Brian Tayan prepared this case under the supervision of Professor Maureen McNichols as the basis for class discussion rather
than to illustrate either effective or ineffective handling of an administrative situation.
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Margarita Torres first purchased shares in Costco Wholesale Corporation in 1997 as part of her
personal investment portfolio.
Between 1997 and 2002, she added slightly to her holdings from
time to time when the company sold stock for what she felt was a reasonable valuation, and up to
that time she did not sell any of her shares. Having watched Costco grow from 265 warehouses
to 365 worldwide, and from sales revenue of $21.8 billion to $34.1 billion, she wondered what
factors led to such successful growth.
She also wanted to determine whether those factors would
hold consistent going forward.
At this point, Costco was one of a special breed of retailers called wholesale clubs. Unlike other
retailers, wholesale clubs required that customers purchase annual memberships in order to shop
at their stores.
Costco operated a chain of warehouses that sold food and general merchandise at
large discounts to member customers.
The company was able to maintain low margins by selling
items in bulk, keeping operating expenses to a minimum, and turning inventory over rapidly.
Costco’s closest competitors were SAM’S Club (a division of Wal-Mart) and BJ’s Wholesale,
which both operated as wholesale clubs. Other competitors included general discounters (such as
Wal-Mart), general retailers (such as Sears), grocery store chains (such as Safeway), and
specialty discounters (such as Best Buy).
Torres first considered investing in Costco because she herself was a member.
impressed by the company’s low prices and noticed in particular that her local Costco was
She decided to research the company and started, as always, with their annual
She discovered a company with tremendous growth potential, strong operational
efficiency, and a dedicated management team – and a stock selling at a reasonable price.
in July 2002, having profited well from her investment, she decided it was time to update her
analysis and determine whether the company was still operating efficiently.