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COSTCO WHOLESALE CORPORATION

(COST)
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Costco CFO Juggles Managing Inventory For Products in High, Low Demand

09/29/2020 | 05:02pm EDT

By Mark Maurer

Costco Wholesale Corp.'s finance chief is zeroing in on working capital and inventory levels to make sure the warehouse chain has the right stock for sale as the pandemic continues.

The members-only retailer in recent months struggled to keep its shelves filled with popular products such as sanitizing wipes, baking yeast and laptops as consumers adjusted their shopping habits and manufacturers had trouble meeting heightened demand.

"The supply chain continues to improve, but it will still take six to nine months on some categories or products," Chief Financial Officer Richard Galanti said.

Having sufficient reserves of highly-sought products meant Costco had to find additional suppliers and decide which offerings to cut back on, Mr. Galanti said.

Overall inventory levels rose 7% to $12.2 billion in the year ended Aug. 30 compared with the prior year, Costco said last week. Working capital, or cash trapped in operations, totaled $3.3 billion in its latest fiscal year, up from $248 million the previous year. Mr. Galanti said working capital grew because the company recently experienced higher-than-expected sales and hasn't needed much of the debt it raised.

CFOs across industries saw their companies' working capital as a percentage of revenue go up to 46.8% in the second quarter, compared with 42.2% during the prior-year period, according to a recent study of quarterly results by The Hackett Group, a consulting firm. Inventory levels fell 0.1% to $938 billion. Companies on average now take 60 days to pay their suppliers, up 10% from last year.

Costco usually stocks paper towels from two suppliers, but is now buying products from as many as four manufacturers to meet demand, Mr. Galanti said. In some cases, the company had to build new relationships with suppliers, he said.

The company also decided it might store some patio furniture and other seasonal items to sell next year instead of discounting them. Costco has to pay vendors for these products now, resulting in an increase in working capital as well as inventory, Mr. Galanti said.

At the same time, Costco also takes longer to pay its suppliers. Accounts payable -- the amount of money that the company owes to its suppliers -- rose by 21% to $14.2 billion, according to CreditRiskMonitor, a provider of commercial credit reports. The company has been selling inventory faster than planned, which increases payables, Mr. Galanti said.

The company earlier this year sold $4 billion in bonds to increase liquidity and prepare for a range of worst-case scenarios. Costco's same-store sales were up 14.1% year-over-year in the most recent quarter.

Mr. Galanti said he is working closely with the company's merchandising team to rightsize upcoming purchase orders for certain product categories, such as seasonal items. Costco expects lower sales of Halloween costumes and trick-or-treat candy this year, which is why the retailer shrank its orders for these types of products, he said.

The company provides its merchants with daily, weekly and monthly reports on data such as sales, freight costs and inventory shrinkage to help them anticipate demand, Mr. Galanti said.

Day-to-day inventory management is handled largely by Costco's head of merchandising, senior vice presidents, merchandise managers and buyers, Mr. Galanti said. "Their job is to make sure we have product flowing and product on the shelf," he said, adding that he is in close communication with those teams.

Finding new suppliers within a short time period can be costly, even though for larger companies the effect is somewhat limited, said Greg Melich, an analyst at Evercore ISI, a brokerage firm.

Retailers also need to guarantee the products meet internal quality standards. "Costco, uniquely to their membership model, is going to be extra careful to make sure what they have is really good," Mr. Melich said.

Mr. Galanti should continue equipping merchants and supply-chain workers with ample liquidity when searching for inventory, Mr. Melich said.

Write to Mark Maurer at mark.maurer@wsj.com

 

Stocks mentioned in the article
ChangeLast1st jan.
COSTCO WHOLESALE CORPORATION -1.01% 380.88 Delayed Quote.1.09%
EVERCORE INC. -1.15% 128.03 Delayed Quote.16.77%
THE HACKETT GROUP, INC. -2.17% 17.17 Delayed Quote.19.32%
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Financials (USD)
Sales 2021 192 B - -
Net income 2021 4 784 M - -
Net cash 2021 2 737 M - -
P/E ratio 2021 35,2x
Yield 2021 1,14%
Capitalization 168 B 168 B -
EV / Sales 2021 0,86x
EV / Sales 2022 0,80x
Nbr of Employees 214 500
Free-Float 99,8%
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Technical analysis trends COSTCO WHOLESALE CORPORATION
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TrendsNeutralBullishNeutral
Income Statement Evolution
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Mean consensus OUTPERFORM
Number of Analysts 34
Average target price 405,29 $
Last Close Price 380,88 $
Spread / Highest target 18,9%
Spread / Average Target 6,41%
Spread / Lowest Target -34,6%
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Managers and Directors
NameTitle
Walter Craig Jelinek President, Chief Executive Officer & Director
Richard A. Galanti Chief Financial Officer, Director & Executive VP
Hamilton Evans James Non-Executive Chairman
Paul G. Moulton Chief Information Officer & Executive VP
James Patrick Murphy Chief Operating Officer-International & EVP
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