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The two other nominees for Morningstar's 2011 CEO of the Year award were Jeffrey Bezos of Amazon.com and John Pinkerton of Range Resources.
"This year's nominees each have added intrinsic value to the companies they run," said Paul Larson, chief equities strategist and editor of Morningstar StockInvestor. "James Sinegal, who has served as CEO since co-founding Costco in 1983, has created and maintained value for all company stakeholders during his tenure. The average Costco employee is attractively compensated relative to other retail workers, keeping employee turnover low and productivity high. Although its top-notch benefits package and superior wages are costly on the surface, the firm is reimbursed handsomely, generating more than $500,000 in sales per employee.
"At the same time, the company remains a low-cost producer for its customers. Costco also has reasonable management compensation levels and a high level of communication and transparency with investors. The company has grown considerably over the last few decades and we think it's well positioned to continue expanding internationally."
While the total annualized return of the SandP 500 has been nearly flat over the last five years, Costco shareholders have seen a return of nearly 12 percent annualized over the same period. Notably, in fiscal 2011, Sinegal helped Costco achieve comparable-club sales of 10%, 10 basis points of operating margin expansion to 2.8%, a 14.2% return on invested capital, and more than $1 billion returned to shareholders in repurchases and dividends.
Under Sinegal's leadership, Costco has established an
enviable position among retailers:
• With a high-quality selection at rock-bottom prices that
makes Costco a relevant shopping destination for consumers
and small businesses alike, Morningstar believes the company
is poised to capture incremental market share from other
retail channels as consumers look for ways to stretch their
budgets during a post-recessionary environment.
• Costco continues to generate healthy increases in club
traffic, suggesting that consumers may be reluctant to return
to traditional retailers and grocers as economic conditions
further stabilize.
• The company converts its inventory into cash before
payments are due to suppliers, an efficiency that leads to
returns on invested capital that are exceptionally high for a
warehouse club chain.
• With about 600 clubs worldwide and the early success of
warehouse clubs in markets outside the United States, Costco
has attractive global growth opportunities, and international
expansion will be one of the company's growth engines going
forward.
"We consider Costco to have an 'economic moat,' or set of sustainable competitive advantages, in light of its considerable bargaining power, significant economies of scale, and brand that is synonymous with low prices," Larson added. "Although competition with mass merchants is fierce, we believe favorable pricing from suppliers and industry-leading inventory turnover will allow Costco to consistently generate positive profits over time. As long as management continues to align the company's product assortment with consumer demand and allocate capital wisely, we see few reasons why Costco's already narrow economic moat won't expand."
Morningstar's Economic Moat™ rating is a proprietary measure of a company's sustainable competitive advantages, and Morningstar assigns each company a rating of Wide, Narrow, or None. An economic moat can be obtained through five primary sources: Efficient Scale, a limited market where there is little incentive for new entrants; Network Effect, a situation where incremental customers add value for existing customers; Cost Advantage; Intangible Assets such as patents or strong brands; and Switching Costs for customers. Morningstar also evaluates a company's "moat trend," which indicates whether its Economic Moat is strengthening or weakening.
Morningstar introduced its CEO of the Year award in January 2000. Winners are chosen by Morningstar equity analysts based on their in-depth independent research.
About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent
investment research in North America, Europe, Australia, and
Asia. The company offers an extensive line of products and
services for individuals, financial advisors, and
institutions. Morningstar provides data on approximately
330,000 investment offerings, including stocks, mutual funds,
and similar vehicles, along with real-time global market data
on more than 5 million equities, indexes, futures, options,
commodities, and precious metals, in addition to foreign
exchange and Treasury markets. Morningstar also offers
investment management services through its registered
investment advisor subsidiaries and has more than $167
billion in assets under advisement and management as of Sept.
30, 2011. The company has operations in 26 countries.
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