Costco Wholesale Canada Ltd.

Alden Greenhouse, David Schroeder / 416-593-5577 ext.2281, ext.2232 / agreenhouse@dbrs.com

DBRS is confirming the commercial paper and corporate ratings for Costco Wholesale Canada Ltd. at R-1 (middle) and A (high) with Stable trends, based on the Costco Wholesale Corporation (“Costco” or the “Company”).  The confirmation stems from the following considerations: (1) Costco has maintained its position as the dominant warehouse operator in North America through expansion and same-store sales growth despite a slowing economy.  Costco is well positioned to continue this growth as the Company enhances its in-store ancillary offerings, such as photo development and improved fresh food sections, as well as expanding existing and introducing new out-of-store offerings, such as the growing Gas station business, the co-branded Amex card, and the new “Costco Home” home furnishing concept.  (2) Despite large capital expenditures to finance expansion, the Company’s strong cash flow and zero-dividend policy generally allow capex to be internally funded, so the financial profile remains very solid, with net adjusted debt below 15%, which is much lower than peers.  Working capital is generally self-funding, which enhances this stability.  (3) The Company’s interest income and equity earnings more than cover interest costs. (4) The Company’s international operations (excluding Canada) have begun to contribute to the bottom line.  Traditionally the non-North American operations had been unprofitable, but as the store base matures, the foreign segment has generated minimal profit this year, and this contribution is expected to grow in the future.  (5) The Company continues to have substantially higher sales per warehouse than any of its competitors, doing over $100 million per warehouse annually, while Wal-Mart’s Sam’s Clubs drives near $60 million per warehouse and BJ’s Wholesale drives closer to $45 million.  This stems, in part, from the Company’s increased proportion of food sales. 

Despite these strengths, Costco does face some challenges:  (1) The entry of Wal-Mart’s superstores into food retailing has significantly impacted traditional food retailers.  While this impacts Costco to a much lesser degree due to the Company’s already low prices, the resulting rationalization and reformatting of the entire food retail landscape could affect the Company.  (2) Costco’s successful expansion will become much more difficult as the Company enters into markets where competitors are well entrenched.  In addition, as the North American market becomes saturated, the Company may need to continue its expansion overseas, which has proven difficult, or to look at other retail concepts, such as the Costco Home format the Company is currently testing.  Wal-Mart’s Sam’s Clubs has just announced its entrance into the Canadian market, building four to six stores in 2003.  Costco’s established presence (61 stores) and loyal customer base give the Company a significant competitive advantage in that market.

Dominion Bond Rating Service Limited (DBRS) will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, please contact us at: info@dbrs.com.