Costco Canada Inc.: Upgrades to R-1 (middle)

Sean Mason, David Schroeder / 416-593-5577 ext.2226, ext.2232 / e-mail: smason@dbrs.com

 

The commercial paper rating of Costco Canada Inc., which is based upon the unconditional guarantee from its parent, Costco Companies Inc., is upgraded to R-1 (middle) from R-1 (low), with a Stable trend. The rating upgrade reflects the following considerations: (1) Costco has a strong balance sheet. The ratio of net debt to total capitalization, including adjusting for operating leases as debt equivalent, is very low at 21.4% as at November 22, 1998, and cash and cash equivalents exceed US$450 million. (2) The Company continues to increase strongly both cash flow and earnings. In this respect, for the last two years, the Company has generated more than sufficient cash flow to cover its substantial capital expenditures program, and this trend is expected to continue. The strong profitability has had a positive impact on net interest coverage (including adjusting for operating leases), which reached 23.2 times for the rolling 12-months period ended November 22, 1998. (3) Costco is a dominant club warehouse operator in the U.S.A. and Canada, featuring high quality products at low prices. The success of its concept is recognized in its strong membership loyalty and renewal levels. (4) Challenges include: (a) Competing with Wal-Mart Inc.’s Sam’s Club, the other dominant U.S. club warehouse operator. Future expansion may bring Costco more into geographic areas where Sam’s Club is well established; (b) As yet, overseas operations are not highly profitable and further economies of scale are required before this is likely to be achieved; (c) the Company still generates a small percentage of its sales from its higher margin private label brands; and (d) the Company must find uses for the substantial accumulation of cash that it generates annually.