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Moody's upgrades Costco to Aa3 with stable outlook

Moody's on Oct. 4 upgraded all ratings of Costco Wholesale Corp. to Aa3 with a stable outlook.

The rating agency said the upgrade reflects the U.S. membership warehouse operator's position as one of the "top performers in all of global retail."

In a statement, Moody's Vice President Charlie O'Shea said, "Costco has proven the portability of its membership/warehouse concept, with a very successful and expanding international operation, which is a key characteristic of an Aa retailer."

The upgrade covers all of Costco's ratings, including its senior unsecured rating, which was revised to Aa3 from A1; and its senior unsecured shelf, which was upgraded to (P)Aa3 from (P)A1. Moody's also changed Costco's outlook to stable from positive.

The stable outlook reflects the agency's expectation that Costco's credit metrics will continue to improve to their pre-2017 dividend levels.

Moody's note came shortly after the Issaquah, Wash.-based retailer said that it recorded net income attributable to Costco of $1.04 billion for fourth-quarter 2018, well above the $919 million figure it reported in the same period a year ago.

In addition to Costco's position in the retail industry, Moody's also cited the company's "world class operating capability, its excellent liquidity profile, and a financial policy," which, according to the agency, continues to be well-balanced between shareholders and debt holders.

Moody's said it acknowledges Costco's problems regarding "material weakness" in the retailer's internal financial record-keeping systems. The issue relates to Costco's information technology team "who had access to something they shouldn't have," Costco's Executive Vice President, CFO and Director Richard Galanti earlier said.

Moody's said Costco's ratings could be upgraded further if operating performance improved from current levels, "particularly margins, financial policy remained balanced and predictable, long-term strategy remains consistent, liquidity remains excellent, and leverage metrics sequentially-improved such that RCF/net debt was maintained comfortably above 50%."

Meanwhile, the agency could downgrade Costco's ratings if its financial policy becomes more aggressive and less-predictable, or if international expansion becomes challenged, among other reasons.