COST significantly leads the industry in store volume. $103 $101 $104 $107 $115 $122 $131 $132 $142 $136 $144 $149 $153 $39 $41 $40 $42 $45 $48 $49 $49 $50 $55 $54 $58 $59 $54 $56 $59 $60 $64 $67 $70 $71 $74 $79 $79 $81 $83 $- $20 $40 $60 $80 $100 $120 $140 $160 $180 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e Costco Bjs Sam's Gregg Carlson 28 $’s in millions Source: company reports, Gregg Carlson
  29. 29. Warehouse industry revenue market share 52.6% 52.4% 52.8% 53.1% 53.8% 54.3% 55.8% 56.3% 57.7% 55.2% 57.4% 58.9% 59.7% 6.8% 7.3% 7.1% 7.3% 7.5% 7.6% 7.3% 7.3% 7.1% 7.6% 7.4% 7.4% 7.4% 40.6% 40.3% 40.1% 39.6% 38.7% 38.1% 36.9% 36.4% 35.3% 37.1% 35.2% 33.7% 32.9% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e Costco Bjs Sam's COST has increased its market share since 2000. Gregg Carlson 29 Source: company reports, Gregg Carlson
  30. 30. COST - industry comps and key market industry penetration rates  Moderate recent increases in the store penetration rate for COST and the industry as a whole along with positive recent post recession comps suggest that key markets within the US and the US as a whole are not over penetrated.  International comps and sales per store performance remain strong. This along with the small store base in key countries, markets and urban centers with significant populations suggest the overall international penetration rate is low.  The following charts illustrate the store penetration rate for COST and the industry as a whole in key states within the US and for the US as a whole. Gregg Carlson 30
  31. 31. US comp & y/y change in store per capita within COST markets 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Jly01 Jly02 Jly03 Jly04 Jly05 Jly06 Jly07 Jly08 Jly09 Jly10 Jly11 Jly12 Costco US comp US y/y chg store per capita COST mkts Between 2001 and 2011 COST’s comps have increased as store base growth has slowed on a per capita basis. We do not see a correlation between the overall y/y change in store penetration rate and COST’s US comp. Gregg Carlson 31 Source: company reports, US Census Bureau, Gregg Carlson
  32. 32. COST y/y change in major market penetration rate In COST’s key U.S. markets the y/y change in penetration rate has generally declined since 2008 owing to population growth and an expansion slowdown triggered by the U.S. recession. We do not see a strong correlation between the sequential increase in penetration rate within COST’s key markets and annual total US comps. -10% -5% 0% 5% 10% 15% Jly 01 Jly 02 Jly 03 Jly 04 Jly 05 Jly 06 Jly 07 Jly 08 Jly 09 Jly 10 Jly 11 CA FL AZ WA NY TX VA US y/y chg store per capita COST mkts Costco US comp Gregg Carlson 32 Source: company reports, US Census Bureau, Gregg Carlson
  33. 33. COST y/y change in CA penetration rate -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% Jly 01 Jly 02 Jly 03 Jly 04 Jly 05 Jly 06 Jly 07 Jly 08 Jly 09 Jly 10 Jly 11 Jly 12 California is COST’s largest individual market with approximately 20% of total company stores located there. The y/y penetration rate has slowed since 2009 due to population growth and an expansion slowdown during 2010 and 2011. Gregg Carlson 33 Source: company reports, US Census Bureau, Gregg Carlson
  34. 34. Industry comps and overall y/y change in US penetration rate Industry comps have recovered post the 2008 to 2009 recession. The y/y change in penetration rate has increased post recession but remains below its historical range. Comps have been positive in the US warehouse industry except for FYE Jan 2010 despite the overall increase in supply. The y/y change in industry penetration rate reached a decade low in 2009 and has remained below 2001 to 2008 levels during 2010 and 2011. -4% -2% 0% 2% 4% 6% 8% 10% Jan02 Jan03 Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10 Jan11 Costco US comp Sams US comp Bjs US comp US y/y chg in avg store per capita Gregg Carlson 34 Source: company reports, US Census Bureau, Gregg Carlson
  35. 35. COST y/y change in industry penetration rate in major company markets Post recession ex Illinois, the y/y change in warehouse industry store penetration rate in select key markets rate in 2008 – 2011 is below historical rates which we believe is positive for the industry. -5% 0% 5% 10% 15% 20% Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 AZ WA NY TX VA IL CA FL US y/y chg in avg store per capita Gregg Carlson 35 Source: company reports, US Census Bureau, Gregg Carlson
  36. 36. Y/Y change in industry penetration rate in CA The y/y industry penetration rate declined in CA during the recession and has only modestly increased as of Jan 2011. -2% -1% 0% 1% 2% 3% 4% Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Gregg Carlson 36 Source: company reports, US Census Bureau, Gregg Carlson
  37. 37. Y/Y change in industry penetration rate in all major markets Post recession the y/y change in major market store penetration has generally decreased (ex IL , MA and MD) compared to the 2001to 2008 period. Major markets are the home to 72% of total industry capacity as of late 2010 early 2011. -5% 0% 5% 10% 15% 20% Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 CA FL AZ WA NY TX VA IL CO GA MD MA MI NJ NC OH PA Gregg Carlson 37 Source: company reports, US census Bureau, Gregg Carlson
  38. 38. Detailed financial metrics The following charts present key financial data for COST that include:  Sales by category  Membership fee and operating income  Inventory turns Gregg Carlson 38
  39. 39. COST sales by category 25% 24% 23% 22% 23% 23% 22% 20% 20% 21% 19% 19% 18% 17% 19% 19% 19% 20% 21% 21% 21% 12% 12% 11% 10% 10% 10% 10% 11% 11% 12% 12% 12% 12% 12% 13% 14% 14% 17% 15% 16% 18% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2005 2006 2007 2008 2009 2010 2011 Ancillary Fresh food Softlines Food Hardlines Sundries Sundries – candy, snack foods, tobacco, alcohol, beverages, cleaning and other supplies. Hardlines – appliances, electronics, health and beauty aids, hardware, office supplies, cameras, garden, sporting goods, seasonal items and automotive. Food – dry and institutionally packaged food. Softlines – apparel, jewelry, housewares, media, home furnishings and small appliances. Fresh Food – meat, bakery, deli and produce. Ancillary and Other – gas stations, pharmacy, food court, optical, one-hour photo, hearing and travel In 2009 through 2011 COST’s sales mix shifted to ancillary and food categories as COST customer spending was focused on less discretionary spending categories (i.e. food and gasoline). Gregg Carlson 39 Source: company reports, Gregg Carlson
  40. 40. COST membership fee and operating income $- $500 $1,000 $1,500 $2,000 $2,500 $3,000 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 Membership fee revenue operating income $’s in billions Membership fee revenue drives operating income and free cash flow. Over time COST has achieved a membership renewal rate in the high 80% range. Membership fees as a percentage of operating income have increased over time between 1998 and 2011 and now comprises approximately 80% of operating income which provides a stable stream of cash flow. We therefore view COST as a stable long-term sequential growth business with a recurring revenue stream. Gregg Carlson 40 Source: company reports, Gregg Carlson
  41. 41. COST inventory turns 10.5 11.0 11.5 12.0 12.5 13.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Post recession, COST’s 2010 and 2011 inventory turns have increased to near historic peak levels. Gregg Carlson 41 Source: company reports, Gregg Carlson
  42. 42. Top line financial performance and US macro data  We believe the eat at home trend that occurred as a result of the most recent recession has benefitted COST.  The following charts indicate that COST's comp performance has been strong despite high US unemployment and weak consumer confidence. Gregg Carlson 42
  43. 43. % change in US food spend at home & away from home -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 food away from home gth food at home gth Between 2003 to 2006 spending on food away from home increased at a faster rate than spending for food at home. In 2008 through 2010 this trend reversed as y/y spend for food at home was equal to or greater than y/y spending for food away from home. We believe this trend positively impacted COST. Gregg Carlson 43 Source: company reports, USDA, Gregg Carlson
  44. 44. US macro data – COST & US unemployment 0% 2% 4% 6% 8% 10% 12% -10% -5% 0% 5% 10% 15% 20% Jan03 Mar03 May03 Jul03 Sep03 Nov03 Jan04 Mar04 May04 Jul04 Sep04 Nov04 Jan05 Mar05 May05 Jul05 Sep05 Nov05 Jan06 Mar06 May06 Jul06 Sep06 Nov06 Jan07 Mar07 May07 Jul07 Sep07 Nov07 Jan08 Mar08 May08 Ju;08 Sep08 Nov08 Jan09 Mar09 May09 Jul09 Sep09 Nov09 Jan10 Mar10 May10 Jly10 Sep10 Nov10 Jan11 Mar11 May11 Jly11 Sep11 Nov11 Jan12 Costco monthly comp U.S. Unemployment Rate COST’s monthly US comps increased post recession despite the ongoing high unemployment rate Gregg Carlson 44 Source: company reports, BEA, Gregg Carlson
  45. 45. US macro data – COST and consumer confidence -20% -15% -10% -5% 0% 5% 10% 15% 20% 0 20 40 60 80 100 120 140 Dec11 Sep11 Jun11 Mar11 Dec10 Sep10 Jun10 Mar10 Dec09 Sep09 Jun09 Mar09 Dec08 Sep08 Jun08 Mar08 Dec07 Sep07 Jun07 Mar07 Dec06 Sep06 Jun06 Mar06 Dec05 Sep05 Jun05 Mar05 Dec04 Sep04 Jun04 Mar04 Dec03 Sep03 Jun03 Mar03 Consumer confidence index Costco U.S. comps COST’s comp to consumer confidence correlation was reduced post recession as comps improved in 2010 and 2011 despite ongoing weak consumer confidence. Gregg Carlson 45 Source: company reports, Conference Board, Gregg Carlson
  46. 46. COST and major competitor revenue growth -5% 0% 5% 10% 15% 20% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Costco Wal Mart US Sams Club Bj's Target COST’s overall revenue growth has outpaced all of its most direct major competitors during 2010 and 2011. Gregg Carlson 46 Source: company reports, Gregg Carlson
  47. 47. COST and key competitor financial metrics  In the following charts we present a comparison of COST key financial metrics to select direct competitors.  COST produces consistently positive operating profits, free cash flow and ROIC using a low margin, high inventory turnover strategy that allows it to deliver value to members while leveraging SG&A.  COST continues to be unlevered with a negative net debt balance sheet position. Gregg Carlson 47
  48. 48. COST and major competitor financial model comparison Gross margin 0% 5% 10% 15% 20% 25% 30% 35% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Costco Target Bj's Wal Mart SG&A % 0% 5% 10% 15% 20% 25% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Costco Target Bj's Wal Mart COST pursues a low margin high inventory turnover strategy. COST’s SG&A is a significantly smaller percentage of revenue than Target and Wal Mart. Gregg Carlson 48 Source: company reports, Gregg Carlson
  49. 49. COST and major competitor financial model comparison Operating margin 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Costco Target Bj's Wal Mart WMT US operating margin WMT Intl operating margin Sams Club operating margin Total asset turnover 0 1 2 3 4 5 6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Costco Target Bj's Wal Mart COST’s operating margin is lower than its major and direct competitors due to lower gross margins which drives high inventory and overall asset turnover. Gregg Carlson 49 Source: company reports, Gregg Carlson
  50. 50. COST and major competitor leverage - 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Costco Target Bj's Wal Mart COST has long term debt in its capital structure. On a net debt basis however COST has been unlevered since 2003. COST owns most of its store real estate and the company’s net debt remains at zero when the present value of lease obligations is included in its debt total. Leverage in the accompanying chart is defined as total assets/shareholder equity. Gregg Carlson 50 Source: company reports, Gregg Carlson
  51. 51. COST and major competitor returns ROA 0% 2% 4% 6% 8% 10% 12% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Costco Target Bj's Wal Mart ROE 0% 5% 10% 15% 20% 25% 30% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Costco Target Bj's Wal Mart Target and Wal Mart’s higher ROA is driven from their higher gross margins, among other factors with ROE also being driven by higher leverage. Gregg Carlson 51 Source: company reports, Gregg Carlson
  52. 52. COST and major competitor ROIC and free cash flow ROIC 0% 5% 10% 15% 20% 25% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Costco Target Bj's Wal Mart Free cash flow yield -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Costco Target Bj's Wal Mart COST has used its free cash flow to build stores, pay dividends and buy back shares. We expect COST to buyback $3B to $4B of shares over the next 4 years. COST’s ROIC and FCF yields have increased during 2010 and 2011. Gregg Carlson 52 Source: company reports, Gregg Carlson
  53. 53. COST and major competitor earnings, free cash flow, ROIC and ROA/ROE We present detailed financial models for COST, Wal Mart, Target and BJ’s for the years 2000 through 2011. Gregg Carlson 53
  54. 54. COST earnings, free cash flow, ROIC and ROA/ROE We have provided the financial models of COST, Wal Mart, Target and Bj’s. COST has significantly grown revenue since 2000 and has more than doubled operating income and net income while significantly expanding free cash flow. Gregg Carlson 54 Source: company reports, Gregg Carlson 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (dollars in billions) REVENUE Net sales 31,621.0 34,137.0 37,993.0 41,693.0 47,146.0 51,879.1 58,963.2 63,087.6 70,977.9 69,890.1 76,255.0 87,048.0 Membership fees 543.0 660.0 769.0 853.0 961.0 1,073.2 1,188.0 1,312.5 1,505.6 1,533.1 1,691.0 1,867.0 Total revenue 32,164.0 34,797.0 38,762.0 42,546.0 48,107.0 52,952.3 60,151.2 64,400.1 72,483.4 71,423.2 77,946.0 88,915.0 y/y 8.2% 11.4% 9.8% 13.1% 10.1% 13.6% 7.1% 12.6% -1.5% 9.1% 14.1% OPERATING EXPENSES Merchandise costs 28,322.0 30,598.0 33,983.0 37,235.0 42,092.0 46,346.9 52,745.5 56,449.7 63,503.2 62,334.0 67,995.0 77,739.0 gross margin % 11.9% 12.1% 12.3% 12.5% 12.5% 12.5% 12.3% 12.3% 12.4% 12.7% 12.8% 12.6% SG&A 2,756.0 3,129.0 3,576.0 4,097.0 4,598.0 5,061.4 5,732.1 6,273.1 6,954.1 7,252.4 7,840.0 8,682.0 SG&A % 8.6% 9.0% 9.2% 9.6% 9.6% 9.6% 9.5% 9.7% 9.6% 10.2% 10.1% 9.8% Preopening 42.0 60.0 51.0 37.0 30.0 53.2 42.5 55.2 56.9 41.6 26.0 46.0 Asset impairment 7.0 18.0 21.0 20.0 1.0 16.4 5.5 13.6 0.0 16.8 8.0 9.0 Operating income 1,037.0 992.0 1,131.0 1,157.0 1,386.0 1,474.4 1,625.6 1,608.5 1,969.2 1,778.4 2,077.0 2,439.0 operating margin 3.2% 2.9% 2.9% 2.7% 2.9% 2.8% 2.7% 2.5% 2.7% 2.5% 2.7% 2.7% OTHER INCOME & EXPENSE Interest expense (39.0) (32.0) (29.0) (37.0) (37.0) (34.4) (12.6) (64.1) (102.6) (108.2) (111.0) (116.0) Interest income & other 54.0 43.0 36.0 38.0 51.0 109.0 138.4 165.5 132.7 44.8 68.0 (20.0) INCOME BEFORE TAX 1,052.0 1,003.0 1,138.0 1,158.0 1,400.0 1,549.0 1,751.4 1,709.9 1,999.2 1,715.1 2,034.1 2,303.1 Taxprovision 421.0 401.0 438.0 437.0 518.0 485.8 648.2 627.2 716.3 628.7 731.0 841.0 NET INCOME 631.0 602.0 700.0 721.0 882.0 1,063.2 1,103.2 1,082.7 1,282.9 1,086.4 1,303.1 1,462.1 Free Cash Flow (FCF) operating cash flow 1,070.4 1,032.6 1,018.2 1,507.2 2,098.8 1,772.8 1,831.2 2,076.4 2,206.0 2,092.0 2,780.0 3,198.0 cap-ex (1,228.4) (1,447.5) (1,038.6) (810.7) (705.6) (992.3) (1,216.5) (1,385.7) (1,599.0) (1,250.0) (1,055.0) (1,290.0) proceeds from sale of equipment 62.7 110.0 32.8 51.8 55.4 19.4 15.7 14.1 48.0 7.0 4.0 16.0 FCF (95.3) (305.0) 12.5 748.4 1,448.6 800.0 630.5 704.8 655.0 849.0 1,729.0 1,924.0 OS shares 475.7 475.8 479.2 479.3 486.4 492.0 480.3 457.6 444.2 440.5 445.9 443.2 FCF per share (0.20) (0.64) 0.03 1.56 2.98 1.63 1.31 1.54 1.47 1.93 3.88 4.34 year end stock price 32 34 30 30 38 40 44 59 64 50 56 78 FCF yield -0.6% -1.9% 0.1% 5.2% 7.8% 4.1% 3.0% 2.6% 2.3% 3.9% 6.9% 5.6% ROIC net debt 317 566 655 1 (1,565) (2,437) (2,014) (910) (601) (1,036) (1,901) (2,575) equity 4,240 4,883 5,694 6,555 7,625 8,881 9,143 8,623 9,192 10,018 10,829 12,002 Invested capital 4,558 5,449 6,349 6,556 6,060 6,444 7,129 7,714 8,591 8,982 8,928 9,427 operating income 1,037 992 1,131 1,157 1,386 1,474 1,626 1,609 1,969 1,778 2,077 2,439 taxrate 40% 40% 38% 38% 37% 31% 37% 37% 36% 37% 36% 37% NOPAT 415 397 435 437 513 462 602 590 706 652 746 891 ROIC 9.1% 7.3% 6.9% 6.7% 8.5% 7.2% 8.4% 7.6% 8.2% 7.3% 8.4% 9.4% Dupont Analysis Operating margin 3.2% 2.9% 2.9% 2.7% 2.9% 2.8% 2.7% 2.5% 2.7% 2.5% 2.7% 2.7% Total asset turnover 3.7 3.4 3.3 3.2 3.2 3.2 3.4 3.3 3.5 3.2 3.3 3.3 EBIT/total assets 12.0% 9.8% 9.7% 8.8% 9.2% 8.9% 9.3% 8.2% 9.5% 8.1% 8.7% 9.1% Interest expense/total assets 0.2% 0.1% 0.1% 0.0% 0.1% 0.5% 0.7% 0.5% 0.1% -0.3% -0.2% -0.5% EBT/total assets 12.2% 9.9% 9.8% 8.8% 9.3% 9.4% 10.0% 8.7% 9.7% 7.8% 8.5% 8.6% Leverage 2.0 2.1 2.0 2.0 2.0 1.9 1.9 2.3 2.3 2.2 2.2 2.2 EBT/sh equity 24.8% 20.5% 20.0% 17.7% 18.4% 17.4% 19.2% 19.8% 21.7% 17.1% 18.8% 19.2% Taxretention rate 60.0% 60.0% 61.5% 62.3% 63.0% 68.6% 63.0% 63.3% 64.2% 63.3% 64.1% 63.5% ROE 14.9% 12.3% 12.3% 11.0% 11.6% 12.0% 12.1% 12.6% 14.0% 10.8% 12.0% 12.2% ROA 7.4% 6.1% 6.1% 5.6% 6.0% 6.6% 6.4% 5.6% 6.3% 5.1% 5.6% 5.6%
  55. 55. Wal Mart earnings, free cash flow, ROIC and ROA/ROE Gregg Carlson 55 Wal Mart’s (WMT) overall growth strategy is focused on international markets. WMT recently posted it first positive US comp in nine quarters at 3Q12. WMT will continue to use free cash flow to pay dividends and buy back shares in addition to expanding its store base. Source: company reports, Gregg Carlson 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (dollars in billions) REVENUE Walmart US 108,721 121,889 139,131 157,121 174,220 191,826 209,910 226,294 239,529 256,970 259,919 260,261 Walmart International 22,728 32,100 35,485 40,794 47,572 56,277 59,237 77,116 90,640 96,141 97,407 109,232 Sams Club 24,801 26,798 29,395 31,702 34,537 37,119 39,798 41,582 44,357 47,976 47,806 49,459 Other 8,763 10,542 13,788 Membership and other revenue 1,796 1,966 2,013 1,960 2,352 2,767 3,156 3,658 4,273 3,167 2,953 2,897 Total revenue 166,809 193,295 219,812 231,577 258,681 287,989 312,101 348,650 378,799 404,254 408,085 421,849 y/y total 15.9% 13.7% 5.4% 11.7% 11.3% 8.4% 11.7% 8.6% 6.7% 0.9% 3.4% y/y Walmart US 12.1% 14.1% 12.9% 10.9% 10.1% 9.4% 7.8% 5.8% 7.3% 1.1% 0.1% y/y International 41.2% 10.5% 15.0% 16.6% 18.3% 5.3% 30.2% 17.5% 6.1% 1.3% 12.1% y/y Sams Club 8.1% 9.7% 7.8% 8.9% 7.5% 7.2% 4.5% 6.7% 8.2% -0.4% 3.5% y/y Other 20.3% 30.8% y/y membership and other rev 9.5% 2.4% -2.6% 20.0% 17.6% 14.1% 15.9% 16.8% -25.9% -6.8% -1.9% OPERATING EXPENSES Merchandise costs 129,664 150,255 171,562 178,299 198,747 219,793 237,649 264,152 286,515 303,941 304,444 315,287 gross margin % 22.3% 22.3% 22.0% 23.0% 23.2% 23.7% 23.9% 24.2% 24.4% 24.8% 25.4% 25.3% SG&A 27,040 31,550 36,173 39,983 44,909 51,105 55,739 64,001 70,288 77,546 79,639 81,020 SG&A % 16.2% 16.3% 16.5% 17.3% 17.4% 17.7% 17.9% 18.4% 18.6% 19.2% 19.5% 19.2% Operating income 10,105 11,490 12,077 13,295 15,025 17,091 18,713 20,497 21,996 22,767 24,002 25,542 operating margin 6.1% 5.9% 5.5% 5.7% 5.8% 5.9% 6.0% 5.9% 5.8% 5.6% 5.9% 6.1% Operating income by segment Wal Mart US 8,700 9,700 10,300 11,840 12,916 14,163 15,267 16,620 17,516 18,310 19,313 19,914 Wal Mart International 817 1,112 1,458 1,998 2,370 2,988 3,438 4,265 4,749 4,832 4,901 5,606 Sams Club 850 942 1,028 1,023 1,126 1,280 1,407 1,480 1,618 1,649 1,515 1,711 Other (262) (264) (709) (1,566) (1,387) (1,340) (1,399) (1,868) (1,887) (2,024) (1,727) (1,689) WMT US operating margin 8.0% 8.0% 7.4% 7.5% 7.4% 7.4% 7.3% 7.3% 7.3% 7.1% 7.4% 7.7% WMT Intl operating margin 3.6% 3.5% 4.1% 4.9% 5.0% 5.3% 5.8% 5.5% 5.2% 5.0% 5.0% 5.1% Sams Club operating margin 3.4% 3.5% 3.5% 3.2% 3.3% 3.4% 3.5% 3.6% 3.6% 3.4% 3.2% 3.5% Other -3.0% -2.5% -5.1% Interest expense (1,022) (1,374) (1,326) (927) (832) (986) (1,178) (1,529) (1,798) (1,900) (1,884) (2,004) INCOME BEFORE TAX 9,083 10,116 10,751 12,368 14,193 16,105 17,535 18,968 20,198 20,867 22,118 23,538 Tax provision 3,338 3,692 3,897 4,357 5,118 5,589 5,803 6,365 6,908 7,133 7,156 7,579 INCOME FROM CONT OPS 5,745 6,424 6,854 8,011 9,075 10,516 11,732 12,603 13,290 13,734 14,962 15,959 INC FROM DISCONT OPS (net of tax) (170) (129) (183) (193) (214) (249) (324) (425) (406) 146 (79) 1,034 NET INCOME 5,575 6,295 6,671 7,818 8,861 10,267 11,408 12,178 12,884 13,880 14,883 16,993 Less: Minority interest (198) - - 137 193 - (177) (894) (153) (499) (513) (604) NET INCOME attributable to Walmart 5,377 6,295 6,671 7,955 9,054 10,267 11,231 11,284 12,731 13,381 14,370 16,389 Free Cash Flow operating cashflow 8,194.0 9,604 10,260 13,005 15,996 15,044 18,241 19,952 20,354 23,147 26,249 23,643 cap-ex (1) (16,846) (8,714) (8,383) (9,756) (8,287) (12,351) (14,186) (14,463) (15,670) (10,742) (11,620) (12,193) FCF (8,652) 890 1,877 3,249 7,709 2,693 4,055 5,489 4,684 12,405 14,629 11,450 OS shares 4,474 4,484 4,481 4,446 4,373 4,266 4,188 4,168 4,072 2,951 3,877 3,670 FCF per share (1.93) 0.20 0.42 0.73 1.76 0.63 0.97 1.32 1.15 4.20 3.77 3.12 year end stock price 46 48 51 41 47 46 41 43 46 44 51 54 FCF yield -4.2% 0.4% 0.8% 1.8% 3.8% 1.4% 2.4% 3.1% 2.5% 9.6% 7.4% 5.8% ROIC cash 1,856 2,054 2,161 2,758 5,199 5,488 6,193 7,373 5,492 7,275 7,907 7,395 debt & equity 46,631 53,556 58,650 66,782 70,665 81,304 94,242 105,152 111,265 114,202 119,260 127,170 invested capital 44,775 51,502 56,489 64,024 65,466 75,816 88,049 97,779 105,773 106,927 111,353 119,775 operating income 10,105 11,490 12,077 13,295 15,025 17,091 18,713 20,497 21,996 22,767 24,002 25,542 tax rate 37% 36% 36% 35% 36% 35% 33% 34% 34% 34% 32% 32% NOPAT 6,391 7,297 7,699 8,611 9,607 11,160 12,520 13,619 14,473 14,985 16,236 17,318 ROIC 14.3% 14.2% 13.6% 13.5% 14.7% 14.7% 14.2% 13.9% 13.7% 14.0% 14.6% 14.5% Dupont Analysis Operating margin 6.1% 5.9% 5.5% 5.7% 5.8% 5.9% 6.0% 5.9% 5.8% 5.6% 5.9% 6.1% Total asset turnover 2.5 2.6 2.8 2.6 2.5 2.5 2.3 2.3 2.3 2.5 2.4 2.3 EBIT/total assets 15.0% 15.5% 15.2% 14.7% 14.7% 14.6% 13.7% 13.5% 13.5% 14.0% 14.1% 14.1% Interest expense/total assets -1.5% -1.8% -1.7% -1.0% -0.8% -0.8% -0.9% -1.0% -1.1% -1.2% -1.1% -1.1% EBT/total assets 13.5% 13.6% 13.6% 13.7% 13.9% 13.7% 12.9% 12.5% 12.4% 12.8% 13.0% 13.0% Leverage 2.6 2.4 2.3 2.3 2.3 2.7 2.6 2.5 2.5 2.5 2.4 2.6 EBT/sh equity 35.1% 32.2% 30.5% 31.3% 32.5% 37.1% 33.0% 30.9% 31.4% 32.1% 31.4% 34.3% Tax retention rate 63.3% 63.5% 63.8% 64.8% 63.9% 65.3% 66.9% 66.4% 65.8% 65.8% 67.6% 67.8% ROE 22.2% 20.5% 19.5% 20.3% 20.8% 24.2% 22.1% 20.6% 20.7% 21.1% 21.2% 23.3% ROA 8.5% 8.6% 8.6% 8.9% 8.9% 9.0% 8.6% 8.3% 8.1% 8.4% 8.8% 8.8%
  56. 56. Target earnings, free cash flow, ROIC and ROA/ROE Gregg Carlson 56 Source: company reports, Gregg Carlson 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (dollars in billions) REVENUE Net sales 26,296.0 29,462.0 32,602.0 36,519.0 40,928.0 45,682.0 51,271.0 57,878.0 61,471.0 62,884.0 63,435.0 65,786.0 Credit Card Revenues 233.0 278.0 419.0 891.0 1,097.0 1,157.0 1,349.0 1,612.0 1,896.0 2,064.0 1,922.0 1,604.0 Total revenue 26,529.0 29,740.0 33,021.0 37,410.0 42,025.0 46,839.0 52,620.0 59,490.0 63,367.0 64,948.0 65,357.0 67,390.0 y/y 12.1% 11.0% 13.3% 12.3% 11.5% 12.3% 13.1% 6.5% 2.5% 0.6% 3.1% OPERATING EXPENSES Merchandise costs 18,576.0 20,870.0 23,030.0 25,498.0 28,389.0 31,445.0 35,788.0 40,366.0 42,929.0 44,157.0 44,062.0 45,725.0 gross margin % 30.0% 29.8% 30.3% 31.8% 32.4% 32.9% 32.0% 32.1% 32.3% 32.0% 32.6% 32.1% SG&A 5,424.0 6,025.0 6,612.0 7,505.0 8,657.0 9,797.0 10,324.0 11,852.0 12,670.0 12,954.0 13,078.0 13,469.0 SG&A % 20.4% 20.3% 20.0% 20.1% 20.6% 20.9% 19.6% 19.9% 20.0% 19.9% 20.0% 20.0% CC expenses 155.0 185.0 313.0 629.0 722.0 737.0 776.0 707.0 837.0 1,609.0 1,521.0 860.0 Depreciation and amortization 583.0 676.0 820.0 967.0 1,098.0 1,259.0 1,409.0 1,496.0 1,659.0 1,826.0 2,023.0 2,084.0 Operating income 1,791.0 1,984.0 2,246.0 2,811.0 3,159.0 3,601.0 4,323.0 5,069.0 5,272.0 4,402.0 4,673.0 5,252.0 operating margin 6.8% 6.7% 6.8% 7.5% 7.5% 7.7% 8.2% 8.5% 8.3% 6.8% 7.1% 7.8% Interest expense (455.0) (422.0) (470.0) (584.0) (556.0) (570.0) (463.0) (572.0) (647.0) (866.0) (801.0) (757.0) INCOME BEFORE TAX 1,336.0 1,562.0 1,776.0 2,227.0 2,603.0 3,031.0 3,860.0 4,497.0 4,625.0 3,536.0 3,872.0 4,495.0 Taxprovision 518.0 600.0 675.0 851.0 984.0 1,146.0 1,452.0 1,710.0 1,776.0 1,322.0 1,384.0 1,575.0 NET INCOME 818.0 962.0 1,101.0 1,376.0 1,619.0 1,885.0 2,408.0 2,787.0 2,849.0 2,214.0 2,488.0 2,920.0 Free Cash Flow operating cashflow 2,252 2,134 2,012 1,590 3,160 3,821 4,451 4,862 4,125 4,430 5,881 5,271 cap-ex (1,733) (2,319) (3,002) (3,040) (2,738) (3,068) (3,888) (3,928) (4,369) (3,547) (1,729) (2,129) FCF 519 (185) (990) (1,450) 422 753 563 934 (244) 883 4,152 3,142 OS shares 912 898 905 910 912 891 874 860 819 752 745 704 FCF per share 0.57 (0.21) (1.09) (1.59) 0.46 0.85 0.64 1.09 (0.30) 1.17 5.57 4.46 year end stock price 29 34 40 25 34 46 50 57 52 30 49 54 FCF yield 2.0% -0.6% -2.7% -6.4% 1.4% 1.8% 1.3% 1.9% -0.6% 3.9% 11.4% 8.3% ROIC cash 220 356 499 758 708 2,245 1,648 813 2,450 864 2,200 1,712 debt & equity 11,791 14,037 18,005 22,055 23,965 24,757 26,160 27,594 32,778 33,594 33,246 33,635 invested capital 11,571 13,681 17,506 21,297 23,257 22,512 24,512 26,781 30,328 32,730 31,046 31,923 operating income 1,791 1,984 2,246 2,811 3,159 3,601 4,323 5,069 5,272 4,402 4,673 5,252 taxrate 39% 38% 38% 38% 38% 38% 38% 38% 38% 37% 36% 35% NOPAT 694 762 854 1074 1194 1362 1626 1928 2024 1646 1670 1840 ROIC 6.0% 5.6% 4.9% 5.0% 5.1% 6.0% 6.6% 7.2% 6.7% 5.0% 5.4% 5.8% Dupont Analysis Operating margin 6.8% 6.7% 6.8% 7.5% 7.5% 7.7% 8.2% 8.5% 8.3% 6.8% 7.1% 7.8% Total asset turnover 2.0 1.9 1.7 1.5 1.5 1.5 1.5 1.6 1.4 1.5 1.5 1.5 EBIT/total assets 13.8% 12.9% 11.3% 11.5% 11.5% 11.2% 12.4% 13.6% 11.8% 10.0% 10.5% 12.0% Interest expense/total assets -3.5% -2.7% -2.4% -2.4% -2.0% -1.8% -1.3% -1.5% -1.5% -2.0% -1.8% -1.7% EBT/total assets 10.3% 10.2% 9.0% 9.1% 9.5% 9.4% 11.0% 12.0% 10.4% 8.0% 8.7% 10.3% Leverage 2.2 2.3 2.5 2.6 2.5 2.5 2.5 2.4 2.9 3.2 2.9 2.8 EBT/sh equity 22.8% 23.9% 22.5% 23.4% 23.4% 23.3% 27.2% 28.8% 30.2% 25.8% 25.2% 29.0% Taxretention rate 61.2% 61.6% 62.0% 61.8% 62.2% 62.2% 62.4% 62.0% 61.6% 62.6% 64.3% 65.0% ROE 13.9% 14.7% 13.9% 14.5% 14.5% 14.5% 17.0% 17.8% 18.6% 16.1% 16.2% 18.9% ROA 6.4% 6.3% 5.6% 5.8% 6.1% 6.0% 7.1% 7.7% 6.6% 5.2% 5.8% 6.8%
  57. 57. BJs earnings, free cash flow, ROIC and ROA/ROE Gregg Carlson 57 Source: company reports, Gregg Carlson 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (dollars in billions) REVENUE Net sales 4,054.5 4,766.6 5,105.9 5,728.9 6,553.9 7,215.9 7,748.2 8,303.0 8,667.0 9,662.5 9,820.9 10,632.9 Membership fees 89.0 102.5 117.4 130.7 139.4 155.0 165.9 176.7 173.2 175.1 179.6 190.7 Other revenues - - - - - - - - 46.5 47.0 50.1 53.6 Total revenue 4,143.5 4,869.1 5,223.3 5,859.6 6,693.3 7,370.9 7,914.1 8,479.7 8,886.7 9,884.6 10,050.6 10,877.2 y/y 17.5% 7.3% 12.2% 14.2% 10.1% 7.4% 7.1% 4.8% 11.2% 1.7% 8.2% OPERATING EXPENSES Merchandise costs 3,666.9 4,316.5 4,632.2 5,231.0 6,018.0 6,612.0 7,083.6 7,626.5 7,967.9 8,866.9 8,950.7 9,697.0 gross margin % 11.5% 11.3% 11.3% 10.7% 10.1% 10.3% 10.5% 10.1% 10.3% 10.3% 10.9% 10.9% SG&A 288.2 334.7 345.8 397.2 502.6 554.5 604.2 697.5 714.0 787.3 860.8 933.8 SG&A % 7.0% 6.9% 6.6% 6.8% 7.5% 7.5% 7.6% 8.2% 8.0% 8.0% 8.6% 8.6% CC expenses 8.9 8.5 10.3 11.7 - 7.0 4.0 2.0 - - - - Pre opening expenses 9.0 13.2 7.6 9.4 4.9 4.9 11.4 12.6 Restructuring and other 25.7 - - - - - - - - - - - - Operating income 179.5 209.4 235.0 219.7 163.7 184.2 214.7 144.3 199.9 225.5 227.7 208.1 operating margin 4.3% 4.3% 4.5% 3.7% 2.4% 2.5% 2.7% 1.7% 2.2% 2.3% 2.3% 1.9% OTHER INCOME & EXPENSE Interest expense - - - - - - - - - - (0.7) (1.3) Loss on lease obligation (106.3) 15.6 4.5 9.4 4.5 3.1 Interest income & other 4.0 6.2 4.1 0.4 - 0.8 2.7 2.6 3.7 0.8 - - INCOME BEFORE TAX 183.5 215.6 132.8 235.7 168.2 194.4 221.9 150.0 203.6 226.3 227.0 206.8 Tax provision 71.0 83.0 49.0 89.8 63.4 74.8 86.5 57.2 79.5 87.7 92.1 82.6 NET INCOME before cum effect 112.5 132.6 83.8 145.9 104.8 119.6 135.4 92.8 124.1 138.6 134.9 124.2 of accounting chg + other (1.4) (1.1) (1.5) (15.0) (1.9) (5.2) (6.9) (20.9) (1.7) (4.6) (3.5) (29.2) NET INCOME 111.1 131.5 82.3 130.9 102.9 114.4 128.5 71.9 122.4 134.0 131.4 95.0 Free Cash Flow operating cashflow 205 156 211 151 199 249 192 173 308 224 300 229 cap-ex (87) (98) (166) (134) (176) (133) (123) (191) (89) (138) (176) (186) FCF 118 58 45 17 23 116 69 (18) 219 86 124 43 OS shares 75 74 74 71 69 70 69 66 65 59 55 54 FCF per share 1.56 0.78 0.61 0.24 0.33 1.65 1.00 (0.27) 3.40 1.46 2.27 0.80 year end stock price 34 36 47 19 24 30 29 31 32 35 35 45 FCF yield 4.6% 2.2% 1.3% 1.3% 1.4% 5.5% 3.5% -0.9% 10.6% 4.2% 6.5% 1.8% ROIC cash 118 120 87 33 79 125 162 56 97 51 59 101 debt & equity 626 718 840 853 959 1,057 1,128 1,130 1,101 1,115 1,167 1,352 invested capital 508 598 753 820 880 932 966 1,074 1,004 1,064 1,108 1,251 operating income 180 209 235 220 164 184 215 144 200 226 228 208 tax rate 39% 38% 37% 38% 38% 38% 39% 38% 39% 39% 41% 40% NOPAT 110 129 148 136 102 113 131 89 122 138 135 125 ROIC 21.7% 21.5% 19.7% 16.6% 11.6% 12.2% 13.6% 8.3% 12.1% 13.0% 12.2% 10.0% Dupont Analysis Operating margin 4.3% 4.3% 4.5% 3.7% 2.4% 2.5% 2.7% 1.7% 2.2% 2.3% 2.3% 1.9% Total asset turnover 3.7 3.9 3.7 4.0 3.9 3.9 4.0 4.3 4.3 4.9 4.6 4.7 EBIT/total assets 15.9% 17.0% 16.5% 14.8% 9.5% 9.7% 10.8% 7.2% 9.7% 11.1% 10.5% 9.0% Interest expense/total assets 0.4% 0.5% -7.2% 1.1% 0.3% 0.5% 0.4% 0.3% 0.2% 0.0% 0.0% -0.1% EBT/total assets 16.2% 17.5% 9.3% 15.9% 9.8% 10.3% 11.2% 7.5% 9.9% 11.2% 10.5% 8.9% Leverage 2.0 1.9 2.1 2.0 2.0 2.0 2.0 2.0 2.1 2.1 2.1 2.0 EBT/sh equity 31.8% 32.4% 19.3% 31.8% 19.7% 20.7% 21.8% 14.7% 20.9% 23.1% 22.1% 18.1% Tax retention rate 61.3% 61.5% 63.1% 61.9% 62.3% 61.5% 61.0% 61.9% 61.0% 61.2% 59.4% 60.1% ROE 19.5% 19.9% 12.2% 19.7% 12.3% 12.7% 13.3% 9.1% 12.7% 14.2% 13.2% 10.9% ROA 10.2% 11.0% 6.0% 10.1% 6.2% 6.5% 7.0% 4.8% 6.2% 7.0% 6.4% 5.5%
  58. 58. Forward growth rate and valuation assumptions  We present forward store growth rate data and estimates for a potential incremental 400 unit multi year store build-out based on company estimates for store counts and timing.  We also present our historic and forward valuation analysis that suggests COST is currently trading within recent historic valuation ranges.  In our DCF models we used an approximate 11% discount rate and 6% terminal growth rate to arrive at the current $91 stock price. Our DCF model includes an estimate of current stock price implied fundamental assumptions for COST between 2012 and 2019. We note that these assumptions are conservative relative to recent and historical results.  We provide a return matrix based on forward EPS estimates PE multiples.  We also present COST’s balance sheet and P&L. Gregg Carlson 58
  59. 59. COST forward store growth rate Store count 3.5% 4.0% 5.0% 6.0% 7.0% Unit increase 3.5% 4.0% 5.0% 6.0% 7.0% year 600 600 600 600 600 year 600 600 600 600 600 1 621 624 630 636 642 1 21 24 30 36 42 2 643 649 662 674 687 2 22 25 32 38 45 3 665 675 695 715 735 3 22 26 33 40 48 4 689 702 729 757 786 4 23 27 35 43 51 5 713 730 766 803 842 5 24 28 36 45 55 6 738 759 804 851 900 6 25 29 38 48 59 7 763 790 844 902 963 7 26 30 40 51 63 8 790 821 886 956 1031 8 27 32 42 54 67 9 818 854 931 1014 9 28 33 44 57 10 846 888 977 10 29 34 47 11 876 924 1026 11 30 36 49 12 907 961 12 31 37 13 938 999 13 32 38 15 971 15 33 16 1005 16 34 The matrix shows COSTs target approximate store count goal of 1,000. COST has indicated that their goal to achieve this target is approximately 10 to 12 years which implies a 4% to 5% annual footprint expansion rate. We have used a 3% to 4% growth rate assumption in our company forward forecast . The number 600 represents the approximate existing store base at 12/31/11. Gregg Carlson 59 Source: company reports, Gregg Carlson
  60. 60. COST and major competitor forward PE’s and long-term EPS growth Forward PE 0 5 10 15 20 25 30 35 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E Costco Wal Mart Target Long-term EPS growth -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E Costco Wal Mart Target At a recent price of $89 to $90, COST’s forward PE is below 2008 peak levels while current EPS growth rate estimates are near peak levels. Gregg Carlson 60 Source: company reports, Gregg Carlson
  61. 61. COST forward PE, EPS growth, comp & store growth 23 20 16 17 17 19 20 26 17 17 23 20 -4% 15% 3% 21% 18% 6% 3% 22% -15% 1% 13% 17% 15% -40% -30% -20% -10% 0% 10% 20% 30% 40% 10 15 20 25 30 35 40 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E annual comps store growth rate forward PE EPS YOY % In this chart we put together comps, store growth, forward PE and EPS growth to show that EPS growth has increased –accelerated since the trough of the recent recession while the forward PE remains below peak 2008 levels. Gregg Carlson 61 Source: company reports, Gregg Carlson
  62. 62. COST EV/ebitda 0 2 4 6 8 10 12 14 16 18 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E EV/ebitda average COST’s current EV/ebitda was is at a multi year low. Gregg Carlson 62 Source: company reports, Gregg Carlson
  63. 63. COST long-term forecast assumptions embedded in current stock price Gregg Carlson 63 To arrive at a $91 current stock price, we used DCF modeling assumptions that include terminal value 6% growth in net sales between 2013 and 2019 based on a 3% unit growth rate (which is lower that COST’s implied unit growth rate based on the company expansion target ). Our model also assumes comps decline from much higher historic and current levels to a 4% intermediate rate before fading to an ultimate terminal comp rate of 2.5%. We also note that margins (not presented here) are modeled with no improvement beyond 2014 which appears to be conservative due to COST’s perceived ability to further leverage SG&A and expand its private label business. Source: Gregg Carlson Revenue model 2005 2006 2007 2008 2009 2010 2011 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e Netsales 51,879 58,963 63,088 70,978 69,890 76,255 87,048 96,014 102,255 108,390 114,894 121,787 129,094 136,840 145,050 y/y 10% 14% 7% 13% -2% 9% 14% 10.3% 6.5% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% Membership fees 1,073.2 1,188.0 1,312.5 1,505.6 1,533.1 1,691.0 1,867.0 2,147.6 2,330 2,486 2,640 2,794 2,975 3,157 3,347 y/y 12% 11% 10% 15% 2% 10% 10% 10.3% 8.5% 6.7% 6.2% 5.8% 6.5% 6.1% 6.0% Total revenue 52,952 60,151 64,400 72,484 71,423 77,946 88,915 98,162 104,585 110,876 117,534 124,581 132,069 139,997 148,398 y/y 10% 14% 7% 13% -1% 9% 14% 10.3% 6.5% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% consensus 98,130 104,560 10% 7% number of stores 471 504 529 550 566 582 598 617 636 655 678 702 726 752 778 y/y stores 5% 7% 5% 4% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% comps 7% 8% 6% 8% -4% 7% 10% 7% 4% 3% 2.5% 2.5% 2.5% 2.5% 2.5% y/y stores +comps 12% 15% 11% 12% -1% 10% 13% 10% 7% 6% 6% 6% 6% 6% 6% new storeadj+cann.Factor -1.9% -1.4% -4.0% 0.5% -0.4% -0.7% 1.4% 0.1% -0.6% 0.0% 0.5% 0.5% 0.1% 0.5% 0.0% membership fees %of netsales 2.1% 2.0% 2.1% 2.1% 2.2% 2.2% 2.1% 2.2% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3%
  64. 64. COST long-term forecast assumptions embedded in current stock price Gregg Carlson 64 Our DCF model assumptions are based on earnings that reach a stable earnings growth run rate of 6% to 7% between 2016 and 2018 and a terminal run rate of 6%. We also used an implied WACC assumption of 11.2% to arrive at a present value that is equivalent to an approximate $91 stock price. Source: Gregg Carlson 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 earningsgrowthrate 3.8% -1.9% 18.6% -15.4% 20.0% 12.3% 15.8% 12.7% 17.0% 9.4% 6.1% 6.8% 6.9% 6.0% Netincome 1,063$ 1,103$ 1,082$ 1,283 1,086 1,303 1,463 1,695 1,909 2,233 2,444 2,593 2,770 2,962 3,140 Add depreciation 482 515 566 653 728 795 855 900 950 1,000 1,050 1,100 1,150 1,200 1,250 Less cap-ex (973) (1,201) (1,372) (1,599) (1,290) (1,055) (1,290) (1,400) (1,400) (1,400) (1,440) (1,480) (1,520) (1,570) (1,620) Adjustfor chginwc 228 213 (330) (35) (228) 223 (81) 205 (59) (433) (654) 0 - 0 0 chgindebt (298) 11 1,686 34 (6) (84) - - - FCFE 1,400 1,400 1,400 1,400 2,213 2,400 2,592 2,770 WACC(1) 11.15% - - - 1,400 1,260 1,133 1,020 1,450 1,414 1,375 1,321 SUMPVexplicitforecastperiod 10,373 PVterminalvalue $29,087 60,963 terminalvalue>>> TotalPV(explicitforecastperiodplus terminalvalue) 39,460 3,140 terminalearnings OSshares 432 6.0% terminalgrowthrate Persharevalue 91$ 11.15% WACC (1) InputWACC/(IRR)valuetobringPVtoapproximatecurrentstockprice.
  65. 65. COST future valuation estimates based on forward EPS estimates and PE multiples At the current forward PE of 20x applied to forward implied EPS estimates for 2013, 2014, 2015 and 2016, future equity value estimates are $92, $108, $122 and $132 per share. See the matrix below for a range of equity value estimates based on earnings estimates and multiples. Please note that at 2016, COST should have several more years of earnings growth ahead of it based on its current 1,000 store build out target. The key risk to this scenario is a comps slowdown beyond what is implied in our DCF model. We also note that the future equity value per share at 2016 (based on a 11.2% WACC assumption within our existing DCF model ) is $126 - $130. Gregg Carlson 65 Source: company reports, Gregg Carlson FWD PE 2011 2012e 2013e 2014e 2015e 2016e EPS 3.30 3.92 4.52 5.42 6.08 6.60 y/y change 19% 15% 20% 12% 9% Price target 22 86 100 119 134 145 based on fwd PE 21 82 95 114 128 139 20 78 90 108 122 132 19 75 86 103 116 125 18 71 81 98 109 119 17 67 77 92 103 112 16 63 72 87 97 106 15 59 68 81 91 99
  66. 66. COST balance sheet Gregg Carlson 66 COST’s balance sheet is unlevered as LTD plus the PV of store operating leases is less than cash and short-term investments. Source: company reports, Gregg Carlson (dollars in millions) 2006 2007 2008 2009 2010 2011 2012E 2013E CURRENT ASSETS Cash and CE 1,511 2,780 2,619 3,157 3,214 4,009 2,304 1,763 ST investments 1,322 576 656 570 1,535 1,604 1,604 1,604 Receivables, net 565 762 748 834 884 965 965 965 Inventories 4,561 4,879 5,039 5,405 5,638 6,638 7,238 7,838 Deferred taxes and other current assets 272 327 400 371 437 490 490 490 Total current assets 8,232 9,324 9,462 10,337 11,708 13,706 12,601 12,660 PROPERTY AND EQUIPMENT Land 2,747 3,010 3,217 3,341 3,484 3,819 3,819 3,819 Buildings, leaseholds and improvements 6,241 7,036 7,749 8,453 9,096 10,278 11,678 13,078 Equipment and fixtures 2,405 2,747 3,057 3,265 3,513 4,002 4,002 4,002 CIP 248 276 306 264 267 269 269 269 11,642 13,069 14,329 15,323 16,360 18,368 19,768 21,168 Less: accumulated depreciation (3,078) (3,549) (3,974) (4,423) (5,046) (5,936) (6,836) (7,786) Net property and equipment 8,564 9,520 10,355 10,900 11,314 12,432 12,932 13,382 OTHER ASSETS 699 763 865 742 793 623 623 623 17,495 19,607 20,682 21,979 23,815 26,761 26,156 26,665 CURRENT LIABILITIES ST borrowings 41 54 134 16 26 - - - AP 4,581 5,125 5,225 5,450 5,947 6,544 6,544 6,544 Accrued salaries & bene 1,080 1,227 1,321 1,418 1,571 1,758 1,758 1,758 Accrued sales + other tax 324 268 283 302 322 335 335 335 Deferred memebrship fees 584 692 748 824 869 973 973 973 Current portion, LTD 309 60 6 81 - 900 - - Other current liabilities 899 1,156 1,157 1,190 1,328 1,540 1,540 1,540 Total current liabilities 7,819 8,582 8,874 9,281 10,063 12,050 11,150 11,150 LTD, excludes current portion 215 2,108 2,206 2,206 2,141 1,253 1,253 1,253 DEFERRED TAXES AND OTHER LIABILITIES 254 224 328 388 681 885 885 885 Total liabilities 8,288 10,914 11,408 11,875 12,885 14,188 13,288 13,288 COMMITMENTS AND CONTINGENCIES MINORITY INTEREST 63 69 82 86 101 571 571 571 SHAREHOLDERS EQUITY Preferred stock - Common stock 2 2 2 2 2 2 2 2 Additional PIC 2,823 3,118 3,543 3,811 4,115 4,516 3,516 2,516 Accumulated and other comp income 277 371 286 104 122 373 373 373 Retained earnings 6,041 5,132 5,361 6,101 6,590 7,111 8,406 9,915 Total shareholders equity 9,143 8,623 9,192 10,018 10,829 12,002 12,297 12,806 17,495 19,607 20,682 21,979 23,815 26,761 26,156 26,665
  67. 67. COST income statement Our 2012 and 2013 revenue estimates of $98.2B and $104.5B are slightly ahead of current consensus estimates of $98.1 and $104.5. Our 2012 and 2012 EPS estimates of $3.92 and $4.52 are ahead of consensus estimates as of March 12, 2012. Gregg Carlson 67 Source: company reports, Gregg Carlson 2005 2006 2007 2008 2009 2010 2011 2012e 2013e REVENUE Net sales 51,879.1 58,963.2 63,087.6 70,977.9 69,890.1 76,255.0 87,048.0 96,013.9 102,254.9 Membership fees 1,073.2 1,188.0 1,312.5 1,505.6 1,533.1 1,691.0 1,867.0 2,147.6 2,329.8 Total revenue 52,952.3 60,151.2 64,400.1 72,483.4 71,423.2 77,946.0 88,915.0 98,161.5 104,584.7 y/y 10% 14% 7% 13% -1% 9% 14% 10.4% 6.5% consensus 98,130 104,560 OPERATING EXPENSES 10.4% 6.6% Merchandise costs 46,346.9 52,745.5 56,449.7 63,503.2 62,334.0 67,995.0 77,739.0 85,773.6 91,333.8 SG&A 5,061.4 5,732.1 6,273.1 6,954.1 7,252.4 7,840.0 8,682.0 9,521.7 10,040.1 Preopening 53.2 42.5 55.2 56.9 41.6 26.0 46.0 50.8 54.1 Asset impairment 16.4 5.5 13.6 0.0 16.8 8.0 9.0 9.9 10.6 Operating income 1,474.4 1,625.6 1,608.5 1,969.2 1,778.4 2,077.0 2,439.0 2,805.6 3,146.1 y/y 10% -1% 22% -10% 17% 17% 15.0% 12.1% OTHER INCOME & EXPENSE Interest expense (34.4) (12.6) (64.1) (102.6) (108.2) (111.0) (116.0) (96.0) (96.0) Interest income & other 109.0 138.4 165.5 132.7 44.8 68.0 (20.0) (20.0) (20.0) INCOME BEFORE TAX 1,549.0 1,751.4 1,709.9 1,999.2 1,714.6 2,034.0 2,303.7 2,689.7 3,030.2 Tax provision 485.8 648.2 627.2 716.3 628.7 731.0 841.0 995.2 1,121.2 tax rate on pretax income 31.4% 37.0% 36.7% 35.8% 36.7% 35.9% 36.5% 37.0% 37.0% NET INCOME before cum effect 1,063.2 1,103.2 1,082.7 1,282.9 1,085.9 1,303.0 1,462.7 1,694.5 1,909.0 y/y 4% -2% 18% -15% 20% 12% 15.8% 12.7% Diluted EPS 2.18 2.30 2.37 2.89 2.47 2.92 3.30 3.92 4.52 y/y 6% 3% 22% -15% 18% 13% 19% 15.3% eps consensus (avg. est.) 3.85 4.40 16.6% 14.3% OS diluted shares 492,035 480,341 457,641 444,240 440,454 445,970 443,186 432,000 422,000
  68. 68. Disclosure and terms of use statement Gregg Carlson 68 The analysis and opinions expressed in this report reflect the personal view of the author. This report is not a solicitation to buy or sell securities. No part of the author’s compensation was directly or indirectly related to specific recommendations or views expressed in this research report. Readers should consider this report as only a single factor in making investment, business and/or economic decisions. As the author-we are not your advisor the author-we do not take responsibility for any action you take based on this report. This publication is provided to you for information purposes only. The views in this publication are those of the author and are subject to change, and the author has no obligation to update the opinion or information in this publication. The author does not accept liability for any direct or indirect losses arising from use of this publication or its contents. The author recommends that readers of this report consult with any personal advisor’s they deem necessary before taking any actions based on this report. Actual results may and are likely to be materially different than those indicated in this report. The author-we have received no compensation from the companies mentioned in this report and do not have an economic and/or advisory relationship with any companies mentioned in this report. The author-we may or may not own shares in any of the companies mentioned. The author does not provide tax or financial advice and nothing contained herein should be construed to be tax or financial advice. Please note that this report was originally prepared for and issued to approved market professionals, professional advisors and to specific client relationships. Recipients of this report who are not designated recipients should not use its contents, take action based on its contents and/or redistribute the report. This report should not be relied on as a substitute for the exercise of independent judgment. We believe the information and opinions included in the report are complete and accurate. Information and opinions included in the report were obtained from sources that we believe are reliable. We make no representation as to their accuracy or completeness. We accept no liability or loss arising from use of the material presented in this report. The information presented in this report is provided to you for information purposes only and is not considered as an offer or the solicitation to sell or to buy or subscribe to securities of other financial instruments. We will not treat report recipients as its customers by virtue of receiving this report. This report and its contents may not be altered, transmitted to, copied or distributed to any other party, without prior express written permission of the author. You may not reproduce, distribute, transmit, disseminate, sell, publish, display, broadcast, circulate or forward any part of this report to anyone, including but not limited to others in the same company or organization, without express written consent of the author. This requirement and limitation includes, for example, electronic activities such as emailing, scanning, web site posting, downloading, printing, photocopying, faxing and the like. Authorized recipients may print a single copy (not multiple copies) solely for your own personal use. No other copying of any kind is authorized.

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