| Ticker | COST |
| Company Name | COSTCO WHOLESALE CORP |
| Shariah Compliance | FAILED |
| Dividend Purification Ratio | 5.47% |
Report Published as on 31st May 2024
We conducted a comprehensive review of Costco Wholesale Corp from a Shariah perspective, meticulously analyzing its revenue streams to determine compliance with Shariah principles.
Costco Wholesale Corporation, commonly known as Costco, is a prominent American multinational enterprise renowned for its chain of membership-only big-box warehouse club retail stores. As of 2021, Costco stands as the third-largest retailer globally, distinguished as the foremost purveyor of choice and prime beef, organic foods, rotisserie chicken, and wine since 2016.
Operating on a distinctive business model, Costco offers an extensive array of merchandise in a warehouse-style setting, featuring discounted prices across various product categories. These categories encompass food items including fresh, frozen, and packaged goods, a wide selection of beverages spanning both alcoholic and non-alcoholic options, household essentials such as cleaning supplies and paper products, electronics, appliances, furniture, home décor, apparel, health, and beauty products.
Additionally, Costco extends its offerings to include auxiliary services like gas stations and travel services through its subsidiary, Costco Travel. This diversified portfolio of merchandise and services underscores Costco’s position as a leader in the retail industry, with a steadfast commitment to providing quality goods to its members at competitive prices.
Let’s have a look at the operating segments from which the company derives its revenue and apply the Shariah screens to them:
Segment Breakup: (In millions of USD)
For the year ended 30th September 2023
| Segments | Revenue | Non- Permissible Revenue | %of Non- Permissible Revenue | Non-Permissible Segment Classification | Comments |
| Foods and Sundries | $96,175 | $9,617.5 | 10% | Pork/Alcohol | – |
| Non-Foods | $60,865 | – | – | – | – |
| Fresh Foods | $31,977 | $3,197.7 | 10% | Pork/Alcohol | – |
| Warehouse Ancillary and Other Businesses | $48,693 | – | – | – | – |
| Membership Fees | 4,580 | – | – | – | – |
| Total | $242,290 | $12,815.2 | 5.29% | – | – |
Tricky Areas From a Shariah perspective
The initial analysis of Costco Wholesale Corp’s business segments reveals that two segments, namely “Foods and Sundries” and “Fresh Foods,” are involved in activities deemed non-permissible from a Shariah perspective. These segments include sales of alcohol and pork products, which are considered impermissible as per the Shariah principles. Based on our analysis, we have assumed approximately 10% of the revenue from each of these segments to be derived from these non-permissible sources.
Upon further examination, it becomes evident that the combined revenue from these non-permissible activities exceeds the threshold set by Shariah principles. According to Shariah guidelines, if the total revenue from impermissible sources surpasses 5% of the total operating revenue, the business is classified as Shariah Non-Compliant.
Therefore, based on the information provided, it is concluded that the business operations of Costco Wholesale Corp do not align with Shariah principles due to the significant portion of revenue generated from non-permissible activities. This assessment highlights the importance of adhering to Shariah-compliant practices in financial transactions and business operations to ensure ethical and religious compliance within Islamic finance frameworks.
Let’s have a look at the non-operating income of the company
Non-operating revenue of the company: (In millions of USD) For the year ended 30th September 2023
| Segments | Revenue | Non-Permissible Revenue | % non-permissible revenue | Non-permissible classification | Comments |
| Interest Income | $470 | $470 | 100% | – | – |
| Foreign-currency transaction gains, net | $29 | – | – | – | – |
| Other, net | $34 | – | – | – | – |
| Total | $533 | $470 | 88.18% | – | – |
It is clear from the table above that the non-operating income of the company includes interest income which is Shariah not compliant. This amount is included for the calculation of the Sector Compliance and Dividend Purification.
Sector Compliance Calculation:
| Total Revenue | 242,823 |
| Non-permissible operating revenue | 12,815.2 |
| Interest Income | 470 |
| % of non-permissible revenue | 5.47% |
| Sector Compliance | PASS |
Dividend Purification Calculation:
| Revenue Description | Non permissible Revenue (USD Millions) |
| Non-permissible operating revenue | $12,815.2 |
| Non-permissible non-operating revenue | $470 |
| Total non-permissible revenue | $13,285.2 |
| Total Revenue of The Company | $242,823 |
| Dividend Purification Ratio | 5.47% |
Financial Ratio Screen:
(All figures in USD Millions for the Quarter ended 31st December 2023)
| Particulars | Amount | Remarks |
| 3 years Average Market | 234195.1 | – |
| Total Debt | 6945 | – |
| Adjusted Debts | 6945 | – |
| LC Ratio | 0.029655 | – |
Source: All the above information is based on the website of the company and the latest Annual Report for the period ended 30th September, 2023.
Conclusion
Given the above information, we at Ratings Intelligence believe that Costco Wholesale Corp is a Shariah NOT Compliant company as per the Shariah screening criteria.
