Corporate Valuation Project .pptx
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Transcript of Corporate Valuation Project .pptx
Nathalie Torres
Zuliat Owoade
Amy Xie
Helen Fleischer
Elsie Eastman
Syrine Bessaad
Corporate Valuation
We value Costco at $161, 4.8% above the current market price
2
Movement into New Distribution
Channels
Low Cost
Structure
Commitment to
Customer
• Low operating cost increases the gross margin• Efficient inventory and labor management• Pricing power over suppliers• New deal with Visa
• Opportunities for domestic expansion• Plans for aggressive global expansion• Increased presence in the E-Commerce
sector
• High membership loyalty and satisfaction• Broadening customer base• Response to consumer trends
We value Costco at $161, 4.8% above the current market price
3
Movement into New Distribution
Channels
Low Cost
Structure
Commitment to
Customer
• Low operating cost increases the gross margin• Efficient inventory and labor management• Pricing power over suppliers• New deal with Visa
• Opportunities for domestic expansion• Plans for aggressive global expansion• Increased presence in the E-Commerce
sector
• High membership loyalty and satisfaction• Broadening customer base• Response to consumer trends
Revenue is steadily growing by 7% due to the introduction of new warehouses
4
Other International
Canada
U.S.
Source: CSI Market
New Channels ❖ Low Cost ❖ Commitment to Customer
Revenue in $ million
On average, Costco has a yearly increase of 2.8% in number of domestic warehouses
5
Source: Annual Report and CSI Market
New Channels ❖ Low Cost ❖ Commitment to Customer
• 73% Costco’s revenue comes from US warehouse (2015)
• Costco v. Competitors: high sales and low number of stores
• Possibility of cannibalization
Costco has adopted an aggressive approach to expanding its presence internationally
6
Canada: 89 warehouses in
2015 and 3 more will be added in
2016
Japan: 23 warehouses in
2015 and 2 more will be added in
2016
Australia: 7 warehouses in
2015 and 2 more will be added in
2016
UK: 27 warehouses in
2015 and 1 more will be added in
2016
Taiwan: 11 warehouses in
2015 and 1 more will be added in
2016
Spain: 1 warehouse in 2015 and 1 more will be
added in 2016Source: Annual Report
New Channels ❖ Low Cost ❖ Commitment to Customer
Costco’s appeal has translated well to the international marketplace
7
Source: Annual Report and CSI Market
New Channels ❖ Low Cost ❖ Commitment to Customer
Compared to competitors, Costco’s E-Commerce makes up a higher percentage of total sales
8
Source: Annual Reports and Market Realist
New Channels ❖ Low Cost ❖ Commitment to Customer
• Online business grew about 20% in 2015
We value Costco at $161, 4.8% above the current market price
9
Movement into New Distribution
Channels
Low Cost
Structure
Commitment to
Customer
• Low operating cost increases the gross margin• Efficient inventory and labor management• Pricing power over suppliers• New deal with Visa
• Opportunities for domestic expansion• Plans for aggressive global expansion• Increased presence in the E-Commerce
sector
• High membership loyalty and satisfaction• Broadening customer base• Response to consumer trends
Costco has successfully kept COGS low to maintain a growing gross margin
10
Gross Margin
Source: 10-K New Channels ❖ Low Cost ❖ Commitment to Customer
Low shrinkage, volume purchasing, and self-service warehouse facilities contribute to the low COGS
11
Low shrinkage due to the strictly controlled entrance
Limited brands and volume purchasing
Self-service warehouse facilities reduce needs of labor
Source: Annual Report 2015
New Channels ❖ Low Cost ❖ Commitment to Customer
Costco had the highest inventory turnover ratio among its competitors
12
Costco
Walm
art
Target
Source: Stock Analysis on Net
New Channels ❖ Low Cost ❖ Commitment to Customer
High employee satisfaction lowers the employee turnover rate for Costco
13
$9.86 $17
33% 8%
Hourly Wage
Health Premium
Source: Harvard Business Review
New Channels ❖ Low Cost ❖ Commitment to Customer
Costco has pricing power over suppliers
14New Channels ❖ Low Cost ❖ Commitment to Customer
• Costco can absorb costs rather than passing along to customers
• No supplier accounts for more than 5% sales• Kirkland Signature gives more control over cost structure
Source: Market Realist
Costco passes savings on to customers through low operating margins
15
Source: Yahoo Finance
New Channels ❖ Low Cost ❖ Commitment to Customer
Costco switched co-branded credit cards from American Express to Visa and Citi on June 20, 2016
• Amex transaction fee 3.5% vs. Visa 2-3%
• Wider customer base
• Better customer rewards
16New Channels ❖ Low Cost ❖ Commitment to Customer
We value Costco at $161, 4.8% above the current market price
17
Movement into New Distribution
Channels
Low Cost
Structure
Commitment to
Customer
• Low operating cost increases the gross margin• Efficient inventory and labor management• Pricing power over suppliers• New deal with Visa
• Opportunities for domestic expansion• Plans for aggressive global expansion• Increased presence in the E-Commerce
sector
• High membership loyalty and satisfaction• Broadening customer base• Response to consumer trends
Costco maintains a high rate of customer loyalty
• The “Costco Lifestyle”
• Loyalty: 91% Subscription renewal rate in US and Canada
• 88% renewal rate worldwide
• Satisfaction Guarantee
• Importance of Word-of-mouth
18New Channels ❖ Low Cost ❖ Commitment to Customer
Source: Costco Annual Report 2015, Costco website
Costco uses products, promotions, and sustainable practices to broaden its customer base
19New Channels ❖ Low Cost ❖ Commitment to Customer
Products & Services
• Flowers• Designer Clothing• Cosmetics• E-Commerce
Promotions
• Huge savings for millennials
Sustainability
• Solar panels on warehouse roofs
• Efficient lighting
Source: Costco website, American Builders Quarterly, 2016
Costco’s memberships are steadily increasing year to year
• 81 Million cardholders worldwide
• In 2015, membership increased by more than 6%
– 4% increase in shopping frequency
20
Members in million
Gold Star
Business
New Channels ❖ Low Cost ❖ Commitment to Customer
Costco capitalizes on consumer’s growing preferences for private label brands
• 75% of US customers think of label brands as alternatives to name brands
21
Canada
USA
Source: Nielson Global Survey
New Channels ❖ Low CostNew Channels ❖ Low Cost ❖ Commitment to Customer
Membership revenue is on average more than 70% of Costco’s operating incomes
22
Source: Annual report 2011-2015
New Channels ❖ Low Cost ❖ Commitment to Customer
The firm value is $76.2B, suggesting an appropriate price per share of $161
23
Financial Assumptions
❖ Sales growth rate: 8.0% ❖ Membership growth rate: 6.4%
❖ COGS as % of sales: 89.2% ❖ Terminal growth rate: 3.0%
❖ SG&A as % of sales: 10.0% ❖ Risk free rate: 2.93%
❖ Beta: 0.845 ❖ WACC: 5.99%
Key Results
Enterprise Value
$76.2BPrice per Share
$161
We value Costco at $161, 4.8% above the current market price
24
Movement into New Distribution
Channels
Low Cost
Structure
Commitment to
Customer
• Low operating cost increases the gross margin• Efficient inventory and labor management• Pricing power over suppliers• New deal with Visa
• Opportunities for domestic expansion• Plans for aggressive global expansion• Increased presence in the E-Commerce
sector
• High membership loyalty and satisfaction• Broadening customer base• Response to consumer trends
AppendixNathalie & ZuliatRevenue growth 4Domestic warehouses 5Map 6International 7E-Commerce 8
Amy & HelenLow COGS 10Reasons for low COGS 11Inventory turnover 12Employee satisfaction 13Pricing power 14Low operating margin 15Visa 16
25
Additional Information
Food and Sundries 26History 1976-1989 27History 1991-2015 28Five Forces 29Stock Performance 30Financials 31Membership 32Sustainability 33Future Challenges 34Millennial data 35
Elsie & SyrineCustomer loyalty 18Broaden consumer base 19Membership increase 20Private label 21Membership revenue 22
Valuation 23
Food and Sundries are 55% of Costco’s revenues
26
Source: Costco’s Annual Report 2015
History 1976-1989• 1976: Price Club founded by Sol & Robert Price for $2.5 Million.
– First warehouse club for business shoppers only
– Remodeled airplane hangar in San Diego, CA
• 1980: Price Company offers public stock on July 12
• 1983: First Costco warehouse opens in Seattle
• 1984: Price Club sales exceed $1 billion, splits stock 2 for 1 on June 13
• 1985: Costco offers public stock on Dec. 5, opens first Canadian warehouse
• 1986: Price Company Stock splits 2 for 1 on Feb. 4, Costco opens a pharmacy and fresh meat dept.
• 1987: Costco opens first produce and bakery depts. Price Club and Costco open optical depts.
• 1989: Price Company is third most profitable company in US
27
History 1991-2015• 1991: Costco stock splits 2 for 1 on May 16
• 1992: Costco stock splits 3 for 2 on March 9, first Price Club in Mexico opens
• 1993: Shareholders approve Costco and Price Company merger, PriceCostco opens first warehouse in UK
• 1994: First Asia Costco opens in Korea, first hearing aid center opens
• 1995: First gas station opens, Kirkland Signature (exclusive, private label) is introduced
• 1997: Executive membership is introduced
• 1998: Costco opens E-Commerce on Costco.com
• 1999: Costco American Express co-branded membership credit card is introduced, average annual sales per warehouse reaches $100 million
• 2000: Costco opens Travel Business, stock splits 2 for 1 on Jan 14
• 2003: Average annual sales per warehouse $105 million, Costco.com generated sales of $226 million
• 2004: True Earnings credit card from Costco and American Express introduced, Costco is 5th largest retailer in US and 11th largest in world
• 2015: Costco announces Visa will replace American Express
28
Five Forces
29
Rivalries
Low switching cost
Many competitors
STRONG
Low switching costMany available substitutes
Bargaining Power of Customers
STRONG
Large supplier poolCostco only offers a few
Bargaining Power of Suppliers
WEAK
Low barrier to entry
Hard to match economies of scale
Threat of New Entry MEDIUM/WEAK
Traditional
Retail stores
Specialty stores
Growing e-commerce
Threat of Substitutes
STRONG
Costco Stock Performance over 5 years
30
Costco financials
31
COST WMT TGT Industry
Market Cap 67.36B 223.18B 39.83B 21.43B
EBITDA 4.84B 33.22B 7.41B 2.01B
Operating Margin 0.03 0.05 0.07 0.05
EPS 5.29 4.52 5.4 3.08
P/E 0.57 0.46 0.55 0.85
Membership Explanation
32
Gold Star membership
• $55 annual fee• One free
Household Card
Business Membership
• $55 annual fee• $55 per
additional cardholders
• Purchases for resale
Executive Membership
• $110 annual fee• 2% annual
reward• Additionally
discounted services
Costco is committed to sustainability
33
• Warehouses made of recycled metal
• Solar panels • Reduced water usage• Increased lighting efficiency• Efficient HVAC units• Better packaging• Grease Biofuel
Solar-Paneled Costco roof in Richmond, CA
New Channels ❖ Low Cost ❖ Commitment to Customer
Source: Costco Annual Report 2015, American Builders Quarterly, 2016
Future Challenges
Strong online competitors
Reliance on California markets
Fluctuating oil prices
Unpredictable foreign currency rates
Millennials Data
• Increased (percentages in the high single digits) sales of produce, including Kale
– Profit growth of 13% in 4th quarter of 2014
– Membership revenue up 7.3%
– $2.4 million in membership fees in 2014
• Specifically revealed its strategy of using produce to lure in younger customers
• Free delivery service in LA, NYC, and SF via a partnership with Google
• 2 million new shoppers
35
Source: Bloomberg, October 2014