DBRS Morningstar Confirms Ratings on Costco Wholesale Corporation at AA (low) and R-1 (middle) with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Costco Wholesale Corporation’s (Costco or the Company) Issuer Rating and Senior Unsecured Debt rating at AA (low) and also confirmed the Company’s Short-Term Issuer Rating at R-1 (middle). All trends are Stable. Although DBRS Morningstar acknowledges Costco’s very strong operating results, which were better than the expectation set at the time the Company was upgraded to AA (low) last year, the confirmations and Stable trends reflect strengthening within the rating category and the expectation that the operating performance is likely to moderate in F2022 as the Company starts to lap very strong comparables. The ratings continue to be supported by the Company’s large size, strong market position, and relative resilience to economic cycles, while also taking into account the intense competition and risks associated with geographic expansion.

Going forward, DBRS Morningstar expects Costco’s earnings profile to continue to underpin the AA (low) rating category, benefitting from continued comparable sales growth and despite inflationary pressures on operating results. DBRS Morningstar expects revenue growth to moderate in F2022, given the exceptional Coronavirus Disease (COVID-19) pandemic-driven volumes experienced in F2021, but still expects revenues to increase toward $210 billion in F2022 from $196 billion in F2021. DBRS Morningstar expects this revenue growth to be driven by mid- to high-single-digit comparable sales growth (excluding changes in foreign currency and gasoline prices); approximately 30 net new warehouse openings and, to a lesser extent, higher membership revenues from new members and upgrades to Executive memberships. DBRS Morningstar expects EBITDA margins to remain relatively stable at approximately 4.3%, despite inflationary pressures in input costs, shipping costs, and packaging costs, because DBRS Morningstar believes Costco will be able to pass on at least some of the inflation-driven cost increases through pricing, and will benefit from operating leverage gains and meaningfully lower pandemic-related expenses. As such, DBRS Morningstar expects EBITDA to increase toward $9.3 billion during F2022 and grow toward $10.0 billion during F2023; however, this could be moderately lower, depending on the magnitude and duration of inflationary pressures.

In terms of financial profile, DBRS Morningstar expects Costco’s operating cash flow to continue to track operating income and increase toward $8.4 billion in F2022. DBRS Morningstar expects capital expenditure spending to increase moderately to approximately $3.9 billion, mainly driven by the higher number of new warehouse openings. DBRS Morningstar expects the Company to continue its practice of debt-financed special returns to shareholders, which may result in a temporary weakening of credit metrics. That said, absent any debt-financed special returns to shareholders, DBRS Morningstar expects the Company's leverage to continue to improve over time, primarily driven by operating income growth, and remain appropriate for the current rating (i.e. debt-to-EBITDA below 1.50 times). Although DBRS Morningstar views it highly unlikely, should Costco's credit metrics deteriorate beyond this level for a prolonged period as a result of weaker-than-expected operating results and/or more aggressive financial management, the ratings could be pressured.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Companies in the Merchandising Industry (July 26, 2021; https://www.dbrsmorningstar.com/research/382073), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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

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

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is an unsolicited credit rating.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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