DBRS Confirms Costco Wholesale Corporation and Costco Wholesale Canada Ltd. at A (high) and R-1 (middle)

DBRS has today confirmed Costco Wholesale Corporation (Costco or the Company) at A (high) and R-1 (middle), with Stable trends, as the credit risk profile of the Company remains consistent with current ratings. Costco’s earnings profile remains strong despite recent pressure on adjusted same-store sales and margins as the Company continues to benefit from its dominant market position and stable revenue base.

Going forward, DBRS expects same-store sales growth will continue to be challenged by intensifying competition from Sam’s Club and other retailers, a softer outlook for consumer spending, and the slight cannibalization effect of the more aggressive store expansion plan. DBRS also expects operating margins to decline slightly for the full-year F2007 and into F2008 because of the competitive environment and rising input and labour costs. As such, net earnings should grow at a pace below that of top-line growth in the near term.

In terms of financial profile, Costco began to use its historically very strong balance sheet to implement a significantly more aggressive store expansion and share repurchase program in F2006. Costco plans to repurchase approximately $2 billion of shares in the full-year F2007, matching the gross proceeds received from a debt issue completed in Q3 F2007. DBRS also expects capital expenditures to increase further from recent highs as Costco continues with its ambitious store expansion plan. As such, free cash flow (after dividends but before changes in working capital) should be positive, but remain below historical high levels.

Costco’s current credit ratings could be pressured by substantial levels of debt-financed share repurchases going forward. In particular, the short-term rating may be more susceptible to increasing financial leverage (i.e. weakened liquidity metrics).

Notes:
All figures are in U.S. dollars unless otherwise noted.
Issuer ratings apply to all general senior unsecured obligations of the issuer in question.