Forecasting The Financial Performance Of Costco Wholesale Corporation Using Moving Average Method

Introduction and Data Approach

Costco was seen to be established in1976 under the brand name of Price Club. Since its inception, the mental of the other company has identified with keeping the business simple and maintaining low cost as much as possible. The large base of members has been able to create a tremendous value for the company worldwide, thereby exceeding the total sales by $64 billion. At present, is a strategy perspective, the organisation is heavily dependent on repeat shoppers buying memberships (Costco.com. 2020a). Therefore, through selling membership, the company can barely cover the costs at a low price point. In this context, the major problem of the business model of Costco is inferred with the company is not able to buy in bulk as it is not ideal for all types of consumers especially the consumers living in cities where it is a cumbersome process to shift large items from store to their homes. Along with this, several consumers look forward to the convenience related to online shopping which it significantly lacks. Is further worth noting that there is a significant risk for the company in terms of changing preferences of the consumers as a model is highly dependent on very high sales volume (Chen 2021; Ren and Wang 2018).

At present, the value of the company can be depicted with market cap of $236.86 Billion. Some of the main excerpts of the discussion has not only identified the existing strategy problem but also evaluated the present financial performance, thereby suggesting the appropriate forecasting methods such as moving average forecasting method. The moving average forecasting method is depicted as the computation of average performance associated to a given metric which is considered in short timeframes. Moreover, this method is seen to create a constant update pertaining to the average values with (Mao et al. 2018). The rational for selecting this method is mainly based on its conduciveness in investigating common financial metrics such as the prices of the stocks, growth in sales, profit and revenue growth. In this regard, our study has focused on forecasting the financial performance over the moving average of last three years (2021, 2020 and 2019) to predict the financial performance in 2022, 2023 and 2024. The main metrics used for the forecast using moving average methods would be identified with net profit margin, return on equity and return on assets.

The secondary sources of data will comprise of extracting relevant information from various sources. In this regard, some of the main methods of sourcing the data will comprise of books, published sources, journals, newspapers, company website, company annual report, blogs, government records and podcasts (Chuang2018).

The forecasting method being implemented for providing the relevant estimates and projections for future performance is identified with the use of moving average technique to know about the relevant idea of trends pertaining to the dataset. Moreover, the future estimates using this type of forecasting method has been useful for using any subset of numbers to obtain long-term trends. Moreover, the moving average forecasting method allows computation of forecasting data pertaining to any time period. Based on the selected method of forecasting, we have used a three-year moving average forecasting for the overall growth of the company which has been measured in terms of net profit margin, return on equity and return on assets. The moving average forecasting method has been able to represent not only the forecasted plot for aforementioned financial metrics, but also visualisation for the same (Hardaker and Zhang 2021).

Organisation or Company Overview

The financial forecast has been performed based on three-year moving average forecast for profitability ratios of Costco Wholesale Corporation. Based on the financial projection analysis, we can identify how all the parameters of profitability are anticipated to increase by 2024. In this aspect, we can say that Costco Wholesale Corporation will be able to generate higher profit from its sales between 2022 to 2024. Additionally, there is also significant scope for earning higher return from its equity as well. It is further forecasted that Costco will be able to demonstrate better use of assets in the future (Costco.com. 2022).

Figure: Financial Forecast of Profitability of Costco using 3-year Moving average forecasting method

(Source: As created by the author)

The future financial projections can be further used for the benefit of the organisation can be identified with forecasting liquidity ratio, financial leverage ratio and efficiency measures as well. In this aspect, the future financial projections can include debt ratio, debt-to-equity ratio for cash ratio, fixed asset turnover ratio, receivables turnover ratio and total assets turnover ratio as well (Gudlaugsson 2018).

The assessment of financial and using profitability ratio, we are clearly will identify how Costco has demonstrated an improving trend of earning higher profit from its sales over the years. Additionally, the increasing return on equity suggests that the business is able earn higher return from inventing its equity capital. Similarly, there is also a clear depiction of company being able to use the assets in a better way (Costco.com. 2022).

As per the assessment of liquidity ratios, the average of the company to meet its short-term debt obligations by using the current assets as slightly reduced from 1.13 in 2020 to 1 in 2021. Similarly, the increasing quickly show and cash ratio depict similar inference (Costco.com. 2022).

As per the evaluation of financial leverage ratios, Costco’s reliance in terms of maintaining lower debt has reduced to some extent. This indicates an unfavourable financial health. Moreover, the debt ratio has also increased, thereby indicating that the long-term liabilities has measurably increased over time. The decrease in the equity ratio further indicates the ability of Costco to generate lower equity capital (Costco.com. 2022). 

Based on the efficiency performance, the company’s divisions in generating revenue from its assets has substantially increased over the years. This is evident with both fixed assets and total assets. Along with this, in terms of receivables, the ability of the company to quickly encash their accounts receivable has slightly decline from 2020 to 2021 (Costco.com. 2022).

Based on the identified problem, the strategic goal of Costco should include ensuring the presence of store through showing up online search more quickly. Additionally, Costco should be able to display its local inventory both on Google maps and Google search. There should be an augmented focus on preventing click and collect. The presentation and UI of the mobile app should appeal to the retailers. Lastly, Costco needs to put an augmented focus on developing and hiring employees who can facilitate top-notch customer experiences. Costco needs to put a greater emphasis on improving its sales targets and also promote corporate social responsibility. Lastly, the visual elements need to be updated on a regular basis (Johnson 2021).

Sourcing Data

The overall mission of the company should be identified with increasing the convenience of online shopping, which is considered as one of the main challenges of Costco at the moment.

The top-line strategy of the company needs to emphasise on the growth of online store and improving the existing UI of the website and mobile apps. This will allow to overcome the present challenges of decreased leverage and the liquidity performance in terms of decreased ability to pay short-term debt obligations (Etzion 2020).

The competitive strategy at Costco should emphasise on cost leadership so that it is able to overcome the competition from existing brands such as Target, BJ’s Wholesale Club and Walmart (Tikhonova 2021; Duru 2018).

The vertical integration of the company can be done by acquiring a similar company such as Lincoln Premium Poultry or a similar distributor such as Cargill Meat Solutions, Perdue Farms, Pilgrim’s and Tyson Foods would be conducive for emphasising more on the decreased revenue from diversified businesses (Anderson 2019).

Section 4: Conclusion

Based on the findings of forecasting methods, we can identify how all the parameters of profitability are anticipated to increase by 2024. In this aspect, we can say that Costco Wholesale Corporation will be able to generate higher profit from its sales between 2022 to 2024. In terms of financial health, Costco has excelled in demonstrating the favourable profitability and efficiency performance. However, the financial health clearly lacks in terms of leverage and liquidity performance. Some of the main strengths have been identified with low pricing strategy, least money spent on advertising and largest loyal customer base. On the other hand, the weaknesses are evident with higher transmission cost and exist as a very niche customer base which results in dealing with lower quantities. The overall direction and vision of the firm to put an augmented emphasis towards improving the existing presence of online experience in the stores.

It is worth noting how other organisation facing similar challenge with the online grocery sales can be seen with Kroger. In 2020, Kroger was unable to keep up with the expected service level among the consumers due to increasing hindrances pertaining to COVID-19 pandemic. Due to the sudden surge in online grocery sales, there was a rounding error in terms of computing the actual sales (Indigo9digital.com.2022).

The selected strategy of focusing on better presence of online store through showing up online search more quickly directly acknowledges the present issue of lower convenience related to the online shopping experience. Moreover, displaying the local inventory both on Google maps and Google search will be able to address another problem of Costco not being able to buy in bulk from large cities. Lastly, the focus on hiring and developing employees will enable the company to excel in terms of highest form of customer experience and put out when it referred on improving the sales targets.

References

Anderson, K. 2019. LPP official: No plans for a second Costco chicken plant in Nebraska – Brownfield Ag News, Brownfield Ag News. Available at: https://brownfieldagnews.com/news/lpp-official-no-plans-for-a-second-costco-chicken-plant-in-nebraska/ (Accessed: 16 March 2022).

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Costco.com. 2020a. Available at: https://www.costco.com/about.html (Accessed: 16 March 2022).

Costco.com. 2022. Financial Reports | Costco Wholesale Corporation (2022). Available at:

https://investor.costco.com/financial-information/annual-reports (Accessed: 16 March 2022).

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