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Patrick Burke Elvina Mintarno Alex Kreter Peter ShepardLindsay Meck Peter Zaroulis

Not a Buy

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Agenda

1.Business Model• Cutting Cost, not Quality

2.Industry • Competitors • Expansion

3.Valuation• OVERPRICED

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Retail is Detail:What makes Costco Unique

Wholesale Membership

Products Services

• 1983 – Foundation

• 1993 – Merger

• 1996 – Branding

• 1997 – Incorporation

Business Model * Industry * Valuation

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Leading the Industry

• New Store Criteria– 80,000 households– 9,000 businesses

• Employees– Better Pay– Better Benefits

• Over Saturation – Cannibalization

Business Model * Industry * Valuation

Total Stores

Under Performing

BJ’s 172 29Sam’s Club

551 50

Costco 377 34

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• Membership- Gold Star

- 17,338,000 members- Executive Business

- 5,214,000 members

• Demographic Targets- Small business owners- High income families

Ringing Up Results

Business Model * Industry * Valuation

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Got Ads?

• No Frills– Low Overhead – No “paper or plastic?”

• Limited Advertising– E-marketing– Costco Connection

Business Model * Industry * Valuation

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Retail Sector Trends

• Consumer Confidence Index– July: up 7.3 to 112.6 points

• Consumer Price Index (CPI)– Rising

• Gas Price Forecasting– Leveling-off in 2008 Year 2006 2007 2008

All grades

2.62 2.84 2.82

Regular 2.58 2.79 2.78

July

‘07

Aug.

‘07

Sep.

‘07

Oct.

‘07

Nov.

‘07

Dec.

‘07

208.9 209.4 209.8 210.2 210.7 211.0

CPI Index CPI Forecast (CPI: 1982-1984 = 100)

Average Gas Prices ($/gallon)

Business Model * Industry * Valuation

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Market Share

Sales/ft2

Stores RetentionRate

TargetedLocations

Operating Profit per

warehouse

50% 795 377 89%Coasts-

Suburban/Urban

$3MM

40% 516 551 --East of

Mississippi Coast -

Suburban

$1.8MM

10% 411 172 85%Northeast-

Urban Areas $1.1MM

Costco Conquers Competitors

Business Model * Industry * Valuation

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Growth

Online sales

International expansion

Penetrate the U.S. Market

Private label with Martha Stewart

Pharmacies

Membership growth

Business Model * Industry * Valuation

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Discounted Cash Flow

Costco Price Per Share

Current: $64. 39

Our Price: $41.60

Historical Data Wall Street Expectations

Key Assumptions:

1. Sales Growth: 12%

2. Membership Rev. Growth: 12.5%

3. Gross Profit (ex MFI): 10.9%

Management Guidance

Business Model * Industry * Valuation

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Overvalued based on Comparables

Current Price: $64Target price based on P/E: $38.4, EV/Eb.: $43.4

Costco is overvalued based on Enterprise and Equity Multiples

22.6x 20.4x 20.7x

16.0x

20.9x 20.9x

13.0x

17.2x 14.7x 15.2x

10x

15x

20x

25x

Costco Walmart BJ Target Mean

EV/(EBITDA-Capx) P/E Fwd

Business Model * Industry * Valuation

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Say “No” to Costco

“Costco’s corporate philosophy is to put its customers first, then its employees, then

its vendors and finally its shareholders.” – Bill Dreher, financial analyst

• Low Profit Margin- Compete with Wal-Mart Prices

• Employee Benefits

Business Model * Industry * Valuation

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Works Cited

• Desjardins, Doug. "Costco Eyes Steady Growth Here, Abroad." LookSmart. 7 Feb. 2005. 1 Aug. 2007 <http://www.findarticles.com>.   

• Greenhouse, Steve. "How Costco Became the Anti-Wal-Mart." The New York Times 17 July 2005. 29 July 2007 <http://www.nytimes.com>. 

• Grom, Charles, Paul Trussell,  and Matthew R. Boss. Costco Wholesale Corporation: a Closer Look - New Store Economics, Overweight. New York, NY: JP Morgan Securities, Inc., 2007.   

• Holmes, Stanley, and Wendy Zellner. "The Costco Way." Business Week 3878 (2004). Academic Search Premier. 1 Aug. 2007.   

• Kozloff, Emme, and Ian Gordon. The Warehouse Club Industry. New York, NY: Sanford C. Bernstein & Co, 2004.