Costco Canada Inc.: Rates at A (high)

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

 

Note: Corporate rating represents the highest credit rating applicable to the direct obligations of Costco Wholesale Corporation.

 

The corporate rating for Costco Canada Inc., based upon the unconditional guarantee from its parent, Costco Wholesale Corp. (“Costco” or “the Company”), is assigned at A (high) with a Stable trend reflecting the following positive factors: (1) Results should continue to rise steadily within a healthy North American economy. EBIT improved 16% to $2.2 billion in the 36 weeks (3rd quarter F2000) ended May 7, 2000, driven by net 17 new warehouse openings and same store sales growth of 12%. (2) Costco benefits from its successful retail strategy, high portion of food sales and good member loyalty, and should be able to maintain its dominant club-warehouse market share position. (3) Despite growing cash needs and high store ownership, the steadily rising cash flow has allowed for an above average balance sheet over time. Net adjusted debt in the capital structure is modest and coverage ratios are strong.

 

Despite these strengths, Costco faces several challenges over the next few years; (1) To fund growth plans of 20-25 net new sites annually in each of the next two years, Costco has greatly increased its cash needs, spending nearly $740 million for the period with a projection of about $1.3 billion for F2000 and $1.5 billion for F2001. (2) Early in the 4th quarter, Costco began to utilize its $500 million issuer bid program to repurchase shares, totalling $100 million. (3) The North American merchandising and food retailing environments remain very competitive. (4) Overseas operations have lower profitability in aggregate but further expansion, especially in U.K., is improving results. While Costco must avoid overbuilding in any single area, new and existing domestic market expansion should aid long-term profits to remain strong. Sales per square foot are already high at $763 and profitability should continue to rise slowly but steadily. The possibility of a downturn in consumer spending would affect profitability and expansion plans, but Costco is likely in a good position to withstand such a situation and should continue to have reasonable results. While cash needs are growing, the substantial cash flow and cash holdings currently near $670 million should allow the balance sheet to remain above average through the next few years.