Costco Wholesale Corporation: Financial Statement Analysis (B) Harvard Case Solution & Analysis

Costco Wholesale Corporation: Financial Statement Analysis (B) Case Solution

The second factor is the members per store. It had been estimated that these would be around 10% of the total population by the end of the year 2010, however, it is not the case and they are approximately 6% of the 500,000 population, therefore, this assumption needs to be changed till the company achieves 10% members of the total population. Furthermore, the members per store are also constant at 50 and there is no effect of the renewal incorporated, which should be incorporated in the assumptions. Lastly, the assumptions do not seem to incorporate the impact of the saturation point of the market of 1500 warehouses, which would be shared among all the US competitors. Therefore, assumptions also need to be made to incorporate this point also.

Question 4
Review Torres’ forecasted income statement and common-size income statement. Do you feel these are achievable results for Costco?

If we analyze the forecasted income statement and the common size income statement, then it could be seen that the merchandise costs, general and admin expenses and the provision for the impaired assets is decreasing over all the years. On the other hand, the operating income margin and the net income margin for Costco from 2001 to 2010 also seem to be increasing consistently each year. Furthermore, if we look at the balance sheet, then the net operating long term assets for Costco also seem to be increasing over the forecasted period. However, based on the assumptions as identified in question 3, if all of those assumptions are incorporated in the forecasted income statement and the balance sheet of the company, then it would not be possible for the management of the company to achieve these forecasted results.

If we analyze the forecast of the abbreviated balance sheet for the period of 2001 to 2010, then it could be said that if over the forecasted period, the management assumes an aggressive rate of expansion for the new store openings then it is going to have a significant impact on the balance sheet and the free cash flow of the company. The increase in new stores openings is likely to bring rapid growth for the assets of the company. On the other hand, the rapid growth of the store opening would result in higher outflows for Costco and as a result of higher outflows; the management of Costco might face liquidity issues in future years to come.

Question 6
How does Costco’s use of the equity method to account for its ownership of the 20 warehouses in Mexico affect the income statement forecast, the balance sheet forecast, and the discounted cash flow model?

It has been stated that the sales from the Mexican stores would be accounted for separately using the equity method based on 50% ownership. In the light of the income statement, the ownership of these 20 stores increases the net income for the company as shown by the interest income and other line of item. However, this might be considered as an additional cost for the equity of Costco and this would result in an outflow from the discounted cash flow model, hence reducing the valuation for the company........................

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