DBRS Confirms Costco Wholesale Corporation at A (high) and R-1 (low), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Costco Wholesale Corporation (Costco or the Company) at A (high) and its Short-Term Rating at R-1 (low), all with Stable trends. The confirmation of the ratings reflect steady growth in Costco’s revenues and operating earnings despite the negative impact of foreign exchange and gasoline price fluctuations. The ratings continue to be supported by the Company’s large size, efficient operations, strong market position and the benefits associated with its warehouse membership business model. The ratings also consider intense competition in the retail industry, risks associated with geographic expansion and the potential for less conservative financial management.

Costco’s total revenue and EBITDA exhibited steady growth in 9M F2016. Cash flow from operations grew in line with earnings, increasing to $2.9 billion in 9M F2016, and the Company’s lease-adjusted debt-to-EBITDAR at 1.34x remained adequate for the current rating category.

Going forward, DBRS expects Costco’s earnings profile to remain stable due to its dominant position in the warehouse club segment, steady membership renewal rate, efficient operations and relative resilience to economic cycles. DBRS believes that comparable warehouse sales should grow in the low-single-digit range in F2016 and F2017 as the negative impact of foreign currency fluctuations will be moderated in this period. In this period, DBRS anticipates a 3% to 4% annual increase in new selling space (causing sales to grow by approximately 2% per year) and expects steady growth in the Company’s membership fee. As such, DBRS forecasts that total revenue will grow in the low- to mid-single digit range in each of F2016 and F2017. DBRS believes that Costco will maintain EBITDA margins of around 4% in this period.

Cash flow from operations should track operating income, and are expected to be approximately $4 billion on average per year in F2016 and F2017. DBRS expects that a steady increase in new warehouses, along with remodeling of existing ones and spending on modernization of information systems, will hold the Company’s capex budget at approximately $2.5 billion to $2.7 billion per year through F2017. DBRS believes that, subsequent to the special dividend paid in F2015, the Company will pursue its regular dividend policy, as a result of which the dividend outlay is likely to be approximately $750 million to $800 million per year through F2017. DBRS expects Costco to use its free cash flow (approximately $750 million on average per year, before working capital changes and after dividends, in F2016 and F2017) and cash on hand, supplemented by some incremental debt to repurchase shares while maintaining lease-adjusted debt to-EBITDAR below the mid-1.0x range, which is appropriate for the current rating category. The Company’s credit profile could, however, come under pressure if there is notable deterioration in comparable sales (excluding currency impact) or operating earnings over a prolonged period, and/or the Company adopts aggressive financial management choices, such as using more debt for greater shareholder returns that may increase financial leverage meaningfully over the mid-1.0x range for an extended period.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Merchandising Industry (August 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.