OREANDA-NEWS. Fitch Ratings has assigned a rating of 'A+' to Costco Wholesale Corporation's (Costco) planned issue of \$1 billion of five and seven-year senior unsecured notes. Proceeds from the issuance will be used to partly finance the company's recently-announced \$2.2 billion special dividend, with the balance of the dividend paid with cash on hand.

Fitch rates Costco's Issuer Default Rating (IDR) 'A+' with a Positive Rating Outlook. Costco had \$5.2 billion of debt and capital leases outstanding at Nov. 23, 2014. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

The rating and Positive Outlook reflect Costco's strong competitive position, healthy operating performance, and ample free cash flow and liquidity. The ratings further reflect Costco's strong balance sheet, with adjusted debt/EBITDAR of 1.5x, potentially improving to the low 1x range over the next year should the company repay with cash the \$1.2 billion of notes that mature in December 2015.

Costco benefits from a focused merchandising strategy, with only 3,700 fast-turning products per warehouse and limited pricing mark-ups, resulting in a loyal customer base and highly productive warehouses that generate, on average, more than \$164 million in revenues annually. High frequency categories account for a significant percentage of sales, with 56% of sales from food and sundries and 17% from ancillary businesses, which include traffic-drivers such as gas stations and pharmacies.

These factors have enabled Costco to maintain strong comparable store sales growth (excluding fuel and forex) of 6% in each of the past four fiscal years (ending August) - compared to growth at Sam's Clubs that has ranged from 1% - 5% over the past four years, and an estimated 3% industry growth in the categories it competes in. In addition, membership renewal rates in the U.S and Canada have remained high at around 91%.

Costco's EBIT margins have been steady at 3.1% to 3.2%, and Fitch expects margins to remain in this range going forward. Free cash flow after dividends was \$1.4 billion in fiscal 2014, but is expected to track between \$500 million - \$700 million over the next three years as capital expenditures increase to \$2.5 billion - \$2.7 billion from \$1.5 billion in fiscal 2012, to support a faster pace of new store growth both in the U.S. and internationally. Costco is expanding its square footage at a 3% - 4% rate in North America and a double digit rate in other regions, with a continued focus on Asia.

Costco repurchased \$334 million of its shares in fiscal 2014, following only \$36 million of repurchases in fiscal 2013, and Fitch expects ongoing share repurchases will be financed with free cash flow and existing cash.

RATING SENSITIVITIES

Positive: Continued strong operating momentum, with top line growth in the mid-to-high single digits and steady operating margins, combined with a sustained reduction in lease-adjusted leverage to the low-1x area on a sustainable basis could lead to a positive rating action.

Negative: Sustained weakness in operating trends and shareholder-friendly actions that push adjusted leverage to the high-1x range for an extended period could lead to a negative rating action.

Fitch rates Costco as follow:

Costco Wholesale Corporation
--IDR 'A+';
--Senior unsecured notes 'A+'.

The Rating Outlook is Positive.