Costco Case Study Essay

(Part 2)


The company seems to maintain a constant financial performance from year to year. Working capital has increased which shows that the company has more internal funds available to pay its current liabilities on a timely basis and finance inventory expansion, additional accounts receivable, and a larger base of operations without resorting to borrowing or raising additional equity capital. The current ration also shows that Costco is able to pay current liabilities by using assets that can be converted to cash in the near term. They are well above the 1.0 ratio. The return on stockholder’s equity has dropped a little over the years but is still within the average range of 12-15%. It seems to be the company is holding steady over the years. In addition to the above numbers, the 6% return on assets percentage shows that Costco’s assets are being well-used to generate revenue. The asset turnover of 11.54 also shows that Costco holds onto inventory for under 12 days.


• Also, because the company sells in bulk, operating costs and inventory ratios are reduced and inventory turnover is quicker. Also, because merchandise is placed on palettes, labor costs are reduced because stocking is not required.


• Costco does enjoy a competitive advantage over Sam’s Club and BJ’s Wholesale for the following reasons:
– Excellent customer service capabilities
– Maintaining low employee turnover
– Competitive pricing of membership fees while offering better selections (also fees contribute to net income)
– Great inventory turnover strategy (limited selection minimizes inventory costs and operating expenses)

Does Costco pay its employees too much? Does it make sense for Costco to compensate its employees so much better that the employees at Wal-Mart/Sam’s Club? Why or why not?
• No, I do not believe that Costco pays their employees too much. Sinegal was convinced that having a well compensated workforce will help execute Costco’s strategy successfully.