DBRS Confirms Ratings of Costco Wholesale Corporation

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debt rating of Costco Wholesale Corporation (Costco or the Company) at A (high) and its Short-Term Issuer Rating at R-1 (low), all with Stable trends. DBRS confirmed the ratings despite Costco’s very strong operating performance during the last 12 months ended May 13, 2018 (LTM F2018), due to the Company’s practice of intermittent debt-financed special returns to shareholders when leverage becomes low for the rating category. The ratings continue to be supported by the Company’s large size, strong market position, efficient operations, relative resilience to economic cycles and the benefits associated with its membership business model. The ratings also consider the increasingly competitive retail industry, risks associated with geographic expansion and the potential for less conservative financial management.

Costco’s earnings profile continued to strengthen above the rating category during the nine months ended May 13, 2018 (9M F2018). Revenues grew to $97 billion during 9M F2018 from $87 billion during 9M F2017, driven by 7% comparable net sales growth (excluding changes in foreign currency and gasoline prices), 20 net new store openings and 12% growth in membership fee revenues. The Company maintained EBITDA margins at 4.2%, and consequently, EBITDA increased to $4.0 billion from $3.6 billion during the period. Costco’s financial profile continued to constrain the ratings with the Company’s practice of debt-financed special returns to shareholders. Free cash flow (after dividends but before changes in working capital) increased to $1.2 billion from $1.0 billion, tracking higher operating income. DBRS notes that during Q4 F2017, Costco paid a special dividend totalling approximately $3.1 billion, which the Company funded through a combination of cash and $2.7 billion in net debt issuances. Despite the increase in debt, driven by earnings growth, key credit metrics have largely returned to 2016 levels, with lease adjusted debt-to-EBITDAR improving to 1.29 times (x) for LTM F2018 versus 1.40x as at the end of F2017 and 1.24x in F2016.

DBRS believes Costco’s overall credit profile will remain supportive of the current rating category through F2019. DBRS expects revenues in F2019 to grow in the mid-single digits, driven by comparable net sales growth in the low- to mid-single digits, 20 to 30 net new warehouse openings and membership fee revenue growth. DBRS expects management to maintain EBITDA margins at approximately 4% and expects EBITDA to grow in the mid-single digits to above $6.2 billion. As such, DBRS would expect the Company’s leverage to continue to decrease to approximately 1.20x. That said, DBRS believes the Company will continue its practice of debt-financed special returns to shareholders but expects credit metrics to remain comfortable in the current rating category (i.e., leverage below 1.5x). However, should Costco’s leverage rise toward 2.0x for an extended period because of further material debt-funded shareholder returns or a material deterioration in operating performance, the ratings could come under pressure.

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

The principal methodology is Rating Companies in the Merchandising Industry, which can be found on dbrs.com under Methodologies.

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

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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