analysis costco & walt-mart (ratios) final

1. INTRODUCTION

1.1. COSTCO WHOLESALE CORP.

Costco Wholesale Corp. (from now on Costco) operates a membership

warehouses that provide different types of products such as food, electrical

appliances, office supplies, pharmaceutical medicines, furniture, and automotive

supplies among others. Until August 31st 2009, Costco operated 527 membership

warehouses, eight regional offices in the United States, two regional offices in

Canada and five regional offices internationally. In addition, it operates regional

cross-docking facilities (depots) for the consolidation and distribution of most

shipments to the warehouses, and various processing, packaging, and other

facilities to support ancillary and other businesses. Costco has also the following

subsidiaries: Costco Wholesale Canada Ltd, Costco Canada Holdings Inc., NW Re

Ltd, Costco Wholesale Membership Inc and Costco Wholesale United Kingdom

Ltd. Company got its new name on Aug.30, 1999, before it was called by the name

of Price/Costco. Company has joint ventures with Controladora Comercial

Mexicana, S.A. de C.V, The Price REIT, Price Club Mexico, Shinsegae

Department Store Co., Ltd. ("Shinsegae"). Finally, its mission statement is to offer

its members low prices on branded and selected label products, producing high

sales volumes and rapid inventory turnover (Mergent Online, 2010).

1.2. WAL- MART

Wal-Mart operates retail stores. Its operations comprise three segments: Wal-Mart

U.S., Sam's Club and International. Wal-Mart U.S. segment includes its discount

stores, supercenters and neighborhood markets in the U.S. as well as

walmart.com. Sam's Club segment consists of membership warehouse clubs in the

U.S. and the segment's online retail operations, samsclub.com. As of Jan 31 2009,

Co.'s International segment consisted of its operations in Argentina, Brazil,

Canada, Chile, China, Costa Rica, El Salvador, Guatemala, Honduras, India,

Japan, Mexico, Nicaragua, Puerto Rico and the U.K., and included retail stores and

restaurants that operate outside the U.S. Wal-Mart has the following subsidiaries:

1

Wal-Mart Stores East LP, Wal-Mart Property Company, Wal-Mart Real Estate

Business Trust and ASDA Group Limited in United Kingdom. Wal-Mart Stores, Inc.

is committed to saving people money so they can live better by providing quality

merchandise and services at everyday low prices (Wal-Mart and Mergent On Line,

2010).

2. PERFORMANCE MEASUREMENT AND ANALYSIS THROUGH RATIO ANALYSIS

2.1. RATIOS

Financial ratios are important to analyze since it helps to identify problems and

opportunities within a firm. The following section analyzes the performance

measurement and analysis through ratio analysis of Costco and Wal-Mart stores

as well as a comparison with its industry ratios. The information for the companies

ratios are calculated from Bloomberg 2010 and for the industry ratio are calculated

from Yahoo Finance 2010 and Source Capital IQ 2010, as shown in Annex I.

2.1.1. PROFITABILITY

Costco, in the last year, has decline in the growth of its sales in 1.5%, after having

grown in a sustainable way for more than four consecutive years, being 2008 the

year of maximum sales (US$ 72 438 millions). This fall is due to a decrease of 4%

in its sales (sales in warehouses open for at least one year, including relocated

warehouses). As well, net sales were impacted by the drop in the price of petrol

which resulted in a 30% decline of the average sales per gallon; by the fall of the

Canadian, American and Korean currency exchange rate (Costco Annual Report

2009 p.28); and by a lower number of warehouse openings year-over-year (Costco

Annual Report 2009, p.27).

Costco is one of two companies that are in the top ten stores of the retail and

warehousing industry that diminished its sales in 2009 and whose gross margin

was placed below the median of the industry (12.7% opposite to 28.9 % of the top

ten retail and warehousing industry), far below 28.6% of Target Corp (third rank

company in the industry) and 24.5% of Wal-Mart. Nevertheless, in the last five

2

years, the gross margin reached its maximum point of 12.7% in 2009 due to the

fact that the cost of goods sold felt -1.8% more than the sales, having an increase

of 1.2% of the gross profit being this the highest growth of the company in last five

years. The graph below shows the relationship between gross margin and sales

(Graph N° 1).

The increase in the gross margin is due to the raise in the food and sundries

departments and gasoline and pharmacy departments and in spite of the type of

unfavourable change in Canada, the United Kingdom and Korea which negatively

impacted gross margin for 2009 by approximately US$ 258 millions (Costco Annual

Report 2009 p.29-30).

GRAPH N°1: GROSS MARGIN & SALES

COSTCO WALT-MART

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

12.1

12.2

12.3

12.4

12.5

12.6

12.7

12.8

2005 2006 2007 2008 2009Sales Gross Margin

Costco: Gross Margin and Sales% US$ Millons

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

22

22.5

23

23.5

24

24.5

25

2005 2006 2007 2008 2009Sales Gross Margin

Walt-Mart: Gross Margin and Sales% US$ Millons

Source: Bloomberg Financial LP 2010Elaboration: Own

On the other hand, Wal-Mart has kept a sustainable growth in its sales during the

last five years, though from 2007 a minor step back is observed passing from a

rate growth of 11.6% to 7.2% in 2009. Last year increase was a product of its

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global store expansion programs, comparable store sales increases and

acquisitions (Wal-Mart Annual Report 2009 p.16), specifically due to an increase in

customer traffic, as well as increase in average transaction size per customer (Wal-

Mart Annual Report 2009 p.20). The gross margin presents the same rising trend

due to the fact that total revenue is always greater than the cost of goods sold.

Gross margin has grown in higher rates than the total revenue which guarantees a

sustainable growth of the first one. A well-known difference between both

companies is that Costco has diminished its operating income in the last year in

7.39% and Wal-Mart on the contrary has increased it in 4.59%.

In spite of the fact that both companies possesses a minor gross margin compare

to the top ten retail and warehousing stores of the industry, Wal-Mart EBIT Margin

in 2009 (5.7%) had a superior median of that of the industry (5.6%), while Costco

was only 2.5%. The reason that Wal-Mart could not obtain better results is because

the low performance of its operating units, International and Sam’s Club. The

International segment fell short of this objective due to fluctuations in foreign

currency exchange rates and due to increases in operating expenses (Wal-Mart

Annual Report 2009 p17).

This is reflected in the behaviour of its indicators of profitability. In Costco, in spite

of the increase in its ROA; ROE and ROC during 2008, in 2009 it decreased

reaching the minimum of the last five years in ROA and ROE indicators (5.3% and

11.3%, respectively). This is because last year net income decreased in 15.4%,

whereas asset and equity increased in 6.3% and 9.0%, respectively. In 2009, net

margin (or profit margin) was the lowest of the last five years, diminishing in 25

basic points approximately in regard to 2008. Wal-Mart profitability ratios show an

acceptable performance since its net income has a sustainable growth in the last

five years under analysis, concluding with an amount of US$ 13 400 millions.

Regarding the top ten retail and warehousing stores of the industry, in 2009,

Costco was left behind in its profitability indicators, being the median of the

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industry’s ROA 6.5% (1.2 percentage points over Costco) and the median of the

industry’s ROE was 14.5% (greater in 3.2 percentage points over Costco). Wal-

Mart situation is opposite since both indicators (ROA of 8.9% and ROE of 20.4%)

overcome the median of the industry. The graph below represents the relationship

between ROA, ROE and ROC (Graph N °2).

GRAPH N°2: RETURN ON ASSET, RETURN ON EQUITY & RETURN ON CAPITAL

COSTCO WALT-MART

0

5

10

15

20

25

2005 2006 2007 2008 2009

ROA ROE ROC

%

0

2

4

6

8

10

12

14

16

2005 2006 2007 2008 2009

ROA ROE ROC

%


2.1.2. LIQUIDITY

For Costco, primary sources of liquidity are cash flows generated from warehouse

operations and existing cash, cash equivalents, and short-term investment

balances, which were US$ 3 727 and US$ 3 275 at the end of 2009 and 2008,

respectively (Costco Annual Report 2009 p.34). In that case, Costco presents a

fluctuating behaviour in its indicators of liquidity during the last five years, placing

the current ratio of 2009 below the median of the industry, which affected its debt

capacity and payment in short term. As well, cash conversion cycle increased in

0.89 days, passing from 2.63 to 3.54 days between 2008 and 2009, being the latter

year the greater one of the last five years. The graph below (Graph N° 3)

demonstrates that the trend in Costco is increasing (with exception of 2008), but

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the number of days for any of the five years are low enough for the company to

operate efficiently.

In Wal-Mart case, the ratios of liquidity are low as demonstrated in the graph

below (Graph N° 3). During the last five years, Wal-Mart, has not overcome its

threshold of 0.90x from the year 2005 and on the contrary this one has fallen down

even more 0.82x in 2008 and it recovered only in 2009 with 0.89x. This situation

worsens in 2009 due to its quick ratio (0.2x) since it is far below the median of the

industry (0.5x), demonstrating that the company does not manage with efficiency

its current liabilities with its current assets. This deficit of working capital can be

explain by the use of cash in funding operations and in providing returns to

shareholders in the form of stock repurchases and payment of dividends (Wal-Mart

Annual Report 2009 p.22).

GRAPH N°3: CURRENT RATIO, QUICK RATIO AND CASH CONVERSION CYCLE

COSTCO WAL-MART

0

0.5

1

1.5

2

2.5

3

3.5

4

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2005 2006 2007 2008 2009

Quick Ratio Current Ratio Cash Conversion Cycle

Currente Ratio, Quick Ratio and Cash Conversion CycleTimes Days

0

2

4

6

8

10

12

14

16

00.10.20.30.40.50.60.70.80.9

1

2005 2006 2007 2008 2009

Quick Ratio Current Ratio Cash Conversion Cycle

Currente Ratio, Quick Ratio and Cash Conversion CycleTimes Days

Source: Bloomberg Financail LP 2010Elaboration: Own

2.1.3. ASSET UTILIZATION

Costco efficiency of its inventory, measured by the inventory turnover, has

diminished in almost a point in the last year. Costco is the leading store, in asset

6

utilization, of its industry during 2009 (11.9x in Costco against the industry median

of 5.5x), in spite of the fact that the sales decreased in 1.5%, whereas the industry

sales decreased in 0.7%, as sow in the graph below (Graph N° 4). This means that

Costco will delay approximately 30 days in selling its inventory, whereas the

median of the industry does it in 69 days approximately.

On the other hand, Wal-Mart presents an increasing trend in its inventory turnover

during the last five years demonstrating good management, in spite of the

deceleration of the growth of its sales. Nevertheless, in 2009 Wal-Mart is three

points below Costco (8.8x versus 11.9x, respectively), as show in the graph below

(Graph N°4).

GRAPH N°4: INVENTORY TURNOVER VS SALES GROWTH

COSTCO WALT-MART

3.5404

-4%-2%0%2%4%6%8%10%12%14%16%

11.4

11.6

11.8

12

12.2

12.4

12.6

12.8

13

2005 2006 2007 2008 2009

Inventory Turnover vs Sales Growth

Inventory Turnover % Sales

Times %

0%

2%

4%

6%

8%

10%

12%

14%

77.27.47.67.8

88.28.48.68.8

9

2005 2006 2007 2008 2009

Inventory Turnover vs Sales Growth

Inventory Turnover % Sales

Times %


Both companies possesses a period of cash collection more rapid than that of the

industry, which is shown in its accounts receivable turnover ratios, being Wal-Mart

in 2009 107.5x and Costco 90.2x opposite to 83.3x of the median of the industry.

Wal-Mart and Costco takes almost 3.3 days and 4 days, respectively to collect the

receivable accounts (days of outstanding sales), which means 4.3 days in that the

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industry is delayed in collecting receivable accounts. In both cases, the accounts

receivable turnover ratio diminishes, increasing the number of days of the on hand

inventory, passing from 2.9 to 4.0 days among 2005 and 2009 for Costco and from

1.8 days to 3.3 days in the same period for Wal-Mart. In 2009 the number of days

that Costco takes in paying its suppliers is 30.9 days and for Wal-Mart is 35.4 days.

This implies that both companies are managing efficiently its relationship between

its accounts receivables turnover and sales. The graph below shows the

relationship between account receivable turnover and sales (Graph N° 5).

GRAPH N°5: RECEIVABLES TURNOVER VS SALES GROWTH

COSTCO WALT-MART

-4%-2%0%2%4%6%8%10%12%14%16%

0

20

40

60

80

100

120

140

2005 2006 2007 2008 2009

Accounts Receivable Turnover % Sales

Times %

0%

2%

4%

6%

8%

10%

12%

14%

0

50

100

150

200

250

2005 2006 2007 2008 2009

Accounts Receivable Turnover % Sales

Times %


2.1.4. LEVERAGE AND CAPITALIZATION

Since 2007 Costco long term borrowings grew significantly, spending US$ 215

millions in 2006 to US$ 2 107 millions in the following years and to US$ 2 206

millions in 2009. Nevertheless, last year the equity grew in 9%, which motivated

the ratio debt/capital to diminish (from 20.1% to 18.5% among 2008 and 2009),

indicating a strengthening in its solvency and a minor risk in its equity holders.

Also, this demonstrates a good indicator of its solvency. In spite of the fact that this

ratio is over the median of its industry (19.4%), it is below Walt-Mart, which has a

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top leverage, being 64.7% in the year 2009. However, both companies are below

their third major competitor leverage, Target Corp's, in 136.8%.

Likewise, Costco's financial leverage measured by the asset/equity ratio has

improved in last two years, reassuring its solvency, passing from 2.25x in 2007 to

2.17x in 2009. Nevertheless, the reduction of the asset/equity ratio for Wal-Mart

was minimal of 2.45x to 2.42x among 2008 and 2009. In both cases, tolerable

levels of leverage are demonstrated in Walt Mat and Costco as demonstrated in

the graph below (Graph N° 6).

GRAPH N°6: TOTAL DEBT/TOTAL EQUITY

COSTCO WAL-MART

0

5

10

15

20

25

30

2005 2006 2007 2008 2009

Total Debt/Total Equity


%

56

58

60

62

64

66

68

70

72

2005 2006 2007 2008 2009



%


Nevertheless, the coverage ratios for Costco show a diminishing behaviour from

the year 2007, observing a significant and permanent decrease in the

EBITDA/Total Interest Expense and EBIT/Interest Expense ratios. This behaviour

indicates that the company has lost solvency throughout time, which reflects

insecurity in its obligations. This is explained by the performance of the interest

expenses, diminishing in 63% in 2006, increasing in 400% in 2007, and achieving

a growing tendency of up to US$ 108 millions in 2009 (Costco Annual Report 2009

p.34).

9

The increasing effect of this variable in 2007 is due to the issuance of the 2007

Senior Notes in February 2007. Meanwhile the increment in the interest expenses

in 2009 is owed to a decrease in capitalized interest related to reduced new

warehouse and remodel construction activity year-over-year (Costco Annual

Report 2009 p.32). Compared with the industry it can be observed that it is below

the medians of 27.7 and 4.7 for the EBITDA/Total Interest Expense and

EBIT/Interest Expense ratios, respectively. Nevertheless, Costco is over Wal-Mart

which confirms its solvency due to the fact that other companies from the industry

have a minor capacity. Wal-Mart, in spite of its last year recovery in its solvency

indicators EBITDA/Total Interest Expense (13.7x) and EBIT/Interest Expense

(10.6x), represents a diminishing trend due to the fact that the interest expenses

have sustainably grown up to US$ 2,184 millions in 2009 year (Wal-Mart Annual

Report 2009 p.49). This situation affirms the little solvency that Wal-Mart has,

increasing shareholders risk. The relationship of the interest coverage is shown in

the graph below (Graph N° 7).

GRAPH N°7: INTEREST COVERAGE

COSTCO WAL-MART

0102030405060708090

0

0.5

1

1.5

2

2.5

3

3.5

2005 2006 2007 2008 2009

EBIT/Total Interest Expense EBITDA/Total Interest ExpenseT12M CFO/Total Debt T12M FCF/Total DebtTotal Debt/T12M EBITDA

Interest Coverage

0

2

4

6

8

10

12

14

16

00.20.40.60.8

11.21.41.61.8

2005 2006 2007 2008 2009

EBIT/Total Interest Expense EBITDA/Total Interest ExpenseT12M CFO/Total Debt T12M FCF/Total DebtTotal Debt/T12M EBITDA

Interest Coverage

Source: Bloomberg Financial LP 2010

10

Elaboration: Own

2.1.5. MARKET VALUATION

A market valuation will confirm which company has a greater profitability, liquidity,

asset utilization and leverage over the others of the same industry.

GRAPH N°8: PE RATIO AND BASIC EARNINGS PER SHARE

COSTCO WALT-MART

0

0.5

1

1.5

2

2.5

3

3.5

17

18

19

20

21

22

23

24

2005 2006 2007 2008 2009

PE Ratio Basic Earnings per Share

Times

00.511.522.533.54

0

5

10

15

20

25

2005 2006 2007 2008 2009

PE Ratio Basic Earnings per Share

Times


From the graph above (Graph N° 8), it can be observe that Wal-Mart shows a

diminishing trend in its P/E ratio, passing from 21.7x to 13.8x, therefore the

investors are ready to pay less for every dollar of reported dividends. Wal-Mart P/E

ratio, in spite of the step back in 2009, is still greater than Costco, reaching 20.4x,

after achieving its maximum peak in the year 2007 (23.4x).

The earnings attributable to each share of common stock (Basic EPS) of Costco

have turn around its growth in 2009 after sustaining it during its last five previous

years and though it is over the median of the industry, it is below Wal-Mart in US$

3.4 millions. The same behaviour is presented by Diluted EPS of Costco, coming to

US$ 2.46 millions in 2009 after reaching its maximum in 2007 with US$ 2.89

11

millions, whereas for Wal-Mart it is US$ 3.3 millions, being this the maximum in the

last five years. This can be appreciated in the graph above (Graph N° 8).

In both companies it is observed that the future profitability exceeds the rate of

return needed by the market. This is explains because both company’s present a

price to book ratio superior to 1 throughout these five years. Specifically, both

overcome the median of the industry of 2.51x, being in 2009, 2.52x and 2.99x for

Costco and Wal-Mart, respectively. This ratio is greater for Wal-Mart due to the fact

that it supports a higher rate of performance on its patrimony. The price of book

value (P/B) can be appreciated in the graph below (Graph N° 9).

GRAPH N°9: PRICE TO BOOK VALUE (P/B)

2.00x

2.50x

3.00x

3.50x

4.00x

4.50x

dic-05 dic-06 dic-07 dic-08 dic-09

Wal-Mart Stores Inc. Costco


2.2. CRUCIAL SOURCES OF IMPROVEMENT OR DETERIORATION

COSTCO

Liquidity ratios are accepted by the industry (inventory turnover and receivables

turnover) allowing the company to possess the necessary liquidity to meet

requirements of some current obligations. Specifically, Costco enjoys an inventory

rotation over the average of its industry. This situation agrees with the fluency that

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a company must have since the products that Costco offers are for basic needs

(food).

Costco is a company with solvency and could assume long term debts, diminishing

its investor risk allowing the company to obtain a better competitive advantage over

others competitors since it has a superior inventory rotation over the average of its

industry. All this gives Costco the possibility of a continuing growth in the market.

Nevertheless, profitability ratios, ROE and ROA, are in an unfavourable situation

for the company, which indicates that the management of the company has not

been efficient. This is why it is recommended to carry out a detailed analysis of the

costs and expenses of the company in order for these to diminish and improve this

way the profitability of the company in order to obtain better benefits.

WAL-MART

The indexes of profitability for Wal-Mart are in a favourable position of that from the

industry, which indicates that the management of the company has been efficient;

nevertheless, the company is left behind in its position of solvency and liquidity.

Long run debts include a great percentage in the company’s administration in

relation to its equity and it will increase the investor’s risk. The company must try in

a possible way to restrict its obligations in long run due to the fact that Wal-Mart is

depending economically of third parties.

This negative situation in long term debts is due to unfavourable conditions of

liquidity supporting a negative working capital. Nevertheless, the turnover and

receivable turnover ratios compensate this situation, helping the company to meet

its current debts.

2.3. DUPONT ANALYSIS: THE DECOMPOSITION OF ROE

COSTCO

13

In 2009 ROE reached its lowest point of the last five years. The explanation of this

situation is due to the fall of its 5 components. The table above shows the

decomposition of ROE into its five elements (Table N° 1).

TABLE N°1: DU PONT ANALYSIS


The reason for the fall in the tax burden is that the net non-operational gains

diminished considerably in 78.8%, passing from US$ 132 527 millions to US$ 28

millions, in spite of the fact that the income tax expenses also fell down, but only in

12%. In previous years of 2009, net non-operational gains had made EBT to

become greater than EBIT, reason for which the interest burden was greater than

100% until 2009, year where EBT is less than EBIT. This is the reason why the

interest burden diminishes to 95.5%. In the same way, EBIT Margin also falls down

due to the fact that sales fell in a minor proportion than EBIT, being these 1.4%

and 8.8%, respectively. The graph below shows the relationship of these

components (Graph N° 10).

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GRAPH N°10: REVENUE, EBIT, EBT AND NET INCOME


The efficiency of the company, measured across the asset turnover, also

diminished in 2009, for what it is possible to affirm that Costco generates less

revenue for every dollar invested in its assets. This is due principally to the

reduction of sales in 1.46% opposite to an increase in the total asset of 6.2%.

Finally, the solvency measured across the leverage ratio, slowly increases during

the last year of the present analysis, due to an increase registered in the equity.

WAL - MART

For Wal-Mart, its ROE has increased in the last two years. The increase of last

year can explain by the raise in the asset turnover and the tax burden. The table

above shows the decomposition of ROE into its five elements (Table N° 2).

15

TABLE N°2: DUPONT ANALYSIS

Ratio 2005 2006 2007 2008 2009ROE 22.075 21.900 19.668 20.179 20.632

Tax Burden 63.7504 64.049 59.4897 63.1561 64.121Interest Burden 112.4337 93.7049 92.5404 91.8276 91.6659

EBIT Margin 5.0221 5.9958 5.879 5.8001 5.6207Asset Turnover 2.5346 2.4162 2.4064 2.4023 2.4812

Leverage 2.4196 2.5188 2.5254 2.4972 2.517check 220759 219002 196687 201792 206321


The fact that the tax burden has increased it implies that the company can support

a higher percentage of its pre-tax profits. Even though the income tax rate was

maintain in 34.3% for the last two years, the Earnings of Discontinued Operations

that have been negative until 2008, US$ (132) millions, went to be positive in 2009,

US$ 146 millions. This way the company income increase, in spite of the fact that

the income rate tax was greater in 2009 that in 2007, of 33.5%, and equally the

same for 2008.

The slight increase of the asset turnover in the last year indicates a greater

efficiency in the uses of its assets, obtaining a small increase in the quantity of

income that Wal-Mart generates for every dollar of assets. Meanwhile the fall in the

interest burden is due to the impact of the increase of the interest expenses in

3.9% on the company ROE. Also, the fall of the EBIT Margin is due to a constant

increase in the general selling and administrative expenses, been in 2009 US$ 76

299 millions. Finally, leverage is reduced by implying that the company is gaining

16

solvency, for that reason the company uses less debt to finance assets. The graph

above shows the relationship between revenue, EBIT, EBT and Net Income

(Graph N° 12).

GRAPH N°12: REVENUE, EBIT, EBT AND NET INCOME

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

0

5000

10000

15000

20000

25000

FY1 2005 FY1 2006 FY1 2007 FY1 2008 FY1 2009

Revenue, EBIT, EBT and Net Income

Income Tax Expenses (Credits) Pretax Income Net Income/Net Profit (Losses) EBIT(Earn Bef Int & Tax) Sales/Revenue/Turnover

Others Revenue


2.4. S&P BOND RATING CRITERIA

COSTCO

Utilizing the most recent available criteria of Standard and Poor’s (Corporate

Rating Criteria 2006 p. 43 -Table 1) it has been concluded that the rating for

Costco is A. This rating is obtained because of the low performance of ROC, in

spite of the fact that the rating grade of the interest coverage ratios are

concentrated with AA. Even though the company has an average capacity to

satisfy payments for acquired obligations it is not generating acceptable

17

profitability. The table below shows the ratios rating grade for Costco in the last five

years (Table N° 3).

TABLE N°3: RATIOS RATING GRADE


WAL - MART

Using the same criteria as the previous case it is concluded that Wal – Mart rating

of Wal-Mart is A-. The reason of this rating is due to the low performance of the

ROC and the concentration of the rating grade A in the interest coverage ratios.

This average rating grade indicates that the company is not very solvent nor it

obtained an acceptable profitability. The table below shows the ratios rating grade

for Wal - Mart in the last five years (Table 4).

TABLE N°4: RATIOS RATING GRADE

18

Bloomberg Ratios 2005 2006 2007 2008 2009 Rating GradeEBIT/Total Interest Expense 10.9595 11.8662 10.2948 9.7435 10.0343 A

EBITDA/Total Interest Expense 14.3298 14.8117 13.0367 12.5473 13.0004 AT12M CFO/Total Debt 0.4845 0.4543 0.5114 0.4621 0.5483 AT12M FCF/Total Debt 0.0693 0.08 0.1098 0.1277 0.2759 A

Total Debt/T12M EBITDA 1.658 1.6619 1.5032 1.5802 1.4293 ATotal Debt/Total Capital 37.9665 41.5368 37.9734 40.1653 38.4871 A

ROC 14.7248 14.2715 13.1605 13.5733 13.8845 BBBA-AVERAGE RATINGS GRADE:


3. WEIGHTED AVERAGE COST OF CAPITAL

Cost of capital is the rate of return that the suppliers of capital (bondholders and

owners) require as compensation for their contribution of capital. The most

common way to estimate this required rate of return is to calculate the marginal

cost of each of the various sources of capital and then calculate a weighted

average of these costs, that is, weighted average cost of capital.

In both companies, Costco and Wal-Mart, and according to Bloomberg, the

marginal cost of the equity has been obtained by using CAPM method, using a risk

free rate of 3.65% for Costco and 3.64% for Wal-Mart, being the beta of the first

one 0.85 and of the second one 0.66. With this result Costco's operations presents

a greater sensibility to the fluctuations of the market. The tables below show the

Equity, Debt and Preferred Equity of Costco and Wal-Mart (Table N° 5 and N° 6).

TABLE N°5: COSTCO WEIGHTED AVERAGE COST OF CAPITAL

Weight (W) Cost (C) W x CEquity 92.26% 9.15% 8.44%Debt 7.74% 2.93% 0.23%Pref Equity 0.00% 0.00% 0.00%

8.67%8.80%

EVA 0.13%

WACCROIC


19

TABLE N°5: WALT-MART WEIGHTED AVERAGE COST OF CAPITAL

Weight (W) Cost (C) W x CEquity 79.99% 7.90% 6.32%Debt 20.01% 2.48% 0.50%Pref Equity 0.00% 0.00% 0.00%

6.82%12.94%

EVA 6.12%

WACCROIC

Source: Bloomberg Financial LP 2010Elaboration: Own In both companies there is no preferred equity (or preferred stock), as well as in

both cases the shareholders demand a greater rate of return. What is observed is

that third parties demand a major rate from Costco, that is to say and according to

the perception of third parties, this company has a greater cost of opportunity than

Walt-Mart, 2.93% of Costco against 2.48% of Wal-Mart. Also, shareholders of Wal-

Mart demand a minor rate of return (7.90%) than the shareholders of Costco

(9.15%). From the analysis of both companies, Costco possesses a greater WACC

than Wal-Mart, 8.67 % versus 6.82 %, respectively.

This conclusion might sound contradictory with the analysis of ratios, but it is in this

type of analysis that a person can commit mistakes when the risk of a company is

inference and where a limitation of the cost of opportunities comes out. These are

two big companies that commercialize products and belong to different sectors,

where it is not easy to develop comparisons and evaluations. Additionally, the

analysis realized in the document S&P Bond Rating Criteria is only centred on the

coverage of interests (Standard and Poor’s Corporate Rating Criteria, 2008).

In conclusion, not only Wal-Mart possesses a minor WACC, but additionally with

the resources obtained from its shareholders and third parties Wal-Mart obtains a

greater profitability of 12.94% against 8.80% of Costco.

4. WORKING CAPITAL MANAGEMENT

20

In this section an exhaustive analysis of the ratios of liquidity has been made.

Likewise, it will be considered the results obtained in the “The 2009 Working

Capital Scorecard” given by CFO, since both companies are in the Food and

Staples Retailing Industry. As it can be observed, the results from the Scorecard

are slightly different from the ratios showed in Bloomberg, in that case the

comparison with the industry’s median will be realized under CFO's parameters

(CFO Magazine, 2009).

CASH CONVERSION CYCLE, this indicator is a measure of the cash cycle calculated

as the sum of a firm’s inventory days and account receivable days, less its account

payable days. The cash cycle, is the length of time between when a firms pay cash

to purchase its initial inventory and when it receives cash from the sale of the

output produced from that inventory (Berk et al, 2010).

Year 2005 2006 2007 2008 2009Costco 2.56 2.91 3.09 2.63 3.54Walt-Mart 14.93 14.13 11.39 9.70 9.59

Whereas Costco is located in a position higher than Wal-Mart because the

industry’s median was 11.7 days for the year 2008, Wal-Mart is place in a position

below, in spite of the fact that Wal-Mart has reduced its measure from 14.93 in the

year 2005 to 9.70 in the year 2008.

INVENTORY CONVERSION PERIOD

It is observed that the number of days that the inventory delays in rotating in

Costco is less than in Wal-Mart throughout the last five years, in spite of the fact

that Wal-Mart is reducing this indicator since 2006. Under CFO's Scorecard, in the

year 2008, Costco has remained below the median of the industry, whereas Walt

Mart would be located over the median (26.9 days).


21

RECEIVABLES COLLECTION PERIOD

Receivables collection period or days sales outstanding (terminology used by

CFO) is always greater in Costco than in Walt-Mart, both with an increasing trend

and according to CFO, would be located above the industry range (median for the

year 2008 was 4.9 days) indicating a good performance in both companies.


PAYABLES DEFERRAL PERIOD:

Payables deferral period for Costco is always less than Walt-Mart, but both

companies would be, according to CFO, above the median of the industry which is

20.0 days for the year 2008, indicating a good performance.


From the mention above, the main difference is in the inventory conversion period,

indicating that Costco has a better management of its inventories. This implies that

Costco receives cash quickly while paying their supplier close to its due dates. On

the other hand, Wal-Mart has a better payables deferral period. Therefore, Costco

is efficient in its internal operations with the availability of net cash flow meaning

that this company has liquidity to manage its activities. Whereas Wal-Mart might

reduce its period of inventory rotation by selling its products in a faster way.

5. DIVIDEND POLICIES

Wal-Mart demonstrates to grant a greater quantity of dividends per share

throughout the last five years, enlarging the distance between both companies.

From having a difference of only 0.09 points in the year 2005, it passed to be a

difference of 0.27 in the year 2009. This explains why Wal-Mart presents a deficit

of working capital (Wal-Mart Annual Report 2009 p.22). Wal-Mart paid dividends of

22

US$ 0.95 per share in 2009 that is a 8.0% over 2008. For the same company, the

expected capital needs depends on the payment of dividends, in that way if

resources were remaining short to pay dividends, the company could anticipate it

by funding commercial paper and long-term debt. Walt Mart during 2009 issued

US$ 6.6 billions of long-term debt. The net proceeds from the issuance of such

long-term debt were used to repay outstanding commercial paper indebtedness

and for other general corporate purposes (Wal-Mart Annual Report 2009 p.24). It is

inferred throughout this behavior that Wal-Mart policy is “Steadily Increasing

Dividends Policy” and that it has a stable growth and profit which increases every

year. Since this is a mature company, it should keep on paying dividends.

Meanwhile, Costco determines the size of its dividends on the basis of its

profitability and expected needs. In spite of the fact that its net sales and net

income diminished the dividends per share in the last year it still demonstrates to

be a mature company and that it will continue to pay dividends to its shareholders.

The percentage of earnings that Costco pays as dividends to the shareholders is

measured by the payout ratio that has grown considerably in the last year,

reaching to be 27.3%, which is closely to the 28% of Walt Mart for the same year.

Additionally, both companies present an increasing behaviour in this ratio which

indicates a decrease in its retention rate (1-dividend payout ratio). Therefore, both

companies are considered to be mature and have a stable behaviour. From the

table and graph below it can be appreciated both industries dividends analysis for

the last five years (Table 6 and Graph 13).

TABLE N°6: COSTCO AND WALT-MART DIVIDENDS

23

Costco 2005 2006 2007 2008 2009Dividends (US$) 205 230 246 265 296Dividends per Share 0.43 0.49 0.55 0.61 0.68Payout Ratio % 19.2% 20.9% 22.7% 20.7% 27.3% Walt-Mart 2005 2006 2007 2008 2009Dividends (US$) 2214 2511 2802 3586 3746Dividends per Share 0.52 0.6 0.67 0.88 0.95Payout Ratio % 21.6% 22.4% 24.8% 28.2% 28.0%

Source: Bloomberg Financial LP 2010 and Source Capital IQ 2010Elaboration: Own

GRAPH N°13: COSTCO AND WAL-MART DIVIDENDS PER SHARE

0

0.2

0.4

0.6

0.8

1

2005 2006 2007 2008 2009

Dividends per share

Costco Walt-Mart


STOCKS REPURCHASE PROGRAM

24

Costco repurchase program is conducted under authorizations made by its Board

of Directors. In October 2004 an inception of the program occurred, through 2009

fiscal year, the Board has authorized the total of US$ 6 800 for stock repurchases,

including US$ 300 and US$ 1 000 authorized in September 2007 and November

2007, which expired in August 2010 and November 2010, respectively, and US$ 1

000 authorized in July 2008, which expires in July 2011 (Costco Annual Report

2009 p. 41).

Given this inception of the program, Costco repurchased US$ 88.7 millions of

common stock shares for a total cash investment of US$ 4 798 (US$ 54.08 per

share) through 2009 fiscal year end. The maximum remaining dollar value of

shares that may be purchased under the stock repurchase program is US$ 2 002.

There was no common stock repurchase program activity for the fourth quarter of

2009 (Costco Annual Report 2009 p.24).

On the other hand, Wal-Mart has repurchased common stock shares of under US$

10.0 billions share repurchase program authorized by its Board of Directors in

September 2004. On May 31 2007, its Board of Directors replaced the US$ 10.0

billions share repurchase program, which had US$ 3.3 billions of remaining

authorization for share repurchases with a new US$ 15.0 billions share repurchase

program announced on June 1 2007. Under this new program, there is no

expiration date or other restriction limiting the period over which Wal-Mart can

make its share repurchases, which will expire only when Wal-Mart repurchased

US$ 15.0 billions of its shares under the program (Wal-Mart Annual Report 2009

p.24). Wal-Mart, fixes its repurchase of shares on the basis of current cash needs,

its capacity for leverage, its cost of borrowings and the market price of its common

stock.

According to the previous analysis, a recommendable policy in view of their stable

profits might be “Low Stable Dividend and Premium Payout Policy” in which stable

dividends plough paid first and the premium is paid when the company's profit is

25

higher than expected. This policy would you have to positive impact on the owners

giving priority to current and future consumption (the capital gain) (Alekneviciene V.

et. al, 2006).

CONCLUSION

Though, it is true that by analyzing Costco’s ratios it can be demonstrated that this

company has a more efficiency administration, a better liquidity, solvency and a

superior administration of working capital, Wal-Mart utilizes in a better way the

resources given by its shareholders measured by EVA. Additionally, Wal-Mart is a

company that has resisted in a better way the economic crisis in such a way that it

increased its net income in the last year obtaining a better profitability indicators

measured by ROA and ROE. Therefore, in spite of the best performance made by

Costco, it is considered that Wal-Mart is a more profitable company and that it

manages its resources better.

REFERENCES

Alekneviciene V. et. Al (2006) The Development of Company Dividend

Policy in Respect of Profit Distribution Priorities. Engineering Economics

[Internet], 2006, Vol. 50 Issue 5, p17-25. Available from:

<http://ezproxy.mala.bc.ca:2048/login?url=http://search.ebscohost.com/

login.aspx?

direct=true&AuthType=ip,cookie&db=bth&AN=23654107&site=ehost-live >

[Accessed 5 February 2010].

Berk, J., DeMarzo, P., and Stangeland, D. (2010) Corporate Finance,

Toronto, Pearson Education.

CFO Magazine (2009) The 2009 Working Capital Scorecard. Available from:

<http://www.cfo.com/article.cfm/13720061> [Accessed 16 February 2010].

26

http://ezproxy.mala.bc.ca:2048/login?url=http://search.ebscohost.com/login.aspx?direct=true&AuthType=ip,cookie&db=bth&AN=23654107&site=ehost-live



Costco (2010) Investor Relations [Internet], Costco Wholesale Corporation

Annual Report 2009. Available from:

<http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-

irhome&cm_re=1_en-_-Bottom_Nav-_-Bottom_investor&lang=en-US>

[Accessed 20 January 2010].

Mergent Online (2010) Company Details: Costco Wholesale Corp. [Internet],

Available from: <http://ezproxy.mala.bc.ca:2102/compdetail.asp?

company=16720&Type=financials&DataType=Ratios&DataPeriod=Annuals

&DataArea=BS&DataRange=7&Footnotes=off&Currency=AsRep&Scale=10

00> [Accessed 20 January 2010].

Mergent Online (2010) Company Details: Wal-Mart [Internet], Available

from:<http://ezproxy.mala.bc.ca:2102/compdetail.asp?

company=91348&type=financials&DataType=Ratios&DataRange=7&Submit

=Refresh > [Accessed 20 January 2010].

Standard and Poor’s Corporate Grading Criteria (2006) [Internet], Available

from:

<http://www2.standardandpoor.com/spf//pdf/fixedincome/corporateratings_0

52007.pdf> [Accessed 2 February 2010].

Standard and Poor’s Corporate Grading Criteria (2008) [Internet], Available

from: < http://www.nafoa.org/pdf/CorprateCriteriaBook-2008.pdf> [Accessed

10 February 2010].

Yahoo Finance (2009) Costco Wholesale Corp. [Internet], Available from:

<http://finance.yahoo.com/q?s=cost> [Accessed 22 February 2009].

Yahoo Finance (2009) Wal-Mart[Internet], Available from:

<http://finance.yahoo.com/q?s=wm> [Accessed 22 February 2009].

27

http://finance.yahoo.com/q?s=cost

http://www2.standardandpoor.com/spf//pdf/fixedincome/corporateratings_052007.pdf

http://www2.standardandpoor.com/spf//pdf/fixedincome/corporateratings_052007.pdf

http://ezproxy.mala.bc.ca:2102/compdetail.asp?company=91348&type=financials&DataType=Ratios&DataRange=7&Submit=Refresh



http://ezproxy.mala.bc.ca:2102/compdetail.asp?company=16720&Type=financials&DataType=Ratios&DataPeriod=Annuals&DataArea=BS&DataRange=7&Footnotes=off&Currency=AsRep&Scale=1000



http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-irhome&cm_re=1_en-_-Bottom_Nav-_-Bottom_investor&lang=en-US

http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-irhome&cm_re=1_en-_-Bottom_Nav-_-Bottom_investor&lang=en-US

ANNEX I: FINANCIAL RATIOS OF THE TOP 10 RETAIL STORES AND WAREHOUSING OF THE INDUSTRY BY REVENUE based on Yahoo Finance ranking and source Capital IQ

Return on Assets % 2004 2005 2006 2007 2008 2009

Dollar Tree Inc Nasdaq

NA 11.2% 9.9% 10.6% 11.3% 12.0%

Big Lots Inc NYSE 4.4% 2.4% 1.1% 6.9% 9.3% 11.1%

Family Dollar Stores 11.8% 9.1% 9.2% 9.4% 8.6% 10.4%

Wal-Mart Stores Inc. 9.4% 9.6% 9.1% 8.8% 8.8% 8.9%

BJ s Wholesale Club 6.5% 6.3% 6.9% 4.8% 6.1% 6.8% Target Corp NYSE TG

6.6% 7.1% 8.0% 8.8% 8.0% 6.2%

Costo 6.2% 5.9% 6.0% 5.2% 6.0% 5.3% Dollar General Corp NYSE

13.1% 12.8% 14.2% 6.9% 4.2% 4.4%

Fred s Inc Nasdaq 8.1% 5.6% 5.2% 5.3% 3.6% 3.7% Median99 Cents Only Stores NYSE

NA NA NA 0.6% (0.6%) 2.5% 6.5%

Return on Capital

% 2004 2005 2006 2007 2008 2009

Big Lots Inc NYSE 6.0% 3.4% 1.6% 10.4% 15.3% 19.4%

Family Dollar Stores 19.2% 15.3% 15.7% 16.9% 15.6% 17.9% Dollar Tree Inc Nasdaq

NA 13.9% 12.3% 13.5% 15.4% 16.5%

BJ s Wholesale Club 13.0% 12.7% 13.6% 9.3% 12.3% 14.0%

Wal-Mart Stores Inc. 13.6% 14.1% 13.4% 13.1% 12.9% 13.1%

Costo 10.2% 10.0% 10.5% 9.3% 10.8% 9.4% Target Corp NYSE TG

9.2% 10.1% 11.6% 12.7% 11.3% 8.5%

Dollar General Corp 18.7% 18.4% 20.9% 10.3% 5.4% 5.5%

28

NYSE

Fred s Inc Nasdaq 11.2% 7.8% 7.3% 7.4% 5.0% 5.1% Median99 Cents Only Stores NYSE

NA NA NA 0.8% (0.7%) 3.1% 11.2%

Return on Equity

% 2004 2005 2006 2007 2008 2009

Big Lots Inc NYSE 8.0% 2.9% 1.5% 10.2% 17.1% 21.9%

Family Dollar Stores 19.6% 15.7% 14.8% 20.4% 19.2% 21.6% Dollar Tree Inc Nasdaq

NA 16.6% 14.9% 16.4% 18.7% 20.5%

Wal-Mart Stores Inc. 21.3% 22.5% 22.2% 21.2% 20.4% 20.4% Target Corp NYSE TG

15.7% 15.6% 17.7% 18.7% 18.4% 15.3%

BJ s Wholesale Club 13.2% 13.4% 13.9% 9.1% 12.1% 13.8%

Costo 12.4% 12.9% 12.2% 12.2% 14.4% 11.3%

Fred s Inc Nasdaq 12.2% 9.3% 8.0% 7.5% 2.9% 4.4% Dollar General Corp NYSE

21.0% 21.3% 20.6% 8.0% (0.6%) 3.9% Median

99 Cents Only Stores NYSE

NA NA NA 1.9% 0.6% 1.6% 14.5%

Gross Margin % 2004 2005 2006 2007 2008 2009

Big Lots Inc NYSE 41.9% 40.7% 39.1% 39.9% 39.5% 40.0% 99 Cents Only Stores NYSE

40.0% 38.4% 37.5% 39.2% 38.4% 39.3%

Family Dollar Stores 33.8% 32.9% 33.1% 34.0% 33.6% 34.8% Dollar Tree Inc Nasdaq 36.4% 35.6% 34.5% 34.2% 34.4% 34.3% Dollar General Corp NYSE

29.4% 29.5% 30.0% 26.5% 27.8% 29.3%

Target Corp NYSE TG 30.7% 31.3% 31.2% 30.1% 30.0% 28.6% Fred s Inc Nasdaq 28.2% 28.1% 28.2% 28.1% 28.1% 28.0% Wal-Mart Stores Inc. 23.2% 23.7% 23.9% 24.2% 24.3% 24.5% Costo 12.5% 12.5% 12.3% 12.2% 12.4% 12.7% Median

BJ s Wholesale Club 10.1% 10.3% 12.1% 12.1% 11.8% 11.7% 28.9%

EBIT Margin % 2004 2005 2006 2007 2008 2009

Dollar Tree Inc Nasdaq 10.5% 9.4% 8.4% 7.8% 7.8% 7.9% Target Corp NYSE TG 7.5% 7.7% 8.2% 8.5% 8.3% 6.8% Family Dollar Stores 7.6% 5.8% 5.7% 5.7% 5.2% 6.2% Dollar General Corp NYSE

7.5% 7.3% 7.7% 3.6% 4.1% 5.9%

Wal-Mart Stores Inc. 5.8% 6.1% 6.0% 5.9% 5.8% 5.7% Big Lots Inc NYSE 3.1% 1.7% 0.7% 3.9% 5.1% 5.5% Costo 2.9% 2.8% 2.7% 2.4% 2.7% 2.5% BJ s Wholesale Club 2.5% 2.5% 2.7% 1.8% 2.2% 2.2% 99 Cents Only Stores NYSE

10.0% 2.6% 1.2% 0.6% (0.5%) 2.0% Median

Fred s Inc Nasdaq 3.8% 2.7% 2.5% 2.4% 1.7% 1.8% 5.6%

29

Current Ratio 2004 2005 2006 2007 2008 2009 Fred s Inc Nasdaq 2.5x 2.8x 2.6x 2.9x 3.2x 2.9x Dollar Tree Inc Nasdaq 2.7x 3.3x 3.2x 2.5x 1.9x 2.6x 99 Cents Only Stores NYSE

NA NA 2.8x 3.0x 2.6x 2.6x

Dollar General Corp NYSE

2.2x 2.1x 2.1x 2.1x 1.8x 1.7x

Big Lots Inc NYSE 2.7x 2.5x 2.3x 2.4x 1.8x 1.7x Target Corp NYSE TG 1.6x 1.7x 1.5x 1.3x 1.6x 1.7x Family Dollar Stores 1.6x 1.5x 1.4x 1.4x 1.3x 1.5x BJ s Wholesale Club 1.2x 1.3x 1.3x 1.2x 1.2x 1.2x Costo 1.2x 1.2x 1.1x 1.1x 1.1x 1.1x Median

Wal-Mart Stores Inc. 0.91x 0.90x 0.90x 0.90x 0.82x 0.88x 1.7

Quick Ratio 2004 2005 2006 2007 2008 2009 99 Cents Only Stores NYSE

NA NA 1.2x 1.2x 0.9x 1.0x

Target Corp NYSE TG 0.7x 0.9x 0.8x 0.7x 0.9x 0.9x Dollar Tree Inc Nasdaq 0.6x 1.1x 1.1x 0.8x 0.2x 0.9x Fred s Inc Nasdaq 0.3x 0.3x 0.3x 0.4x 0.5x 0.6x Costo 0.6x 0.6x 0.4x 0.5x 0.5x 0.5x Family Dollar Stores 0.3x 0.2x 0.2x 0.3x 0.2x 0.4x Dollar General Corp NYSE

0.6x 0.3x 0.3x 0.3x 0.2x 0.4x

Wal-Mart Stores Inc. 0.17x 0.17x 0.18x 0.20x 0.16x 0.20x BJ s Wholesale Club 0.2x 0.3x 0.3x 0.2x 0.2x 0.2x Median

Big Lots Inc NYSE 0.5x 0.0x 0.0x 0.6x 0.1x 0.1x 0.5

Accounts Receivable Turnover 2004 2005 2006 2007 2008 2009

Costo 108.0x 122.5x 109.9x 208.7x NM NM Wal-Mart Stores Inc. 181.6x 191.5x 145.5x 128.7x 116.8x 107.5x 99 Cents Only Stores NYSE NA NA NA NM NM NM Fred s Inc Nasdaq 67.7x 73.0x 79.3x 71.1x 59.3x 60.1x Big Lots Inc NYSE 252.7x NA NA NA NA NA Dollar Tree Inc Nasdaq NA NA NA NA NA NA Family Dollar Stores NA NA NA NA NA NA BJ s Wholesale Club 94.2x 88.7x 83.9x 83.2x 82.8x 83.3x Dollar General Corp NYSE NA NA NA NA NA NA Median

Target Corp NYSE TG 8.0x 9.4x 9.6x 9.8x 8.6x 7.8x 83.3

30

Inventory Turnover 2004 2005 2006 2007 2008 2009

Costo 12.1x 12.1x 12.3x 12.0x 12.8x 11.9x BJ s Wholesale Club 9.0x 9.0x 8.8x 9.0x 9.2x 10.2x Wal-Mart Stores Inc. 7.8 7.7 7.7 8.0 8.3 8.8 Target Corp NYSE TG 6.1x 6.3x 6.3x 6.8x 6.7x 6.6x Dollar General Corp NYSE 4.3x 4.3x 4.2x 4.6x 5.0x 5.5x 99 Cents Only Stores NYSE NA NA NA 4.6x 5.1x 5.5x Family Dollar Stores 3.8x 3.8x 4.0x 4.3x 4.4x 4.8x Dollar Tree Inc Nasdaq NA 3.5x 3.7x 4.4x 4.5x 4.6x Fred s Inc Nasdaq 4.3x 4.0x 3.9x 4.1x 4.0x 4.1x Median

Big Lots Inc NYSE 2.9x 2.9x 3.1x 3.6x 3.7x 3.8x 5.5

Total Asset Turnover 2004 2005 2006 2007 2008 2009 BJ s Wholesale Club 4.2x 4.1x 4.1x 4.3x 4.5x 4.9x Costo 3.4x 3.3x 3.5x 3.5x 3.6x 3.3x Fred s Inc Nasdaq 3.5x 3.3x 3.3x 3.5x 3.3x 3.3x Big Lots Inc NYSE 2.3x 2.3x 2.6x 2.8x 2.9x 3.2x Family Dollar Stores 2.5x 2.5x 2.6x 2.7x 2.6x 2.7x Wal-Mart Stores Inc. 2.6x 2.5x 2.4x 2.4x 2.4x 2.5x Dollar Tree Inc Nasdaq NA 1.9x 1.9x 2.2x 2.3x 2.4x 99 Cents Only Stores NYSE NA NA NA 1.7x 1.9x 2.0x Target Corp NYSE TG 1.4x 1.5x 1.6x 1.6x 1.5x 1.5x Median

Dollar General Corp NYSE 2.8x 2.8x 2.9x 3.0x 1.6x 1.2x 2.6

Total Debt/Equity 2004 2005 2006 2007 2008 2009 Dollar General Corp NYSE 18.1% 16.1% 16.2% 15.5% 161.4% 148.3% Target Corp NYSE TG 99.0% 73.2% 69.5% 64.2% 111.6% 136.8% Wal-Mart Stores Inc. 60.7% 62.9% 72.8% 63.4% 69.1% 64.7% Costo 17.3% 8.7% 6.2% 25.8% 25.5% 23.0% Dollar Tree Inc Nasdaq 18.3% 24.2% 22.9% 23.0% 27.2% 21.4% Family Dollar Stores NA NA 20.7% 21.3% 19.9% 17.4% Big Lots Inc NYSE 18.4% 14.8% 0.5% NA 25.6% 8.8% Fred s Inc Nasdaq 2.8% 7.9% 2.3% 0.8% 9.7% 1.3% BJ s Wholesale Club 0.5% 0.4% 0.3% 0.3% 0.2% 0.2% Median99 Cents Only Stores NYSE

NA NA 1.4% 1.5% 1.5% 0.1% 19.4%

EBIT / Interest Exp. 2004 2005 2006 2007 2008 2009

31

BJ s Wholesale Club NM 219.7x NM 233.7x NM NM Big Lots Inc NYSE 7.4x 2.8x 4.7x NM 94.1x 48.4x Fred s Inc Nasdaq 110.8x 49.1x 40.0x 53.0x 22.9x 45.4x Dollar Tree Inc Nasdaq 39.2x 32.0x 18.3x 18.9x 19.3x 39.5x Family Dollar Stores NA NA 27.7x 22.3x 25.0x 35.3x 99 Cents Only Stores NYSE

NM 109.1x 102.1x 5.6x NM 27.7x

Costo 38.1x 43.5x 130.5x 24.2x 18.9x 16.7x Wal-Mart Stores Inc. 15.1x 14.6x 13.2x 11.3x 10.5x 10.6x Target Corp NYSE TG 5.8x 7.2x 8.8x 8.5x 7.9x 4.9x Median

Dollar General Corp NYSE 14.6x 19.4x 25.2x 9.5x 1.5x 1.6x 27.7

EBITDA / Interest Exp. 2004 2005 2006 2007 2008 2009 BJ s Wholesale Club NM NM NM NM NM NM Fred s Inc Nasdaq 171.1x 84.2x 67.7x 89.2x 43.9x 82.3x 99 Cents Only Stores NYSE

NM 231.7x NM 33.2x 28.8x 64.3x

Big Lots Inc NYSE 12.8x 6.7x 23.0x NM 127.2x 62.4x Dollar Tree Inc Nasdaq 53.5x 46.0x 27.4x 28.5x 28.5x 56.8x Family Dollar Stores NA NA 37.9x 30.6x 35.3x 47.7x Costo 50.1x 57.5x 171.5x 33.0x 25.3x 23.4x Wal-Mart Stores Inc. 19.0x 18.1x 16.4x 14.3x 13.5x 13.7x Target Corp NYSE TG 7.8x 9.7x 11.7x 11.0x 10.4x 7.0x MedianDollar General Corp NYSE

18.9x 25.1x 32.3x 15.2x 2.4x 2.2x47.7

P/BV dic-04 dic-05 dic-06 dic-07 dic-08 dic-09 Dollar Tree Inc Nasdaq 2.97x 2.26x 2.78x 2.93x 3.12x 3.28x Wal-Mart Stores Inc. 5.18x 4.04x 3.45x 2.98x 3.24x 2.99x Family Dollar Stores 3.57x 2.64x 3.58x 2.83x 2.84x 2.78x Dollar General Corp NYSE 2.69x Costco 2.87x 2.61x 2.65x 3.39x 2.52x 2.52x Big Lots Inc NYSE 1.30x 1.27x 2.37x 2.55x 2.22x 2.50x Target Corp NYSE TG 3.64x 3.55x 3.42x 3.08x 2.00x 2.46x BJ s Wholesale Club 2.23x 1.95x 1.94x 2.18x 2.08x 1.90x 99 Cents Only Stores NYSE 2.22x 1.37x 1.67x 1.25x 1.45x 1.60x Median

Fred s Inc Nasdaq 2.30x 1.84x 1.39x 1.08x 1.12x 1.10x 2.51x

32

analysis costco & walt-mart (ratios) final

Documents