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Morningstar, Inc. a Chicago-based provider of independent investment research, named James Sinegal, CEO of Issaquah, Wash.-based Costco Wholesale Corporation as its 2011 CEO of the Year.
Morningstar annually recognizes a chief executive who exhibits exemplary corporate stewardship, demonstrates independent thinking, creates lasting value for shareholders, and has put his or her stamp on an industry. 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 S&P 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 percent, 10 basis points of operating margin expansion to 2.8 percent, a 14.2 percent 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, according to Morningstar; 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.
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.