Annual
Report
2015
Kitakyushu
SCOTLAND (3)
Aberdeen
Edinburgh
Glasgow
WALES (1)
Cardiff
SPAIN (2)
Kobe Seishin
Getafe
Maebashi Gunma
Seville
Makuhari
Nonoichi
Kawasaki
MÉXICO (36)
Shin Misato
Tamasakai
Tsukuba
Yawata Kyoto
Zama
SOUTH
KOREA (12)
Scarborough
Sudbury
Vaughan
Windsor
QUÉBEC (21)
Anjou
Busan
Cheonan
Boisbriand
Boucherville
Sapporo
Kanazawa Seaside
Kaminoyama
Izumi
Sioux Falls
TENNESSEE (5)
Brentwood
Farragut
N.E. Memphis
S.E. Memphis
W. Nashville
TEXAS (26)
Arlington
Austin
S. Austin
Bunker Hill
Cedar Park
Duncanville
El Paso
Fort Worth
N. Fort Worth
2
2
Willowbrook
Etobicoke
Gloucester
Guelph
Kanata
Kingston
Kitchener
London
North London
Markham
E. Markham
Mississauga Central
Mississauga North
Mississauga South
Nepean
Newmarket
Oshawa
Peterborough
Richmond Hill
St. Catharines
Brossard
Candiac
SOUTH DAKOTA (1)
Daegu
Yangjae
Red Deer
Pointe Claire
Québec
Sainte-Foy
Rocky View
Saint-Hubert
Sherwood Park
Saint-Jérôme
St. Albert
Sherbrooke
Okotoks
Tacoma
Terrebonne
Abbotsford
Trois-Rivières-Ouest
Hsinchu
Burnaby
Vaudreuil
Kaohsiung
Courtenay
North Kaohsiung
Satélite
BRITISH COLUMBIA (14)
Medicine Hat
Puyallup
Montréal
Yangpyung
TAIWAN (11)
AGUASCALIENTES (1)
Aguascalientes
BAJA CALIFORNIA (4)
Ensenada
Mexicali
Tijuana
Tijuana II
BAJA CALIFORNIA
SUR (1)
Cabo San Lucas
CHIHUAHUA (2)
Chihuahua
Juarez
COAHUILA (1)
Saltillo
GUANAJUATO (3)
Celaya
León
León II
PUERTO RICO
Chicoutimi
Drummondville
Lacey
Gatineau
Lynnwood
Laval
Lynnwood Bus. Ctr.
Levis
Grande Prairie
Marché Central
Marysville
Lethbridge
Daejeon
Euijeongbu
Gongse
Gwangmyeong
Ilsan
Sangbong
Ulsan
Spartanburg
Myrtle Beach
Greenville
Hillsboro
Naples
Bozeman
Manhattan
Medford
E. Orlando
Helena
Melville
Portland
S. Orlando
Lawrence
Kalispell
Missoula
Nanuet
Roseburg
Pembroke Pines
Foster City
Fountain Valley
Fremont
Fresno
N. Fresno
Fullerton
Garden Grove
Gilroy
Palm Beach Gardens
Eugene
Holbrook
MONTANA (5)
Billings
NEW MEXICO (3)
Albuquerque
NORTH CAROLINA (7)
Charlotte
Durham
Greensboro
Matthews
Raleigh
Wilmington
Winston-Salem
NORTH DAKOTA (1)
West Fargo
OHIO (10)
Avon
Centerville
Columbus
Deerfield Township
Easton
Mayfield Heights
Perrysburg
Springdale
Strongsville
Toledo
OREGON (13)
N.W. Albuquerque
S.E. Albuquerque
Albany
NEW YORK (18)
Aloha
Brooklyn
Bend
Commack
Clackamas
Goleta
Santa Maria
Santa Rosa
Santee
Signal Hill
Simi Valley
Stockton
Sunnyvale
Warrenton
Wilsonville
PENNSYLVANIA (10)
Bucks County
Concordville
Cranberry
Harrisburg
King of Prussia
Lancaster
Santa Cruz
Summerlin
S OF DECEMBER 31, 2015
NEWFOUNDLAND
UNITED
KINGDOM
SPAIN
10
22
3
7
Montgomeryville
Robinson
Sanatoga
West Homestead
SOUTH CAROLINA (4)
Charleston
Yonkers
Kamloops
Syracuse
Westbury
Sparks
Temecula
Torrance
Tracy
Royal Palm Beach
Sarasota Square Mall
Tallahassee
GEORGIA (11)
Alpharetta
Augusta
Brookhaven
Cumberland Mall
LOUISIANA (2)
Baton Rouge
New Orleans
MARYLAND (10)
Arundel Mills
Beltsville
Pompano Beach
KENTUCKY (3)
Florence
Nesconset
Salem
Lexington
Louisville
NEBRASKA (1)
Omaha
NEVADA (7)
Carson City
New Rochelle
Tigard
Port Chester
Queens
Rego Park
Centennial
Riverhead
Henderson
Rochester
Las Vegas Bus. Ctr.
Reno
Staten Island
Union
Wayne
Wharton
Kelowna
Neihu
ONTARIO (29)
Ajax
Ancaster
Barrie
Brampton
Burlington
Downsview
Amagasaki
Liverpool
Manchester
Milton Keynes
Oldham
Querétaro
QUINTANA ROO (1)
Cancún
SAN LUIS POTOSÍ (1)
San Luis Potosí
SINALOA (1)
Culiacan
Halifax
SONORA (1)
Hermosillo
Chiba New Town
Chubu
Gifu Hashima
Reading
Hiroshima
Sheffield
Hisayama
Southampton
Hitachinaka
Imizu
Sunbury
Thurrock
VERACRUZ (2)
NOVA SCOTIA (2)
Dartmouth
AND LABRADOR (1)
St. John's
NEWFOUNDLAND
S. Winnipeg
SOUTH AUSTRALIA (1)
Coventry
NEW BRUNSWICK (3)
Adelaide
Puebla
Croydon
Fredericton
VICTORIA (3)
Derby
QUERÉTARO (1)
Melbourne
Farnborough
Moorabbin
Gateshead
Ringwood
Haydock
Hayes
Leeds
JAPAN (24)
Leicester
Moncton
Saint John
Iruma
Chingford
Watford
Xalapa
Ancillary and Other (including gas stations, pharmacy, food court, and optical) 16% 17% 17%
7
Ancillary businesses within or next to our warehouses provide expanded products and services and
encourage members to shop more frequently. The following table indicates the number of ancillary
businesses in operation at fiscal year-end:
Food Courts.
Optical Dispensing Centers..
Photo Processing Centers..
Pharmacies....
Hearing-Aid Centers.
Gas Stations.
Number of warehouses.
11% 11% 11%
2015 2014 2013
662 641 614
656 649 622
606 589 565
581 549 502
472 445 414
686 663 634
Our online business, which operates websites in the U.S., Canada, U.K., and Mexico, provides our
members additional products, many not found in our warehouses. These products vary by country and
include services such as photo processing, pharmacy, travel, business delivery, and membership
services. Net sales for our online business were approximately 3% of our net sales in each of the last
three fiscal years.
We have direct buying relationships with many producers of national brand-name merchandise. We do
not obtain a significant portion of merchandise from any one supplier. We generally have not experienced
difficulty in obtaining sufficient quantities of merchandise, and believe that if one or more of our current
sources of supply became unavailable, we would be able to obtain alternative sources without substantial
disruption of our business. We also purchase private label merchandise, as long as quality and customer
demand are comparable and the value to our members is greater as compared to brand-name items.
Certain financial information for our segments and geographic areas is included in Note 11 to the
consolidated financial statements included in this Report.
Membership
Our format allows our members to utilize their memberships at any of our worldwide Costco warehouse
locations. We have two types of members: Gold Star (individual) and Business. Gold Star memberships
are available to individuals; Business memberships are limited to businesses, including individuals with a
business license, retail sales license or other evidence of business existence. Business members have
the ability to add additional cardholders (add-ons). Add-ons are not available for Gold Star members. Our
annual fee for these memberships is $55 in our U.S. and Canadian operations and varies by country in
our Other International operations. All paid memberships include a free household card.
Our member renewal rate was approximately 91% in the U.S. and Canada, and approximately 88% on a
worldwide basis in 2015. The renewal rate is a trailing calculation that captures renewals during the
period seven to eighteen months prior to the reporting date. The majority of members renew within the six
months following their renewal date.
8
680 657 628
14% 13% 13%
16% 16%
16%
YUCATÁN (1)
Mérida
LO
BUSINESS OVERVIEW
Forward-Looking Statements
Certain statements contained in this Report constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and
Section 21E of the Securities Exchange Act of 1934. They include statements that address activities,
events, conditions or developments that we expect or anticipate may occur in the future and may relate to
such matters as sales growth, increases in comparable store sales, cannibalization of existing locations
by new openings, price or fee changes, earnings performance, earnings per share, stock-based
compensation expense, warehouse openings and closures, spending on our expansion plans, the effect
of adopting certain accounting standards, future financial reporting, financing, margins, return on invested
capital, strategic direction, expense controls, membership renewal rates, shopping frequency, litigation,
and the demand for our products and services. Forward-looking statements may also be identified by the
words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,"
"plan," "may," "should,” “will,” “would,” “will be,” “will continue," "will likely result,” and similar expressions.
Such forward-looking statements involve risks and uncertainties that may cause actual events, results, or
performance to differ materially from those indicated by such statements, including, without limitation, the
factors set forth in the section titled "Risk Factors”, and other factors noted in the section titled
"Management's Discussion and Analysis of Financial Condition and Results of Operations” and in the
consolidated financial statements and related notes in this Report. Forward-looking statements speak
only as of the date they are made, and we do not undertake to update them, except as required by law.
General
Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983 in
Seattle, Washington. We are principally engaged in the operation of membership warehouses in the
United States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan, Australia, Spain,
and through majority-owned subsidiaries in Taiwan and Korea. Our common stock trades on the
NASDAQ Global Select Market under the symbol "COST."
We report on a 52/53-week fiscal year, consisting of thirteen, four-week periods and ending on the
Sunday nearest the end of August. The first three quarters consist of three periods each, and the fourth
quarter consists of four periods (five weeks in the thirteenth period in a 53-week year). The material
seasonal impact in our operations is an increased level of net sales and earnings during the winter
holiday season. References to 2015, 2014, and 2013 relate to the 52-week fiscal years ended August 30,
2015, August 31, 2014, and September 1, 2013, respectively.
We operate membership warehouses based on the concept that offering our members low prices on a
limited selection of nationally branded and private-label products in a wide range of merchandise
categories will produce high sales volumes and rapid inventory turnover. When combined with the
operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of
merchandise in no-frills, self-service warehouse facilities, these volumes and turnover enable us to
operate profitably at significantly lower gross margins than most other retailers. We generally sell
inventory before we are required to pay for it, even while taking advantage of early payment discounts
when available. To the extent that sales increase and inventory turnover becomes more rapid, more
inventory is financed through payment terms provided by suppliers rather than by our working capital.
We buy most of our merchandise directly from manufacturers and route it to a cross-docking
consolidation point (depot) or directly to our warehouses. Our depots receive large shipments from
6
manufacturers and quickly reallocate these goods for shipment to our individual warehouses. This
process maximizes freight volume and handling efficiencies, eliminating many of the costs associated
with traditional multiple-step distribution channels.
Our average warehouse space is approximately 144,000 square feet, however our newer units tend to be
slightly larger. Floor plans are designed for economy and efficiency in the use of selling space, the
handling of merchandise, and the control of inventory. Because shoppers are attracted principally by the
quality of merchandise and the availability of low prices, our warehouses are not elaborate. By strictly
controlling the entrances and exits of our warehouses and using a membership format, we have limited
inventory losses (shrinkage) to amounts well below those of typical discount retail operations.
Marketing activities for new locations generally include community outreach programs to local businesses
in new and existing markets and direct mail to prospective new members. Ongoing promotional programs
primarily relate to coupon mailers, The Costco Connection (a magazine we publish for our members), and
e-mails to members promoting selected merchandise.
Our warehouses on average operate on a seven-day, 70-hour week. Gasoline operations generally have
extended hours. Because the hours of operation are shorter than other retailers, and due to other
efficiencies inherent in a warehouse-type operation, labor costs are lower relative to the volume of sales.
Merchandise is generally stored on racks above the sales floor and displayed on pallets containing large
quantities, thereby reducing labor required. In general, with variations by country, our warehouses accept
cash, checks, certain debit and credit cards, or a private label Costco credit card.
Our strategy is to provide our members with a broad range of high quality merchandise at prices
consistently lower than they can obtain elsewhere. We seek to limit specific items in each product line to
fast-selling models, sizes, and colors. We carry an average of approximately 3,700 active stock keeping
units (SKUs) per warehouse in our core warehouse business, significantly less than other broadline
retailers. Many consumable products are offered for sale in case, carton, or multiple-pack quantities only.
In keeping with our policy of member satisfaction, we generally accept returns of merchandise. On certain
electronic items, we typically have a 90-day return policy and provide, free of charge, technical support
services, as well as an extended warranty. Additional third-party warranty coverage is sold on certain
electronic item purchases.
The following table indicates the approximate percentage of net sales accounted for by major category of
items:
Foods (including dry and institutionally packaged foods)
Sundries (including snack foods, candy, alcoholic and nonalcoholic beverages,
tobacco, and cleaning and institutional supplies)....
Hardlines (including major appliances, electronics, health and beauty aids,
hardware, and garden and patio)...
Fresh Foods (including meat, produce, deli, and bakery).
Softlines (including apparel and small appliances).
2015 2014 2013
22% 22% 21%
21% 21% 22%
Veracruz
North Lakes
Chester
Bristol
Fredericksburg
Harrisonburg
W. Henrico
Leesburg
Manassas
Mount Vernon
Newington
Newport News
Norfolk
Pentagon City
Potomac Mills
Sterling
Winchester
WASHINGTON (30)
Frisco
Galleria
Houston
Lewisville
Aurora Village
Lubbock
Fairfax
Bellingham
Burlington
Pharr
East Plano
West Plano
Rockwall
N.W. San Antonio
Selma
Sonterra Park
Southlake
Sugar Land
Clarkston
Pearland
Charlottesville
Chesterfield
Chantilly
West Valley
VERMONT (1)
Colchester
VIRGINIA (17)
Toluca
Shih Chih
Langford
Taichung
Langley
Nanaimo
Tainan
Taoyuan
Chiayi
Chung Ho
Chungli South
JALISCO (3)
Guadalajara
Guadalajara II
Puerto Vallarta
MÉXICO (4)
Arboledas
Interlomas
The Woodlands
UTAH (11)
W. Bountiful
S. Jordan
Seattle
Lehi
Murray
S. Ogden
Orem
St. George
Salt Lake City
Sandy
Spanish Fork
Covington
Everett
Federal Way
Fife - Bus. Ctr.
Gig Harbor
Issaquah
W. Edmonton
Port Coquitlam
Prince George
Richmond
Surrey
Vancouver
Willingdon
MANITOBA (3)
Winnipeg
E. Winnipeg
AUSTRALIA (8)
AUS CAP TER (1)
Canberra
NEW SOUTH WALES (2)
UNITED
KINGDOM (27)
ENGLAND (23)
MÉXICO, D.F. (3)
Coapa
Mixcoac
Polanco
MICHOACÁN (1)
Morelia
MORELOS (1)
Cuernavaca
NUEVO LEÓN (3)
Monterrey
Monterrey II
Monterrey III
PUEBLA (1)
Auburn
Sydney
Birmingham
COSTCO
QUEENSLAND (1)
S. Edmonton
SASKATCHEWAN (2)
Regina
Saskatoon
S. Calgary
Edmonton
N. Edmonton
ALBERTA (15)
Kennewick
Kirkland
Sequim
Silverdale
Spokane
N. Spokane
Tukwila
Tumwater
Union Gap
Vancouver
E. Vancouver
E. Wenatchee
Woodinville
WISCONSIN (9)
Bellevue
Grafton
Grand Chute
Menemonee Falls
Middleton
New Berlin
Pewaukee
Pleasant Prairie
Sun Prairie
WASHINGTON, D.C. (1)
Washington, D.C.
PUERTO RICO (4)
E. Bayamón
W. Bayamón
Caguas
Carolina
CANADA (90)
N. Calgary
N.W. Calgary
Marlboro
Mount Laurel
Ocean Township
N. Plainfield
Teterboro
Hawthorne
N. Brunswick
Clifton
Edison
At Fiscal Year End
Year
Opened
# of
Whses
2015
2014
2013
2012
2011
2010
2015
2009
2007
2006 & Before 481
Totals
686
2222222258
23
30
26
$83
$108 109
$99 109 113
2008
2014
2013
2012
Fiscal Year
Average Sales Per Warehouse*
(Sales In Millions)
At Fiscal Year End
Millions
Business Members
7.6
7.4
7.2
7.0
6.8
6.6
6.400
6.4
6.300
6.2
6.600
7.100
6.900
0
2014
2015
2011
15
$105
115 124 128
E. Hanover
Hazlet
Manahawkin
9.90%
9.85%
9.81%
9.80%
וייון
9.82%
9.89%
2011 2012 2013 2014 2015
Fiscal Year
December 17, 2015
Dear Costco Shareholders,
Fiscal 2015, which ended August 30, 2015, represented another year of record sales and earnings
for Costco! Sales totaled $113.7 billion during the fiscal year; and net income increased 15 percent
to $2.4 billion, or $5.37 per share. Additionally, our fiscal 2015 operating cash flows, along with our
strong balance sheet, enabled us to invest nearly $2.4 billion into our business, while at the same
time return over $3.3 billion to shareholders in the form of dividends ($2.9 billion, including a special
cash dividend of $5.00 per share) and share repurchases ($481 million). These accomplishments
were possible because of the dedication and hard work of our more than 200,000 Costco employees
around the world. Looking ahead, we are optimistic about Costco's future, and continue to invest in
growing our businesses in the U.S. and around the world.
During the fiscal year, our membership base grew by more than six percent; and we ended fiscal
2015 with more than 81 million cardholders worldwide. Member loyalty - as measured by renewal
rates and shopping frequency - continued to reach record levels in 2015: 91% of members in the
U.S. and Canada and 88% worldwide renewed their memberships; and shopping frequency, year-
over-year, increased four percent. Executive Members, an increasing percentage of our total
membership base, now represent over one-third of our members and nearly two-thirds of our sales.
TM
TM
TM
In terms of merchandising, we continued to expand both our Kirkland Signature ™ product offerings,
as well as new brand-named items. This past year, new Kirkland Signature ™ items included
Kirkland Signature ™ organic 2% milk, organic liquid eggs, organic coconut water, artisan breads,
and light beer. Sales of all organic products at Costco continued to grow, topping $4 billion during
the fiscal year. New non-food Kirkland Signature™ items in 2015 included new apparel and
cookware; and new brand names offered this past year included Cole Haan shoes, Chi hair
products, Brown Jordan patio furniture and SK-II skin care products.
Costco's e-commerce business grew over 20% in 2015 to $3.4 billion in sales. We finished the fiscal
year with operations in four countries – the U.S., Canada, U.K. and Mexico - and have since opened
an online site in Korea. During the fiscal year, we upgraded our e-commerce distribution network by
adding new depot distribution points, allowing us to deliver orders faster and reduce shipping costs.
We continued to leverage our inline vendor relationships to enhance our online offerings and prices,
with particular success in electronics, apparel and household goods. We also leveraged our in-
location traffic to drive online sales of jewelry, as well as larger-sized products, such as electronics
and appliances, mattresses, exercise equipment and furniture. Lastly, we expanded our
merchandise mix to include additional products in infant care, apparel, health and beauty aids, and
cosmetics.
In mainland China, we are selling Costco products on Alibaba's Tmall site. Two hundred Costco
items, including many Kirkland Signature ™ products, are now being offered to online shoppers in
China. In addition, other ecommerce delivery businesses, including Google Express, Instacart,
Boxed, and Jet.com, offer Costco products for delivery through their own online services.
Costco's ancillary businesses – gasoline stations, pharmacies, optical and hearing aid centers, food
courts, and travel – all performed well in 2015. Sales increased in all of these operations, with the
exception of our gasoline business, where the average sales price per gallon was lower by 22%
year-over-year. Profits in these businesses were also up. We continue to expand our gasoline
operations globally, with almost all new U.S. and Canadian warehouses opening with gasoline
stations; and other international locations adding stations where regulations allow and space
permits. As of calendar 2015 year-end, 490 gasoline stations were in operation. Finally, our travel
business, Costco Travel, had an exceptional year in 2015.
2
In terms of expansion, we continued opening new warehouses in 2015 – in the U.S. and globally -
both in-fill and in new markets. Costco's appeal, strong in North America for many years, has
translated very well to the international marketplace; and international expansion is a key element in
our business strategy. For the fiscal year, 23 new warehouses were opened: twelve in the U.S., one
in Canada; and ten in other international markets, including three new warehouses in Mexico; three
in Japan; and one each in the U.K., Korea, Taiwan, and Australia. These openings brought our total
warehouse count at fiscal year-end to 686 warehouses in operation: 480 in the United States and
Puerto Rico; 89 in Canada; 36 in Mexico; 27 in the United Kingdom; 23 in Japan; 12 in Korea; 11 in
Taiwan; seven in Australia; and one in Spain.
We are now four months into fiscal 2016; and our current plan is to open up to 32 new warehouses
this year: 22 in the U.S., three in Canada, two each in Japan and Australia, and one each in the
U.K., Taiwan, and Spain. To date, in fiscal 2016, twelve new Costco warehouses have already been
opened.
9.95%
וווי יון
10.00% 9.98%
0
$103 120 130
136 139
13
20
26
31
$94 106 122 135
$100 107 130 146 155
$86 83 99 116 128 136
$76 88 92 103 116 127 136
127 133 143 138 146 153 162 171
144 148
157 158
144 146
143 144
177 177
$127 $130 $137 $131
$139 $146 $155 $160
$164 $162
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
*First year sales annualized.
2011-2015 results include Mexico.
2006 and 2012 were 53-week years.
Fiscal Year
Percent of Net Sales
Selling, General and
Administrative Expenses
10.20%
10.15%
10.10%
10.05%
10.07%
9.75%
As we continue the global growth of our Company we must build and operate our business in a
responsible and sustainable manner. In this regard, we are committed to protecting the sustainability
of our business, which involves many dimensions, including our workforce, a continuing supply of
merchandise for our customers, a supply chain that protects the environment, as well as the workers
and animals in the supply chain, and the efficient use and reuse of resources associated with our
operations. Our customers, shareholders, employees, regulators and others are increasingly
focused on sustainability; and we are enhancing our efforts in these challenging areas.
2012 2013
Gold Star Members
Reports of Independent Registered Public Accounting Firm.
Consolidated Financial Statements..
Notes to Consolidated Financial Statements.
Directors and Officers of the Company.
Additional Information
G & A W W N
75
48
73
41
39
43
Number of Warehouses
700
675
650
625
Warehouses in Operation
608
600
592
634
Percent Increase
38
Management's Reports..
Executive Officers and Corporate Governance....
WHOLESALE
FISCAL YEAR ENDED AUGUST 30, 2015
2015
THE COMPANY
Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983 in
Seattle, Washington. In October 1993, Costco merged with The Price Company, which had pioneered the
membership warehouse concept in 1976, to form Price/Costco, Inc., a Delaware corporation. In January
1997, after the spin-off of most of its non-warehouse assets to Price Enterprises, Inc., the Company
changed its name to Costco Companies, Inc. On August 30, 1999, the Company reincorporated from
Delaware to Washington and changed its name to Costco Wholesale Corporation, which trades on the
NASDAQ Global Select Market under the symbol "COST."
As of December 2015, the Company operated a chain of 698 warehouses in 43 states, Washington, D.C.,
and Puerto Rico (488 locations), nine Canadian provinces (90 locations), Mexico (36 locations), the
United Kingdom (27 locations), Japan (24 locations), Korea (12 locations), Taiwan (11 locations, through
a 55%-owned subsidiary), Australia (eight locations) and Spain (two locations). The Company's online
business operates websites in the U.S., Canada, U.K., Mexico and Korea.
CONTENTS
Financial Highlights.
Letter to Shareholders..
Map of Warehouse Locations..
Business Overview.
Risk Factors.......
Properties: Warehouses, Administration and Merchandise Distribution Properties.
Market for Costco Common Stock, Dividend Policy and Stock Repurchase Program.........
2
4
11
20
21
Five Year Operating and Financial Highlights
23
Management's Discussion and Analysis of Financial Condition and Results of Operations ......
24
663
FINANCIAL HIGHLIGHTS
120
(698 at 12/31/15)
0
0
0
2011
2012
2013
2014
2015
2011
2012
At Fiscal Year End
2013 2014
Fiscal Year
2015
2011
2012
2013
2014
2015
Fiscal Year
Comparable Sales Growth
12%
35
Membership
1,462
2011
1,500
87.048
686
115
110
105
Net Sales
100
97.062
95
102.870
2,500
113.666
2,300
110.212
Net Income
2,100
2,058
2,039
1,900
1,709
1,700
2,377
575
90
85
Earlier this year, Ben Carson and Bill Gates retired from our Board of Directors. We thank Ben and
Bill for their significant contributions during their many years of dedicated service. More recently, two
new members were added to Costco's Board - Maggie Wilderotter and John Stanton. Maggie is the
Executive Chairman of Frontier Communications, and previously served as Frontier's Chief
Executive Officer and Chairman of the Board. Her broad-ranging experience includes senior
leadership positions in the areas of telecommunications and technology. John is Chairman of Trilogy
International Partners, Inc., and Trilogy Equity Partners. He is a wireless industry pioneer and former
top executive at companies including McCaw Cellular and Clearwire; and earlier founded and served
as Chairman and CEO of Western Wireless Corporation.
21
As always, we extend our best wishes to you and your families for a joyous holiday season and a
healthy, happy and prosperous New Year.
Novato
Oxnard
Pacoima
Palm Desert
Poway
Rancho Cordova
Rancho Cucamonga
Rancho del Rey
Redding
Redwood City
Richmond
Montebello
Morena
Moreno Valley
Mountain View
Northridge
Norwalk
Rohnert Park
Sacramento
Salinas
San Bernardino
San Diego Bus. Ctr.
S.E. San Diego
San Dimas
San Francisco
S. San Francisco
San Jose
N.E. San Jose
San Juan Capistrano
Roseville
Montclair
Modesto
Mission Valley
S.W. Bakersfield
Burbank
Cal Expo
Carlsbad
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Chico
Chino Hills
Chula Vista
Citrus Heights
Clovis
City of Industry
Commerce Bus. Ctr.
Concord
Corona
Culver City
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El Camino
El Centro
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San Leandro
Bakersfield
San Luis Obispo
Santa Clarita
Chicago South Loop
Glenview
Lake in the Hills
Lake Zurich
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East Peoria
N. Riverside
St. Charles
Schaumburg
INDIANA (5)
Castleton
Fort Wayne
N.W. Indianapolis
Merrillville
Mishawaka
IOWA (2)
Coralville
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KANSAS (3)
Lenexa
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Wichita
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W. Springfield
Waltham
Bedford Park Bus. Ctr.
Bloomingdale
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MICHIGAN (13)
Commerce Township
Grand Rapids
Green Oak Township
Kalamazoo
Livonia |
Livonia II
Madison Heights
Pittsfield Township
Roseville
Shelby Township
Wyoming
MINNESOTA (8)
Baxter
Burnsville
Coon Rapids
Eden Prairie
Maple Grove
Maplewood
Rochester
St. Louis Park
MISSOURI (5)
Independence
Kansas City
Manchester
S. St. Louis
St. Peters
MÉXICO
NEW HAMPSHIRE (1)
Nashua
NEW JERSEY (16)
Brick Township
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Bloomfield
ILLINOIS (19)
Twin Falls
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S.W. Denver
Douglas County
Gypsum
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Superior
Thornton
Timnath
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CONNECTICUT (6)
Brookfield
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DELAWARE (1)
Christiana
FLORIDA (22)
Altamonte Springs
Boca Raton
Brandon
Clearwater
Davie
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Fort Myers
E. Jacksonville
Kendall
Lantana
Miami
N. Miami Beach
Miami Lakes
Nampa
Preserving and enhancing our Company culture developed over more than three decades remains
an “imperative” as Costco expands its operations domestically and internationally. We remain
focused on exceeding the expectations of our stakeholders our members, our employees, our
suppliers and our shareholders - each and every day. These are our challenges for 2016 and in the
years to come; and we are confident that the entrepreneurial and innovative spirit at every level and
in every region of our global company will sustain our growth and continue exceptional performance.
Azusa
San Marcos
Sand City
Santa Clara
Almaden
Mobile
Montgomery
ALASKA (3)
Anchorage
N. Anchorage
Juneau
ARIZONA (18)
Avondale
Cave Creek Road
Chandler
Gilbert
S.E. Gilbert
Turlock
Tustin
Glendale
Inglewood
Irvine
La Habra
Lakewood
La Mesa
Laguna Marketplace
Laguna Niguel
Lake Elsinore
Lancaster
La Quinta
Livermore
Lodi
Mesa
Huntington Beach
Hayward Bus. Ctr.
Hawthorne Bus. Ctr.
Hayward
Antioch
Best Regards,
Янва
Jeff Brotman
Chairman of the Board
Cray Jelek
Craig Jelinek
President and Chief Executive Officer
3
COSTCO
WHOLESALE
SOUTH
KOREA
TAIWAN
D
JAPAN
ده
ALASKA
AUSTRALIA
HAWAII
698 LOCATIONS A
U.S.A. (488)
ALABAMA (4)
Hoover
Los Feliz
Manteca
Huntsville
CALIFORNIA (121)
Coeur d'Alene
Brandywine
Columbia
Frederick
Gaithersburg
Glen Burnie
Wheaton
White Marsh
Woodmore Twn Ctr.
MASSACHUSETTS (6)
Avon
Danvers
10
3
Paradise Valley
Phoenix
Phoenix - Bus. Ctr.
N. Phoenix
Prescott
Scottsdale
Tempe
Thomas Road
Tucson
N.W. Tucson
S.W. Tucson
Tustin Ranch
Vacaville
Vallejo
Van Nuys
Victorville
Alhambra
Colorado Springs
IDAHO (5)
Boise
2
Vista
Visalia
Aurora
Westlake Village
Westminster Bus. Ctr.
Cumming
Fort Oglethorpe
Gwinnett
Mall of Georgia
Perimeter
Town Center
HAWAII (7)
Hawaii Kai
Morrow - Bus. Ctr.
Kailua-Kona
Arvada
Waipio
Iwilei
Maui
Yorba Linda
Kauai
COLORADO (13)
Kapolei
Woodland
Woodland Hills
Our inability to attract, train and retain highly qualified employees could adversely impact our
business, financial condition and results of operations.
We might sell unsafe products, resulting in illness or injury to our members, harm our reputation,
and litigation.
Our success depends on the continued contributions of members of our senior management and other
key operations, merchandising and administrative personnel, and the loss of these contributions could
have a material adverse effect on our business. We must attract, train and retain a large and growing
number of qualified employees, while controlling related labor costs and maintaining our core values. Our
ability to control labor and benefit costs is subject to numerous external factors, including regulatory
changes, prevailing wage rates, and healthcare and other insurance costs. We compete with other retail
and non-retail businesses for these employees and invest significant resources in training and motivating
them. There is no assurance that we will be able to attract or retain highly qualified employees in the
future, which could have a material adverse effect on our business, financial condition and results of
operations.
Multichannel retailing is rapidly evolving and we must keep pace with changing member expectations and
new developments by our competitors. Our members, especially younger members, are increasingly
using computers, tablets, mobile phones, and other devices to shop. As part of our multichannel strategy,
we are making technology investments in our websites and mobile applications. If we are unable to make,
improve, or develop relevant member-facing technology in a timely manner, our ability to compete and
our results of operations could be adversely affected.
If we do not successfully develop and maintain a relevant multichannel experience for our
members, our results of operations could be adversely impacted.
and services and our market share. If we are not successful at predicting our sales trends and adjusting
our purchases accordingly, we may have excess inventory, which could result in additional markdowns
and reduce our operating performance. This could have an adverse effect on gross margin (net sales less
merchandise costs) and operating income.
14
It is difficult to consistently and successfully predict the products and services our members will desire.
Our success depends, in part, on our ability to identify and respond to trends in demographics and
consumer preferences. Failure to timely identify or effectively respond to changing consumer tastes,
preferences (including those relating to sustainability of product sources and animal welfare) and
spending patterns could negatively affect our relationship with our members, the demand for our products
We may not timely identify or effectively respond to consumer trends, which could negatively
affect our relationship with our members, the demand for our products and services, and our
market share.
If our merchandise offerings, including food and prepared food products for human consumption, drugs,
children's products, pet products, and durable goods, do not meet or are perceived not to meet applicable
safety standards or our members' expectations regarding safety, we could experience lost sales,
increased costs, and legal and reputational losses. The sale of these items involves the risk of health-
related illness or injury to our members. Such illnesses or injuries could result from tampering by
unauthorized third parties, product contamination or spoilage, including the presence of foreign objects,
substances, chemicals, other agents, or residues introduced during the growing, manufacturing, storage,
handling and transportation phases, or faulty design. Our vendors are generally contractually required to
comply with applicable product safety laws, and we are dependent on them to ensure that the products
we buy comply with all safety standards. While we are subject to governmental inspection and regulations
and work to comply in all material respects with applicable laws and regulations, we cannot be sure that
consumption or use of our products will not cause a health-related illness or injury in the future or that we
will not be subject to claims, lawsuits, or government investigations relating to such matters resulting in
costly product recalls and other liabilities that could adversely affect our business and results of
operations. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity
surrounding any assertion that our products caused illness or injury could adversely affect our reputation
with existing and potential members and our corporate and brand image, and these effects could be long
term.
We accept payments using a variety of methods, including cash and checks, a select variety of credit and
debit cards, and our proprietary cash card. As we offer new payment options to our members, we may be
subject to additional rules, regulations, compliance requirements, and higher fraud losses. For certain
payment methods, we pay interchange and other related card acceptance fees, along with additional
transaction processing fees which may increase over time and raise our operating costs. We rely on third
parties to provide payment transaction processing services, including the processing of credit and debit
cards, and our proprietary cash card, and it could temporarily disrupt our business if these companies
become unwilling or unable to provide these services to us. We are also subject to payment card
association rules and network operating rules, including data security rules, certification requirements and
rules governing electronic funds transfers, which could change over time. If we fail to comply with these
rules or transaction processing requirements, we may not be able to accept certain payment methods. In
addition, if our internal systems are breached or compromised, we may be liable for banks' compromised
card re-issuance costs, subject to fines and higher transaction fees and lose our ability to accept credit
and/or debit card payments from our members, and our business and operating results could be
adversely affected.
Disruptions in our depot operations could adversely affect sales and member satisfaction.
We depend on the orderly operation of the merchandise receiving and distribution process, primarily
through our depots. Although we believe that our receiving and distribution process is efficient,
unforeseen disruptions in operations due to fires, hurricanes, earthquakes or other catastrophic events,
labor issues or other shipping problems may result in delays in the delivery of merchandise to our
warehouses, which could adversely affect sales and the satisfaction of our members.
13
Our security measures may be undermined due to the actions of outside parties, employee error,
malfeasance, or otherwise, and, as a result an unauthorized party may obtain access to our data systems
and misappropriate business and personal information. In July 2015, we discovered that the company
that hosts our online photo center suffered a security breach that compromised information of users of the
company's site, including some Costco members. In response, that company implemented new
technology with enhanced security features. Additional data security breaches may occur in the future and
may, individually or in the aggregate, have a material adverse effect on our business and operations.
Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage
systems change frequently and may not immediately produce signs of intrusion, we may be unable to
anticipate these techniques, timely discover or counter them, or implement adequate preventative
measures. Any such breach or unauthorized access could result in significant legal and financial
exposure, damage to our reputation, and potentially have an adverse effect on our business.
The use of data by our business and our business associates is regulated at the national and state or
local level in all of our operating countries. Privacy and information security laws and regulations change,
and compliance with them may result in cost increases due to necessary systems changes and the
development of new administrative processes. If we, or those with whom we share information, fail to
comply with these laws and regulations or experience a data security breach, our reputation could be
damaged, possibly resulting in lost future business, and we could be subjected to additional legal risk as
a result of non-compliance.
We receive, retain, and transmit certain personal information about our members and entrust that
information to third party business associates, including cloud service providers that perform activities for
us. Our online business, which operates websites in the U.S., Canada, U.K., and Mexico, depends upon
the secure transmission of encrypted confidential information over public networks, including information
permitting cashless payments. A compromise of our security systems or those of our business associates
that results in our members' information being obtained by unauthorized persons could adversely affect
our reputation with our members and others, as well as our operations, results of operations, financial
condition and liquidity, and could result in litigation against us or the imposition of penalties. In addition, a
security breach could require that we expend significant additional resources related to the security of
information systems and could result in a disruption of our operations.
If we do not maintain the privacy and security of member-related and other business information,
we could damage our reputation with members, incur substantial additional costs, and become
subject to litigation.
effectiveness of adoption, and could make it more difficult for us to realize benefits from the technology.
Targeting the wrong opportunities, failing to make the best investments, or making an investment
commitment significantly above or below our needs could result in the loss of our competitive position and
adversely impact our financial condition and results of operations. Additionally, the potential problems and
interruptions associated with implementing technology initiatives could disrupt or reduce the efficiency of
our operations in the short term. These initiatives might not provide the anticipated benefits or may
provide them on a delayed schedule or at a higher cost.
12
We are currently making, and will continue to make, significant technology investments to improve or
replace our information processes and systems that are key to managing our business. Failure to monitor
and choose the right investments and implement them at the right pace would be harmful. The risk of
system disruption is increased when significant system changes are undertaken, although we believe that
our change management process can mitigate this risk. Excessive technological change could impact the
Given the very high volume of transactions we process each year it is important that we maintain
uninterrupted operation of our business-critical computer systems. Our computer systems, including our
back-up systems, are subject to damage or interruption from power outages, computer and
telecommunications failures, computer viruses, internal or external security breaches, catastrophic events
such as fires, earthquakes, tornadoes and hurricanes, and errors by our employees. If our computer
systems or our back-up systems are damaged or cease to function properly, we may have to make
significant investments to fix or replace them, and we may suffer interruptions in our operations in the
interim. Any material interruption in our computer systems could have a material adverse effect on our
business and results of operations.
We rely extensively on computer systems to process transactions, summarize results, and
manage our business. Failure to adequately update our systems and disruptions in both our
primary and back-up systems could harm our ability to run our business and adversely affect our
results of operations.
Market and Other External Risks
We are subject to payment-related risks.
We face strong competition from other retailers and warehouse club operators, which could
adversely affect our business, financial condition and results of operations.
We could be subject to additional income tax liabilities.
15
In addition, we sell many products under our private label Kirkland Signature brand. Maintaining
consistent product quality, competitive pricing, and availability of our Kirkland Signature products for our
members is essential to developing and maintaining member loyalty. These products also generally carry
higher margins than national brand products carried in our warehouses and represent a growing portion
of our overall sales. If the Kirkland Signature brand experiences a loss of member acceptance or
confidence, our sales and gross margin results could be adversely affected.
Accounting principles and related accounting pronouncements, implementation guidelines, and
interpretations we apply to a wide range of matters that are relevant to our business, including, but not
limited to, revenue recognition, merchandise inventories, vendor rebates and other vendor consideration,
impairment of long-lived assets, self-insurance liabilities, and income taxes are highly complex and
involve many subjective assumptions, estimates and judgments by our management. Changes in these
rules or their interpretation or changes in underlying assumptions, estimates or judgments by our
management could significantly change our reported or expected financial performance.
Provisions for losses related to self-insured risks are generally based upon independent actuarially
determined estimates. The assumptions underlying the ultimate costs of existing claim losses can be
highly unpredictable, which can affect the liability recorded for such claims. For example, variability in
inflation rates of health care costs inherent in these claims can affect the amounts realized. Similarly,
changes in legal trends and interpretations, as well as a change in the nature and method of how claims
are settled can impact ultimate costs. Although our estimates of liabilities incurred do not anticipate
significant changes in historical trends for these variables, any changes could have a considerable effect
upon future claim costs and currently recorded liabilities and could materially impact our consolidated
financial statements.
Changes in accounting standards and subjective assumptions, estimates and judgments by
management related to complex accounting matters could significantly affect our financial
condition and results of operations.
During 2015, we operated 206 warehouses in eight countries outside of the U.S. and we plan to continue
expanding our international operations. Future operating results internationally could be negatively
affected by a variety of factors, many similar to those we face in the U.S., certain of which are beyond our
control. These factors include political conditions, economic conditions, regulatory constraints, currency
regulations, and other matters in any of the countries or regions in which we operate, now or in the future.
Other factors that may impact international operations include foreign trade, monetary and fiscal policies
and the laws and regulations of the U.S. and foreign governments, agencies and similar organizations,
and risks associated with having major facilities located in countries which have been historically less
stable than the U.S. Risks inherent in international operations also include, among others, the costs and
difficulties of managing international operations, adverse tax consequences, and greater difficulty in
enforcing intellectual property rights.
Our international operations subject us to risks associated with the legislative, judicial,
accounting, regulatory, political and economic factors specific to the countries or regions in
which we operate which could adversely affect our business, financial condition and results of
operations.
Legal and Regulatory Risks
cause the market price of our stock to decline, as could changes in our dividend or stock repurchase
policies.
17
We believe that the price of our stock generally reflects high market expectations for our future operating
results. Any failure to meet or delay in meeting these expectations, including our comparable warehouse
sales growth rates, gross margin, earnings and earnings per share or new warehouse openings could
Failure to meet market expectations for our financial performance could adversely affect the
market price and volatility of our stock.
We use natural gas, diesel fuel, gasoline, and electricity in our distribution and warehouse operations.
Increased U.S. and foreign government and agency regulations to limit carbon dioxide and other
greenhouse gas emissions may result in increased compliance costs and legislation or regulation
affecting energy inputs that could materially affect our profitability. In addition, climate change could affect
our ability to procure needed commodities at costs and in quantities we currently experience. We also sell
a substantial amount of gasoline, the demand for which could be impacted by concerns about climate
change and which also could face increased regulation. Climate change may be associated with extreme
weather conditions, such as more intense hurricanes, thunderstorms, tornadoes, and snow or ice storms,
as well as rising sea levels. Extreme weather conditions increase our costs and damage resulting from
extreme weather may not be fully insured.
Factors associated with climate change could adversely affect our business.
Natural disasters, such as hurricanes, typhoons or earthquakes, particularly in California or in Washington
state, where our centralized operating systems and administrative personnel are located, could negatively
affect our operations and financial performance. Such events could result in physical damage to one or
more of our properties, the temporary closure of one or more warehouses or depots, the temporary lack
of an adequate work force in a market, the temporary or long-term disruption in the supply of products
from some local or overseas suppliers, the temporary disruption in the transport of goods to or from
overseas, delays in the delivery of goods to our warehouses or depots within the countries in which we
operate, and the temporary reduction in the availability of products in our warehouses. Public health
issues, whether occurring in the U.S. or abroad, could disrupt our operations, disrupt the operations of
suppliers or members, or have an adverse impact on consumer spending and confidence levels. These
events could also reduce demand for our products or make it difficult or impossible to receive products
from suppliers. We may be required to suspend operations in some or all of our locations, which could
have a material adverse effect on our business, financial condition and results of operations.
Natural disasters or other catastrophic events could negatively affect our business, financial
condition, and results of operations.
financial statements we must translate the results of operations of our international operations from local
currencies into U.S. dollars using exchange rates for the current period. As a result of such translations,
future fluctuations in currency exchange rates over time that are unfavorable to us may adversely affect
the financial performance of our Canadian and Other International operating segments and have a
corresponding adverse period-over-period effect on our results of operations. As we continue to expand
our international operations, our exposure to fluctuations in foreign exchange rates may increase.
We may pay for products we purchase for sale in our warehouses around the world with a currency other
than the local currency of the country in which the goods will be sold. Currency fluctuations may increase
our cost of goods and may not be passed on to members. Consequently, fluctuations in currency
exchange rates may adversely affect our results of operations.
16
Fluctuations in foreign exchange rates may adversely affect our results of operations.
During 2015, our international operations, including Canada, generated 27% and 36% of our net sales
and operating income, respectively. Our international operations have accounted for an increasingly
larger portion of our warehouses and we plan to continue expanding our international operations. Our
operations in countries other than the U.S. are conducted primarily in the local currencies of those
countries. Our consolidated financial statements are denominated in U.S. dollars, and to prepare those
Our suppliers (and those they depend upon for materials and services) are subject to risks, including
labor disputes, union organizing activities, financial liquidity, inclement weather, natural disasters, supply
constraints, and general economic and political conditions that could limit their ability to timely provide us
with acceptable merchandise. For these or other reasons, one or more of our suppliers might not adhere
to our quality control, legal, regulatory or animal welfare standards. These deficiencies may delay or
preclude delivery of merchandise to us and might not be identified before we sell such merchandise to
our members. This failure could lead to litigation and recalls, which could damage our reputation and our
brands, increase our costs, and otherwise adversely impact our business.
We purchase our merchandise from numerous domestic and foreign manufacturers and importers and
have thousands of vendor relationships. Our inability to acquire suitable merchandise on acceptable
terms or the loss of key vendors could negatively affect us. We may not be able to develop relationships
with new vendors, and products from alternative sources, if any, may be of a lesser quality or more
expensive than those from existing vendors. Because of our efforts to adhere to high quality standards for
which available supply may be limited, particularly for certain food items, the large volume we demand
may not be consistently available.
We depend heavily on our ability to purchase merchandise in sufficient quantities at competitive prices.
As these quantities continue to grow, we have no assurances of continued supply, pricing or access to
new products, and any vendor could at any time change the terms upon which it sells to us or discontinue
selling to us. Member demands may lead to out-of-stock positions of our merchandise leading to loss of
sales and profits.
Vendors may be unable to supply us with quality merchandise at the right prices in a timely
manner or may fail to adhere to our high standards resulting in adverse effects on our business,
merchandise inventories, sales, and profit margins.
Higher energy and gasoline costs, inflation, levels of unemployment, healthcare costs, consumer debt
levels, foreign currency exchange rates, unsettled financial markets, weaknesses in housing and real
estate markets, reduced consumer confidence, changes related to government fiscal and tax policies,
sovereign debt crises, and other economic factors could adversely affect demand for our products and
services or require a change in the mix of products we sell. Prices of certain commodity products,
including gasoline and other food products, are historically volatile and are subject to fluctuations arising
from changes in domestic and international supply and demand, labor costs, competition, market
speculation, government regulations, taxes and periodic delays in delivery. Rapid and significant changes
in commodity prices may affect our sales and profit margins. These factors could also increase our
merchandise costs and selling, general and administrative expenses, and otherwise adversely affect our
operations and financial results. General economic conditions can also be affected by the outbreak of
war, acts of terrorism, or other significant national or international events.
General economic factors, domestically and internationally, may adversely affect our business,
financial condition, and results of operations.
The retail business is highly competitive. We compete for customers, employees, sites, products and
services and in other important respects with a wide range of local, regional and national wholesalers and
retailers, both in the United States and in foreign countries, including other warehouse club operators,
supermarkets, supercenters, department and specialty stores, gasoline stations, and internet retailers.
Such retailers and warehouse club operators compete in a variety of ways, including merchandise pricing,
selection and availability, services, location, convenience, and store hours. The evolution of retailing in
online and mobile channels has improved the ability of customers to comparison shop with digital devices,
which has enhanced competition. Some competitors may have greater financial resources, better access
to merchandise and greater market penetration than we do. Our inability to respond effectively to
competitive pressures, changes in the retail markets and member expectations could result in lost market
share and negatively affect our financial results.
Membership loyalty and growth are essential to our business model. The extent to which we achieve
growth in our membership base, increase the penetration of our Executive members, and sustain high
renewal rates materially influences our profitability. Damage to our brands or reputation may negatively
impact comparable warehouse sales, diminish member trust, and reduce member renewal rates and,
accordingly, net sales and membership fee revenue, negatively impacting our results of operations.
Our membership was made up of the following (in thousands):
other wholesale club operators, our lack of familiarity with local member preferences, and seasonal
differences in the market. In addition, entry into new markets may bring us into competition with new
competitors or with existing competitors with a large, established market presence. We cannot ensure
that our new warehouses and new online business websites will be profitably deployed and, as a result,
our future profitability could be delayed or otherwise materially adversely affected.
Part-time employees
Full-time employees.
Our employee count was as follows:
Labor
All Gold Star and Business paid cardholders are eligible to upgrade to an Executive membership in the
U.S., Canada, Mexico, and U.K., for an additional annual fee of approximately $55. Our Executive
members qualify for a 2% reward on qualified purchases (up to a maximum reward of approximately $750
per year), which can be redeemed only at Costco warehouses. This program also offers (except in
Mexico) additional savings and benefits on various business and consumer services, such as auto and
home insurance, the Costco auto purchase program and check printing services. The services are
generally provided by third-parties and vary by country and state. Executive members represented 39% of
eligible cardholders at the end of 2015 and 2014 and 38% at the end of 2013. Executive members
generally spend more than other members, and the percentage of our net sales attributable to these
members continues to increase.
Total cardholders..
76,400 71,200
81,300
34,400 32,200
36,700
42,000 39,000
44,600
10,600 10,400 10,100
31,600 28,900
34,000
2013
2014
2015
Household cards..
Total paid members.
Business, including add-ons
Gold Star
We compute our income tax provision based on enacted tax rates in the countries in which we operate.
As the tax rates vary among countries, a change in earnings attributable to the various jurisdictions in
which we operate could result in an unfavorable change in our overall tax provision. Additionally, changes
Total employees.
Our failure to maintain positive membership loyalty and brand recognition could adversely affect
our results of operations.
2014
2013
11
We intend to continue to open warehouses in new markets. The risks associated with entering a new
market include difficulties in attracting members due to a lack of familiarity with us, attracting members of
We seek to expand our business in existing markets in order to attain a greater overall market share. A
new warehouse may draw members away from our existing warehouses and adversely affect comparable
warehouse sales performance and member traffic at those existing warehouses.
Our growth is dependent, in part, on our ability to acquire property and build or lease new warehouses
and regional depots. We compete with other retailers and businesses for suitable locations. Local land
use and other regulations restricting the construction and operation of our warehouses and depots, as
well as local community actions opposed to the location of our warehouses or depots at specific sites and
the adoption of local laws restricting our operations and environmental regulations, may impact our ability
to find suitable locations, and increase the cost of sites and of constructing, leasing and operating our
warehouses and depots. We also may have difficulty negotiating leases or real estate purchase
agreements on acceptable terms. In addition, certain jurisdictions have enacted or proposed laws and
regulations that would prevent or restrict the operation or expansion plans of certain large retailers and
warehouse clubs, including us, within their jurisdictions. Failure to manage these and other similar factors
effectively may affect our ability to timely build or lease new warehouses and depots, which could have a
material adverse effect on our future growth and profitability.
We may be unsuccessful implementing our growth strategy, including expanding our business,
both in existing markets and in new markets, which could have an adverse impact on our
business, financial condition and results of operations.
We are highly dependent on the financial performance of our U.S. and Canadian operations.
Our financial and operational performance is highly dependent on our U.S. and Canadian operations,
which comprised 88% and 85% of net sales and operating income in 2015, respectively. Within the U.S.,
we are highly dependent on our California operations, which comprised 31% of U.S. net sales in 2015.
Our California market, in general, has a larger percentage of higher volume warehouses as compared to
our other domestic markets. Any substantial slowing or sustained decline in these operations could
materially adversely affect our business and financial results. Declines in financial performance of our
U.S. operations, particularly in California, and our Canadian operations could arise from, among other
things: declines in actual or estimated comparable warehouse sales growth rates and expectations;
negative trends in operating expenses, including increased labor, healthcare and energy costs; failing to
meet targets for warehouse openings; cannibalizing existing locations with new warehouses; shifts in
sales mix toward lower gross margin products; changes or uncertainties in economic conditions in our
markets, including higher levels of unemployment and depressed home values; and failing to consistently
provide high quality products and innovative new products to retain our existing member base and attract
new members.
Business and Operating Risks
The risks described below could materially and adversely affect our business, financial condition and
results of operations. These risks are not the only risks that we face. We could also be affected by
additional factors that apply to all companies operating in the U.S. and globally, as well as other risks that
are not presently known to us or that we currently consider to be immaterial. These Risk Factors should
be carefully reviewed in conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations and our consolidated financial statements and related notes in this Report.
RISK FACTORS
10
2015
117,000 112,000 103,000
88,000 83,000 81,000
205,000 195,000 184,000
Recycling and waste stream management in our warehouses and cross-dock depots have expanded
significantly in recent years. Tons of trash that our warehouses generate each week, much of which was
once discarded into landfills, are now being recycled into usable products, converted into biofuels or
compost, or used as feed stock. We also have warehouse programs where meat scraps and rotisserie
chicken grease are recycled by third parties to make animal feed, biodiesel fuel, soaps, and other
products. Additionally, our merchandise packaging is becoming more sustainable as we pursue
opportunities to eliminate polyvinyl chloride (PVC) plastic in our packaging and replace it with recycled or
recyclable materials.
This past year we increased the number of large rooftop solar photovoltaic systems to 89 warehouses.
in Hawaii, California, Ohio, Utah, New Mexico, New Jersey, Puerto Rico, Colorado, Arizona, New York,
and Japan. These systems are projected to generate 77 million kWh of electricity per year. We also
closely monitor our water usage, especially in drought-stricken states; and continue to expand the use of
non-chemical water treatment systems used in our cooling towers to reduce the amount of chemicals
going into sewer systems and, where possible, reuse that water for site irrigation. By coordinating with
state and federal incentive programs, these and other energy-saving systems help us lower the cost of
operating our facilities.
The construction of our warehouses has increasingly included green building design and sustainable
features. Many of our main building structures use 80% recycled steel materials designed to minimize the
amount of material utilized. The roof materials used on our metal pre-engineered warehouses are
recycled standing seam metal panels, designed to maximize efficiency for spanning the structure; and the
exterior skin of the building is also recycled metal.
We are ever mindful of our responsibilities as an environmental steward to manage our global operations
in an energy-efficient, environmentally-friendly and sustainable manner. With the establishment of our
Corporate Sustainability and Energy Department almost ten years ago we have been actively developing
solutions for many aspects of our business related to sustainability: seeking opportunities to reduce our
carbon footprint; enhancing our warehouse energy management systems; refining our packaging design
initiatives and the "cube efficiency" of our merchandise distribution systems; and further developing our
recycling and waste stream management programs.
Sustainability
We rely on trademark and copyright laws, trade secret protection, and confidentiality, license and other
agreements with our suppliers, employees and others to protect our intellectual property rights. The
availability and duration of trademark registrations vary by country; however, trademarks are generally
valid and may be renewed indefinitely as long as they are in use and their registrations are properly
maintained.
We believe that, to varying degrees, our trademarks, trade names, copyrights, proprietary processes,
trade secrets, patents, trade dress, domain names and similar intellectual property add significant value to
our business and are important to our success. We have invested significantly in the development and
protection of our well-recognized brands, including the Costco WholesaleⓇ series of trademarks and our
private label brand, Kirkland Signature®. We believe that Kirkland Signature products are premium
products offered to our members at prices that are generally lower than those for similar national brand
products and that they help lower costs, differentiate our merchandise offerings from other retailers, and
generally earn higher margins. We expect to continue to increase the sales penetration of our private
label items.
Intellectual Property
9
Our industry is highly competitive, based on factors such as price, merchandise quality and selection,
location and customer service. We compete with warehouse club operations across the U.S. and Mexico
(primarily Wal-Mart's Sam's Club and BJ's Wholesale Club), and nearly every major metropolitan area
has multiple club operations. In addition, we compete on a worldwide basis with global, national and
regional wholesalers and retailers, including supermarkets, supercenters, department and specialty
stores, gasoline stations, and internet retailers. Competitors such as Wal-Mart, Target, Kroger, and
Amazon.com are among our significant general merchandise retail competitors. We also compete with
operators selling a single category or narrow range of merchandise, such as Lowe's, Home Depot, Office
Depot, PetSmart, Staples, Kohl's, Trader Joe's, Whole Foods, CVS, Walgreens, and Best Buy.
Competition
Approximately 14,000 employees in a minority of our locations are represented by the International
Brotherhood of Teamsters. All remaining employees are non-union. We consider our employee relations
to be very good.
We continue to make significant progress in lowering the power consumption of the lighting systems in
our buildings by as much as 50% while actually improving the lighting quality with the use of LED fixtures.
Our HVAC systems are also considerably more efficient over the last several years, while at the same
time meeting stricter requirements for heating, cooling, and humidity control.
18
Our gross margin percentage increased four basis points compared to 2013 and most of the improvement
was derived from the impact of gasoline price deflation on net sales. Excluding this impact, gross margin
as a percentage of adjusted net sales was 10.63%, an increase of one basis point from the prior year.
This increase is predominantly due to warehouse ancillary and other business gross margin of six basis
points, which was largely offset by five basis points due to a LIFO charge in 2014 compared to a benefit in
2013. The LIFO charge resulted from higher costs for our merchandise inventories, primarily our foods
28
Korea
473,000
1,836,000
$141.69
Maximum Dollar
Value of Shares
that May Yet be
Purchased
Under the
Program
420,000
$3,898
508,000
$3,828
435,000
$3,766
473,000
$3,699
1,836,000
142.51
(1)
Our stock repurchase program is conducted under a $4,000 authorization approved by our Board of Directors in April 2015,
which expires in April 2019.
Equity Compensation Plans
Information related to our Equity Compensation Plans is incorporated herein by reference to Costco's
Proxy Statement filed with the Securities and Exchange Commission.
21
Performance Graph
The following graph compares the cumulative total shareholder return (stock price appreciation plus
dividends) on our common stock for the last five years with the cumulative total return of the S&P 500
Index and the following group of peer companies (based on weighted market capitalization) selected by
the Company: Amazon.com, Inc.; The Home Depot, Inc.; Lowe's Companies; Best Buy Co., Inc.; Staples
Inc.; Target Corporation; Kroger Company; and Wal-Mart Stores, Inc. The information provided is from
August 29, 2010 through August 30, 2015.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG COSTCO WHOLESALE CORPORATION,
S&P 500 INDEX AND PEER GROUP INDEX
Dollars
350
300
250
200
Total fourth quarter.
150
143.08
435,000
0.355
116.80
110.65
0.355
125.43
110.18
0.310
125.21
111.50
0.310
Payment of future dividends is subject to declaration by the Board of Directors. Factors considered in
determining dividends are our profitability and expected capital needs. Subject to these qualifications, we
presently expect to continue to pay dividends on a quarterly basis.
The following table sets forth information on our common stock repurchase program activity for the 16-
week fourth quarter of fiscal 2015 (dollars in millions, except per share data):
Period
138.39
May 11, 2015 June 7, 2015.
July 6, 2015 August 2, 2015.
August 3, 2015-August 30, 2015.
Total Number
of shares
Purchased
420,000
Average
Price Paid
per Share
$143.32
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Program(1)
111
508,000
June 8, 2015-July 5, 2015.
100
50
0
2,428
2,286
2,075
1,867
Gross margin (1) as a percentage of net sales
11.09 %
10.66%
10.62%
10.55%
10.69%
Selling, general and administrative
expenses as a percentage of net sales.
10.07 %
2,533
9.89%
9.81%
9.98%
Operating income
$3,624
$3,220
$3,053
$2,759
$2,439
Net income attributable to Costco (2)
2,377
2,058
2,039
1,709
9.82%
Membership fees
$87,048
$97,062
8/29/10
8/28/11
9/2/12
9/1/13
8/31/14
8/30/15
Costco Wholesale Corporation
--Peer Group Index
-----S&P 500
The graph assumes the investment of $100 in Costco common stock, the S&P 500 Index and the Peer
Group Index on August 29, 2010 and reinvestment of all dividends.
Available Information
Our U.S. internet website is www.costco.com. We make available through the Investor Relations section
of that site, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5, and any amendments to those reports, as
soon as reasonably practicable after filing such materials with, or furnishing such documents to, the
Securities and Exchange Commission (SEC). The information found on our website is not part of this or
any other report filed with or furnished to the SEC. In addition, the public may read and copy any
materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC
20549. The public may obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and
information statements, and other information regarding issuers, such as the Company, that file
electronically with the SEC at www.sec.gov.
22
22
FIVE YEAR OPERATING AND FINANCIAL HIGHLIGHTS
The following table sets forth information concerning our consolidated financial condition, operating
results, and key operating metrics. This information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations, included in this Report, and
our consolidated financial statements and notes thereto, included in this Report.
SELECTED FINANCIAL DATA
(dollars in millions, except per share data)
Aug. 30,
2015
As of and for the year ended
(52 weeks)
Aug. 31,
2014
(52 weeks)
Sept. 1,
2013
(52 weeks)
Sept. 2,
2012
(53 weeks)
Aug. 28,
2011
(52 weeks)
RESULTS OF OPERATIONS
Net sales...
$113,666
$110,212
$102,870
113.87
121.62
0.355
121.35
15
23
5
7
12
2
7
Total
(1) 95 of the 144 leases are land-leases only, where Costco owns the building.
542
144
686
The following schedule shows warehouse openings for the past five fiscal years and expected warehouse
openings through December 31, 2015:
8
Openings by Fiscal Year (1)
Canada
Other
International
Total Warehouses
Total
in Operation
2011 and prior
429
82
81
592
592
2012.
10
United States
27
6
21
in the enacted tax rates, adverse outcomes in connection with income tax audits in any jurisdiction,
including transfer pricing disputes, or any change in the pronouncements relating to accounting for
income taxes could have a material adverse effect on our financial condition and results of operations.
Significant changes in, or failure to comply with, federal, state, regional, local and international
laws and regulations relating to the use, storage, discharge and disposal of hazardous materials,
hazardous and non-hazardous wastes and other environmental matters could adversely impact
our business, financial condition and results of operations.
We are subject to a wide variety of federal, state, regional, local and international laws and regulations
relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-
hazardous wastes and other environmental matters. Any failure to comply with these laws could result in
significant costs to satisfy environmental compliance, remediation or compensatory requirements, or the
imposition of severe penalties or restrictions on operations by governmental agencies or courts that could
adversely affect our business, financial condition and results of operations.
We are involved in a number of legal proceedings and audits and some of these outcomes could
adversely affect our business, financial condition and results of operations.
Our business requires compliance with many laws and regulations. Failure to achieve compliance could
subject us to lawsuits and other proceedings, and lead to damage awards, fines, penalties, and
remediation costs. We are, or may become involved, in a number of legal proceedings and audits
including grand jury investigations, government and agency investigations, and consumer, employment,
tort, unclaimed property laws, and other litigation (see discussion of Legal Proceedings in Note 10 to the
consolidated financial statements included in this Report). We cannot predict with certainty the outcomes
of these legal proceedings and other contingencies, including environmental remediation and other
proceedings commenced by governmental authorities. The outcome of some of these legal proceedings,
audits, unclaimed property laws, and other contingencies could require us to take, or refrain from taking,
actions which could negatively affect our operations or could require us to pay substantial amounts of
money adversely affecting our financial condition and results of operations. Additionally, defending against
these lawsuits and proceedings may involve significant expense and diversion of management's attention
and resources.
19
PROPERTIES
Warehouse Properties
At August 30, 2015 we operated 686 membership warehouses:
NUMBER OF WAREHOUSES
United States and Puerto Rico.
Canada..
Mexico
Own Land
and Building
388
Lease Land
and/or
Building
(1)
Total
92 480
89
F 111
United Kingdom...
Japan..
Taiwan
Australia
Spain......
78
36
36
6
1,462
16
2013.
Market Information and Dividend Policy
Our common stock is traded on the NASDAQ Global Select Market under the symbol "COST." On
October 5, 2015, we had 8,527 stockholders of record. The following table shows the quarterly high and
low closing sale prices as reported by NASDAQ for each quarter during the last two fiscal years and the
quarterly cash dividend declared per share of our common stock.
2015:
Fourth Quarter..
Third Quarter
Second Quarter..
First Quarter
2014:
Fourth Quarter..
Third Quarter.
Second Quarter.
First Quarter
(1) The amount shown includes a special cash dividend of $5.00 per share.
MARKET FOR COSTCO COMMON STOCK
Price Range
High
Low
Declared
$146.89
$132.71
$0.400
153.14
143.05
0.400
155.92
137.31
5.355 (1)
140.01
Cash
Dividends
20
20
At the end of 2015, our warehouses contained approximately 98.7 million square feet of operating floor
space: 69.9 million in the U.S.; 12.3 million in Canada; and 16.5 million in Other International locations.
Additionally, we operate regional depots for the consolidation and distribution of most merchandise
shipments to the warehouses, and various processing, packaging, and other facilities to support ancillary
and other businesses, which includes our online business. We operate 23 depots consisting of
approximately 9.3 million square feet. Our executive offices are located in Issaquah, Washington, and we
operate 18 regional offices in the U.S., Canada and Other International locations.
12
3
11
26
634
2014
17
3
9
29
663
2015.
12
1
10
23
686
2016 (expected through 12/31/2015)...
7
1
3
11
697
Total
487
90
120
697
(1) Net of closings and relocations.
608
Net income per diluted common share
attributable to Costco
Issuer Purchases of Equity Securities
4.65
Canada.
(5)%
2%
9%
Other International.
(3)%
3%
1%
Total Company.
1 %
4%
6%
Increases in comparable warehouse sales excluding
6%
the impact of changes in foreign currency and
U.S..
Canada...
Other International.
Total Company.
6%
5%
6%
8 %
9%
9%
6 %
4%
2%
gasoline prices:
5%
3 %
U.S.
Changes in foreign currencies relative to the U.S. dollar adversely impacted diluted earnings per
share by $0.28, primarily due to changes in the Canadian dollar;
In February 2015, we issued $1,000 in aggregate principal amount of Senior Notes, which partially
funded a special cash dividend of $5.00 per share paid in February 2015 (approximately $2,201);
and
The Board of Directors approved an increase in the quarterly cash dividend from $0.355 to $0.40
per share in April 2015.
RESULTS OF OPERATIONS
Net Sales
Net Sales...
Increases in net sales:
U.S.
Canada.
2015
$113,666
2014
2013
$110,212
$102,870
5 %
7%
5%
(3)%
5%
9%
Other International.
2 %
14%
7%
Total Company.
3 %
7%
6%
Increases in comparable warehouse sales:
7 %
Net income increased to $2,377, or $5.37 per diluted share compared to $2,058, or $4.65 per
diluted share in 2014. The current year results were positively impacted by a $57 tax benefit, or
$0.13 per diluted share, in connection with the special cash dividend paid to the Company's 401(k)
Plan participants;
6%
2015 vs. 2014
22
Membership program. The raising of our membership fees in fiscal 2012 positively impacted 2014 and
2013 by $9 and $119, respectively. These increases were partially offset by changes in foreign currencies
relative to the U.S. dollar, which negatively impacted membership fees by approximately $35 in 2014.
Gross Margin
Net sales
Less merchandise costs
Gross margin...
Gross margin as a percentage of net sales.
2015
2014
2013
$113,666
$110,212
$102,870
27
101,065
5.37
$12,601
$11,754
$10,922
11.09%
10.66%
10.62%
2015 vs. 2014
During 2015, the gross margin of our combined core merchandise categories (food and sundries,
hardlines, softlines and fresh foods), when expressed as a percentage of core merchandise sales (rather
than total net sales), increased five basis points, primarily due to increases in softlines and food and
sundries, partially offset by a decrease in fresh foods. This measure eliminates the impact of changes in
sales penetration and gross margins from our warehouse ancillary and other businesses.
Our gross margin percentage increased 43 basis points compared to 2014 and most of the improvement
was derived from the impact of gasoline price deflation on net sales. Excluding this impact, gross margin
as a percentage of adjusted net sales was 10.81%, an increase of 15 basis points from the prior year.
This increase is predominantly due to: an increase in our warehouse ancillary and other business gross
margin of 23 basis points, due primarily to our gasoline business; partially offset by a negative
contribution from core merchandise categories of 12 basis points, as a result of a decrease in their sales
penetration. A LIFO benefit in 2015 compared to a charge in 2014 positively contributed five basis points.
The LIFO benefit resulted largely from lower costs for gasoline. Changes in foreign currencies relative to
the U.S. dollar negatively impacted gross margin by approximately $359 in 2015.
Gross margin on a segment basis, when expressed as a percentage of the segment's own sales
(segment gross margin percentage), increased in our U.S. operations, primarily due to our gasoline
business, food and sundries merchandise category and the LIFO benefit discussed above. The segment
gross margin percentage in our Canadian operations decreased, primarily in hardlines and softlines. The
segment gross margin percentage in our Other International operations decreased, primarily in food and
sundries.
2014 vs. 2013
During 2014, the gross margin of our combined core merchandise categories, when expressed as a
percentage of core merchandise sales, increased seven basis points, primarily due to increases in our
softlines and food and sundries categories, partially offset by a decrease in hardlines. Fresh foods also
had a positive impact as a result of higher sales penetration.
98,458
Membership fees increased 6% in 2014. This increase was primarily due to membership sign-ups at
existing and new warehouses and increased number of upgrades to our higher-fee Executive
2014 vs. 2013
Membership fees increased 4% in 2015. This increase was primarily due to membership sign-ups at
existing and new warehouses and increased number of upgrades to our higher-fee Executive
Membership program. These increases were partially offset by changes in foreign currencies relative to
the U.S. dollar, which negatively impacted membership fees by approximately $76 in 2015. Our member
renewal rates are currently 91% in the U.S. and Canada and 88% worldwide.
Net Sales
Net sales increased $3,454 or 3% during 2015. This was attributable to sales at new warehouses opened
in 2014 and 2015 and a 1% increase in comparable warehouse sales. Changes in foreign currencies
26
26
relative to the U.S. dollar negatively impacted net sales by approximately $3,344, or 303 basis points,
compared to 2014. The negative impact was attributable to all foreign countries in which we operate,
predominantly Canada of $2,027, Mexico of $385, and Japan of $368. Changes in gasoline prices
negatively impacted net sales by approximately $2,902, or 263 basis points, due to a 22% decrease in the
average sales price per gallon.
Comparable Sales
Comparable sales increased 1% during 2015 and was positively impacted by an increase in shopping
frequency partially offset by a decrease in the average ticket. The average ticket and comparable sales
results were negatively impacted by changes in foreign currencies relative to the U.S. dollar and a
decrease in gasoline prices. The increase in comparable sales also includes the negative impact of
cannibalization (established warehouses losing sales to our newly opened locations).
2014 vs. 2013
Net Sales
Net sales increased $7,342 or 7% during 2014. This was attributable to a 4% increase in comparable
warehouse sales, and sales at warehouses opened in 2013 and 2014. Changes in foreign currencies
negatively impacted net sales by approximately $1,336, or 130 basis points, compared to 2013. The
negative impact was primarily due to the Canadian dollar of approximately $1,140 and the Japanese yen
of approximately $311. Changes in gasoline prices negatively impacted net sales by approximately $364,
or 35 basis points, due to a 3% decrease in the average sales price per gallon.
Comparable Sales
Comparable sales increased 4% during 2014 and were primarily impacted by an increase in shopping
frequency. Changes in foreign currencies relative to the U.S. dollar and gasoline prices negatively
impacted comparable sales results, including the average ticket during 2014. The increase in comparable
sales also includes the negative impact of cannibalization (established warehouses losing sales to our
newly opened locations), primarily in our Other International operations.
Membership Fees
Membership fees
Membership fees increase
Membership fees as a percentage of net sales
2015 vs. 2014
2015
$2,533
4%
2.23%
2014
$2,428
6%
2.20%
2013
$2,286
10%
2.22%
6%
Selling, general and administrative (SG&A) expenses as a percentage of net sales increased 18
basis points;
91,948
•
6%
7%
10%
Increase in Total Company comparable
warehouse sales excluding the impact of
changes in foreign currency and gasoline
prices........
7 %
6%
6%
6%
6%
BALANCE SHEET DATA
Net property and equipment
4%
$15,401
33,440
Long-term debt, excluding current portion.
4,864
Costco stockholders' equity.
$10,617
$14,830
33,024
5,093
$12,303
$13,881 $12,961
30,283
4,998
$10,833
$12,432
27,140
26,761
1,381
$12,361
1,253
$12,002
Total assets.
1 %
Total Company...
20%
•
4.63
3.89
3.30
Cash dividends declared per common
share
6.51
1.33
1.03
0.89
Increase in comparable warehouse sales(
(3)
United States
3 %
5%
6%
7%
7%
Canada.
Other International
(5)%
2%
9%
8%
14%
(3)%
3%
1%
3%
WAREHOUSE INFORMATION
Warehouses in Operation
8.17
Opened(4)
23
223
OVERVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(amounts in millions, except per share, membership fee, and warehouse count data)
We believe that the most important driver of our profitability is sales growth, particularly comparable
warehouse sales (comparable sales) growth. We define comparable sales as sales from warehouses
open for more than one year, including remodels, relocations and expansions, as well as online
sales related to websites operating for more than one year. Comparable sales growth is achieved through
increasing shopping frequency from new and existing members and the amount they spend on each visit
(average ticket). Sales comparisons can also be particularly influenced by certain factors that are beyond
our control: fluctuations in currency exchange rates (with respect to the consolidation of the results of our
international operations); and changes in the cost of gasoline and associated competitive conditions
(primarily impacting our U.S. and Canadian operations). The higher our comparable sales exclusive of
these items, the more we can leverage certain of our selling, general and administrative expenses,
reducing them as a percentage of sales and enhancing profitability. Generating comparable sales growth
is foremost a question of making available to our members the right merchandise at the right prices, a skill
that we believe we have repeatedly demonstrated over the long term. Another substantial factor in sales
growth is the health of the economies in which we do business, especially the United States. Sales growth
and gross margins are also impacted by our competition, which is vigorous and widespread, across a
wide range of global, national and regional wholesalers and retailers. While we cannot control or reliably
predict general economic health or changes in competition, we believe that we have been successful
historically in adapting our business to these changes, such as through adjustments to our pricing and to
our merchandise mix, including increasing the penetration of our private label items.
Our philosophy is to provide our members with quality goods and services at the most competitive prices.
We do not focus in the short term on maximizing prices charged, but instead seek to maintain what we
believe is a perception among our members of our "pricing authority" - consistently providing the most
competitive values. Our investments in merchandise pricing can, from time to time, include reducing
prices on merchandise to drive sales or meet competition and holding prices steady despite cost
increases instead of passing the increases on to our members, all negatively impacting near-term gross
margin as a percentage of net sales (gross margin percentage). We believe that our gasoline business
draws members but it generally has a significantly lower gross margin percentage relative to our non-
gasoline business. A higher penetration of gasoline sales will generally lower our gross margin
percentage. Rapidly changing gasoline prices may significantly impact our near-term net sales growth.
Generally, rising gasoline prices benefit net sales growth which, given the higher sales base, negatively
impacts our gross margin percentage but decreases our selling, general and administrative expenses as
a percentage of net sales. A decline in gasoline prices has the inverse effect.
We also achieve sales growth by opening new warehouses. As our warehouse base grows, available and
desirable potential sites become more difficult to secure, and square footage growth becomes a
comparatively less substantial component of growth. The negative aspects of such growth, however,
including lower initial operating profitability relative to existing warehouses and cannibalization of sales at
existing warehouses when openings occur in existing markets, are increasingly less significant relative to
the results of our total operations. Our rate of square footage growth is higher in foreign markets, due to
the smaller base in those markets, and we expect that to continue. Our online business growth both
domestically and internationally has also increased our sales.
Our membership format is an integral part of our business model and has a significant effect on our
profitability. This format is designed to reinforce member loyalty and provide continuing fee revenue. The
24
24
extent to which we achieve growth in our membership base, increase penetration of our Executive
members, and sustain high renewal rates, materially influences our profitability.
Our financial performance depends heavily on our ability to control costs. While we believe that we have
achieved successes in this area historically, some significant costs are partially outside our control, most
particularly health care and utility expenses. With respect to expenses relating to the compensation of our
employees, our philosophy is not to seek to minimize the wages and benefits that they earn. Rather, we
believe that achieving our longer-term objectives of reducing employee turnover and enhancing employee
satisfaction requires maintaining compensation levels that are better than the industry average for much
of our workforce. This may cause us, for example, to absorb costs that other employers might seek to
pass through to their workforces. Because our business is operated on very low margins, modest
changes in various items in the income statement, particularly gross margin and selling, general and
administrative expenses, can have substantial impacts on net income.
(4) Includes warehouse relocations and closures.
Our operating model is generally the same across our U.S., Canada, and Other International operating
segments (see Note 11 to the consolidated financial statements included in this Report). Certain countries
in the Other International segment have relatively higher rates of square footage growth, lower wages and
benefit costs as a percentage of country sales, and/or less or no direct membership warehouse
competition. Additionally, we operate our lower-margin gasoline business in the U.S., Canada, Australia,
U.K., and Japan.
Our fiscal year ends on the Sunday closest to August 31. Fiscal years 2015, 2014 and 2013 were 52-
week fiscal years ending on August 30, 2015, August 31, 2014 and September 1, 2013, respectively.
Certain percentages presented are calculated using actual results prior to rounding. Unless otherwise
noted, references to net income relate to net income attributable to Costco.
Highlights for fiscal year 2015 included:
•
•
•
We opened 23 net new warehouses in 2015, 12 in the U.S., one in Canada, and 10 in our Other
International segment, compared to 29 net new warehouses in 2014;
Net sales increased 3% to $113,666, driven by sales at new warehouses opened in 2014 and
2015, and a 1% increase in comparable sales. Net and comparable sales results were negatively
impacted by changes in all foreign currencies relative to the U.S. dollar and decreases in the price
of gasoline;
Gross margin as a percentage of net sales increased 43 basis points, primarily from the impact of
gasoline price deflation on net sales as well as higher gross margins in our gasoline business;
25
25
•
Beginning of year.
•
In discussions of our consolidated operating results, we refer to the impact of changes in foreign
currencies relative to the U.S. dollar, which are references to the differences between the foreign-
exchange rates we use to convert the financial results of our international operations from local currencies
into U.S. dollars for financial reporting purposes. This impact of foreign-exchange rate changes is
calculated based on the difference between the current period's currency exchange rates and the
comparable prior-year period's currency exchange rates. We also refer to the impact of changes in
gasoline prices on our net sales. This impact is calculated based on the difference between the current
period's average gasoline price per gallon sold and the comparable prior-year period's average gasoline
price per gallon sold.
(3) Includes net sales from warehouses and websites operating for more than one year. For fiscal 2013 and 2012, the prior year
includes the comparable 52 and 53 weeks, respectively.
Membership fee revenue increased 4% to $2,533, primarily due to membership sign-ups at
existing and new warehouses and executive membership upgrades, partially offset by the negative
impact of changes in all foreign currencies relative to the U.S. dollar;
35,300
(2) Includes 50% of the results of Costco Mexico's operations in fiscal 2011, and in 2012 prior to the July acquisition of our
former joint venture partner's 50% equity interest. The remainder of fiscal 2012 and thereafter include 100% of Costco
Mexico's results of operations.
MEMBERSHIP INFORMATION
Total paid members (000's)..
(1) Net sales less merchandise costs.
634
608
592
572
26
Closed (4)
30
26
17
24
663
(1)
36,900
(3)
39,000
42,000
44,600
592
608
End of year
634
(1)
(4)
686
0
663
5
6,429
6,424
2019 to 2020
$834
$1,855
187
$2,449
$1,407
Total
2021 and
thereafter
$6,545
2016
32
Purchase obligations
(merchandise) (2)
Operating leases (3).
Contractual obligations
Long-term debt (1)
Payments Due by Fiscal Year
As of August 30, 2015, our commitments to make future payments under contractual obligations were as
follows:
The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $149. The
outstanding commitments under these facilities at the end of 2015 totaled $90, including $89 in standby
letters of credit with expiration dates within one year. The bank credit facilities have various expiration
dates, all within one year, and we generally intend to renew these facilities prior to their expiration. The
amount of borrowings available at any time under our bank credit facilities is reduced by the amount of
standby and commercial letters of credit then outstanding.
We maintain bank credit facilities for working capital and general corporate purposes. At August 30, 2015,
we had borrowing capacity within these facilities of $407, of which $337 was maintained by our
international operations. Of the $337, $153 is guaranteed by the Company. There were no outstanding
short-term borrowings under the bank credit facilities at the end of 2015 and 2014.
Bank Credit Facilities and Commercial Paper Programs
Our cash dividends paid in 2015 totaled $6.51 per share, as compared to $1.33 per share in 2014. In April
2015, our Board of Directors increased our quarterly cash dividend from $0.355 to $0.40 per share.
Additionally, in 2015, our Board of Directors declared and paid a special cash dividend of $5.00 per share,
totaling approximately $2,201.
359
Dividends
32
2017 to 2018
Contractual Obligations
10
2,097
18
$9,130
380
5
In April 2015, our Board of Directors authorized a new share repurchase program in the amount of
$4,000, which expires in April 2019. This authorization revoked previously authorized but unused
amounts, totaling $2,528. During 2015 and 2014, we repurchased 3,456,000 and 2,915,000 shares of
common stock, at an average price of $142.87 and $114.45, totaling approximately $494 and $334,
respectively. The remaining amount available to be purchased under our approved plan was $3,699 at the
end of 2015. Purchases are made from time-to-time, as conditions warrant, in the open market or in block
purchases and pursuant to plans under SEC Rule 10b5-1. Repurchased shares are retired, in
accordance with the Washington Business Corporation Act.
11
38
326
Total
Other (6)
and other) (5)
(equipment, services
Purchase obligations
321
571
797
170
47
48
24
(4)
Capital lease obligations (4
43
744
obligations..
Construction and land
2,964
452
Stock Repurchase Programs
The following table summarizes our significant sources and uses of cash and cash equivalents:
Net cash used in financing activities totaled $2,324 in 2015 compared to $786 in 2014. The primary uses
of cash in 2015 were dividend payments of $2,865, which includes a $5.00 per share special cash
dividend, repurchases of common stock, and payment of withholding taxes on stock-based awards. Net
cash used in financing activities was partially offset by the issuance of $1,000 in Senior Notes.
$990
2013
34.7%
$1,109
2014
33.2%
$1,195
2015
Effective tax rate
Provision for income taxes
Provision for Income Taxes
and monetary liabilities during the year, primarily our Japanese subsidiary's U.S. dollar-denominated
payables.
30
The increase in interest income in 2014 was primarily driven by higher average cash, cash equivalents,
and short-term investments balances, primarily in our U.S. operations. The decrease in net foreign-
currency transaction gains was primarily attributable to the revaluation or settlement of monetary assets
2014 vs. 2013
The increase in net foreign-currency transaction gains was primarily attributable to favorable mark-to-
market adjustments for forward foreign exchange contracts compared to the prior year. See Derivatives
and Foreign Currency sections in Note 1 to the consolidated financial statements included in this Report.
The increase was also attributable to net gains on the revaluation or settlement of monetary assets and
liabilities during the year.
$97
$90
$104
14
12
7
29
26
39
32.4%
Our provision for income taxes in 2015 and 2013 were favorably impacted by net tax benefits of $68 and
$77, respectively, primarily due to tax benefits recorded in connection with special cash dividends paid to
employees through our 401(K) Retirement Plan. Dividends paid on these shares are deductible for U.S.
income tax purposes. There was no similar special cash dividend in 2014.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities..
Cash Flows from Financing Activities
We opened 23 new warehouses, relocated two warehouses, and converted an existing warehouse to a
business center in 2015 and plan to open up to 32 new warehouses in 2016 and relocate up to five
warehouses. Our primary requirement for capital is acquiring land, buildings, and equipment for new and
remodeled warehouses. To a lesser extent, capital is required for initial warehouse operations, the
modernization of our information systems, and working capital. In 2015 we spent $2,393 on capital
expenditures, and it is our current intention to spend approximately $2,800 to $3,000 during fiscal 2016.
These expenditures are expected to be financed with cash from operations, existing cash and cash
equivalents, and short-term investments. There can be no assurance that current expectations will be
realized and plans are subject to change upon further review of our capital expenditure needs.
Capital Expenditure Plans
Net cash used in investing activities totaled $2,480 in 2015 compared to $2,093 in 2014. Our cash flow
used in investing activities is primarily related to funding our warehouse expansion and remodeling
activities. Net cash flows from investing activities also includes purchases and maturities of short-term
investments.
Cash Flows from Investing Activities
Net cash provided by operating activities totaled $4,285 in 2015 compared to $3,984 in 2014. Our cash
flow provided by operations is primarily derived from net sales and membership fees. Our cash flow used
in operations generally consists of payments to our merchandise vendors, warehouse operating costs
including payroll and employee benefits, credit card processing fees, and utilities. Cash used in
operations also includes payments for income taxes. The increase in net cash provided by operating
activities for 2015 when compared to 2014 was primarily due to stronger earnings.
Cash Flows from Operating Activities
equivalents and short-term investments held at these subsidiaries and considered to be indefinitely
reinvested totaled $1,196 at August 30, 2015.
31
Management believes that our cash position and operating cash flows will be sufficient to meet our
liquidity and capital requirements for the foreseeable future. We believe that our U.S. current and
projected asset position is sufficient to meet our U.S. liquidity requirements and have no current plans to
repatriate for use in the U.S. cash and cash equivalents and short-term investments held by these non-
U.S. consolidated subsidiaries whose earnings are considered indefinitely reinvested. Cash and cash
During 2015, we repatriated a portion of the earnings in our Canadian operations that in 2014 were no
longer considered indefinitely reinvested. In the fourth quarter of 2015, we changed our position regarding
an additional portion of the undistributed earnings of our Canadian operations, which are no longer
considered indefinitely reinvested. Current exchange rates compared to historical rates when these
earnings were generated resulted in an immaterial U.S. tax benefit, which was recorded at the end of
2015.
We have not provided for U.S. deferred taxes on cumulative undistributed earnings of certain non-U.S.
consolidated subsidiaries because our subsidiaries have invested or will invest the undistributed earnings
indefinitely, or the earnings if repatriated would not result in a deferred tax liability. This includes the
remaining undistributed earnings of our Canadian operations that management maintains are indefinitely
reinvested, or could be repatriated without resulting in a deferred tax liability. Deferred taxes are recorded
for earnings of our foreign operations when we determine that such earnings are no longer indefinitely
reinvested.
In February 2015, we issued $1,000 in aggregate principal amount of Senior Notes as follows: $500 of
1.75% Senior Notes due February 15, 2020, and $500 of 2.25% Senior Notes due February 15, 2022.
The proceeds were used to pay a portion of the special cash dividend on February 27, 2015.
Our primary sources of liquidity are cash flows generated from warehouse operations, cash and cash
equivalents and short-term investment balances. Cash and cash equivalents and short-term investments
were $6,419 and $7,315 at the end of 2015 and 2014, respectively. Of these balances, approximately
$1,243 and $1,383 at the end of 2015 and 2014, respectively, represented debit and credit card
receivables, primarily related to sales in the last week of our fiscal year. Cash and cash equivalents were
negatively impacted by changes in exchange rates by $418 and $11, respectively.
(786)
(2,324)
(2,251)
$3,437
$3,984
(2,093)
(2,480)
$4,285
2013
2014
2015
Net cash (used in) provided by financing activities........
Net cash used in investing activities.
44
58
Executive
$2,971
1993
59
Franz E. Lazarus
John D. McKay.
Executive Vice President, Administration. Mr. Lazarus was
Senior Vice President, Administration-Global Operations from
2006 to September 2012.
Executive Vice President, Chief Operating Officer, Northern
Division. Mr. McKay was Senior Vice President, General
Manager, Northwest Region from 2000 to March 2010.
2012
68
2010
58
Paul G. Moulton.
Executive Vice President, Chief Information Officer.
Mr. Moulton was Executive Vice President, Real Estate
Development from 2001 until March 2010.
2001
64
James P. Murphy.
Executive Vice President, Chief Operating Officer,
International. Mr. Murphy was Senior Vice President,
International, from 2004 to October 2010.
2011
62
62
Joseph P. Portera
Executive Vice President, Chief Operating Officer, Eastern
and Canadian Divisions. Mr. Portera has held these positions
since 1994, and has been the Chief Diversity Officer since
2010.
1994
63
Timothy L. Rose.
Vice President, Ancillary Businesses,
Manufacturing, and Business Centers. Mr. Rose was Senior
Vice President, Merchandising, Food and Sundries and
Private Label from 1995 to December 2012.
Executive Vice President and Chief Financial Officer.
Mr. Galanti has been a director since January 1995.
13
73
1983
47
We are exposed to fluctuations in prices for energy that we consume, particularly electricity and natural
gas, which we seek to partially mitigate through fixed-price contracts for certain of our warehouses and
36
34
37
other facilities, predominately in the U.S. and Canada. We also enter into variable-priced contracts for
some purchases of electricity and natural gas, in addition to fuel for our gas stations, on an index basis.
These contracts meet the characteristics of derivative instruments, but generally qualify for the "normal
purchases or normal sales" exception under authoritative guidance and, thus, require no mark-to-market
adjustment.
Other Information
On February 27, 2015, we entered into a Co-Branded Credit Card Program Agreement (the "Program
Agreement”) with Citibank, N.A. (“Citi”). Under the terms of the Program Agreement, Citi would become
the exclusive issuer of our co-branded credit cards to new and existing members of the Company and
Visa U.S.A. Inc. would replace American Express as the credit card network for Costco in the United
States and Puerto Rico. Our current expectation is that Citi will purchase the current co-branded credit
card portfolio from American Express by April 1, 2016 and begin issuing Visa cards by the summer of
2016. We would receive various forms of consideration under the Program Agreement. The initial term of
the Program Agreement is ten years.
The most significant expected revenue provided to Costco from Citi under the co-brand credit card
program is the percentage or royalty on "external spend," purchases made with the co-branded card other
than from Costco. That percentage will vary based primarily on the amount of external spend over the
term of the program. Costco's royalty revenue will also be impacted by the nature and extent of the loyalty
rewards to be provided to cardholders under the program, primarily by Citi but also partially by Costco
under certain circumstances. The amount and character of the loyalty rewards have yet to be determined
and may be adjusted over the term of the program.
The next most significant expected benefit to Costco is the reduction in the base discount rate—the fee
Costco is charged for accepting the co-branded credit card. Costco's cost of acceptance of the co-
branded credit card will be lower than the cost that Costco bears currently.
The loyalty rewards earned by co-branded cardholders are expected to be in the form of certificates
redeemable at Costco, for cash or merchandise. Based on prior experience, Costco expects that most
cardholders will redeem the certificates for merchandise, resulting in a benefit to net sales and gross
margin on those transactions.
Costco will also receive benefits from Citi in the form of a bounty on new credit card accounts Costco
sources, assistance in increasing membership, marketing assistance, staff support, and potentially a
share of any profits of the program.
2013
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Name
W. Craig Jelinek...
Jeffrey H. Brotman.........
Richard A. Galanti.
Position
President and Chief Executive Officer. Mr. Jelinek has been
President and Chief Executive Officer since January 2012 and
a director since February 2010. He was President and Chief
Operating Officer from February 2010 to December 2011.
Prior to that he was Executive Vice President, Chief Operating
Officer, Merchandising since 2004.
Chairman of the Board. Mr. Brotman is a co-founder of Costco
and has been a director since its inception.
Executive
Officer
Since
Age
1995
63
The executive officers of Costco, their position, and ages are listed below. All executive officers have 25
or more years of service with the Company.
63
33
Douglas W. Schutt.
We evaluate our long-lived assets for impairment on an annual basis, when relocating or closing a facility,
or when events or changes in circumstances occur that may indicate the carrying amount of the asset
group, generally an individual warehouse, may not be fully recoverable. Our judgments are based on
existing market and operational conditions. Future events could cause us to conclude that impairment
factors exist, requiring a downward adjustment of these assets to their then-current fair value.
Impairment of Long-Lived Assets
Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as we
progress toward earning those rebates, provided they are probable and reasonably estimable. Other
consideration received from vendors is generally recorded as a reduction of merchandise costs upon
completion of contractual milestones, terms of agreement, or other systematic and rational approaches.
34
34
We provide for estimated inventory losses (shrink) between physical inventory counts as a percentage of
net sales. The provision is adjusted periodically to reflect results of the actual physical inventory counts,
which generally occur in the second and fourth quarters of the year.
Merchandise inventories are valued at the lower of cost or market, as determined primarily by the retail
inventory method, and are stated using the last-in, first-out (LIFO) method for substantially all U.S.
merchandise inventories. We record an adjustment each quarter, if necessary, for the estimated effect of
inflation or deflation, and these estimates are adjusted to actual results determined at year-end. We
believe the LIFO method more fairly presents the results of operations by more closely matching current
costs with current revenues. Merchandise inventories for all foreign operations are primarily valued by the
retail inventory method and are stated using the first-in, first-out (FIFO) method.
Merchandise Inventories
We account for membership fee revenue, net of refunds, on a deferred basis, whereby revenue is
recognized ratably over one-year. Our Executive members qualify for a 2% reward on qualified purchases
(up to a maximum reward of approximately $750 per year), which can be redeemed only at Costco
warehouses. We account for this reward as a reduction in sales. The sales reduction and corresponding
liability are computed after giving effect to the estimated impact of non-redemptions based on historical
data.
We evaluate whether it is appropriate to record the gross amount of merchandise sales and related costs
or a net amount. Generally, when we are the primary obligor, subject to inventory risk, have latitude in
establishing prices and selecting suppliers, influence product or service specifications, or have several but
not all of these indicators, revenue is recorded on a gross basis. If we are not the primary obligor and do
not possess other indicators of gross reporting as noted above, we record a net amount, which is
reflected in net sales. We record related shipping fees on a gross basis.
We generally recognize sales, which include shipping fees where applicable, net of returns, at the time
the member takes possession of merchandise or receives services. When we collect payment from
customers prior to the transfer of ownership of merchandise or the performance of services, the amount is
generally recorded as deferred sales in the consolidated balance sheets until the sale or service is
completed. We provide for estimated sales returns based on historical trends and reduce sales and
merchandise costs accordingly. Our sales returns reserve is based on an estimate of the net realizable
value of merchandise inventories to be returned. Amounts collected from members for sales and value
added taxes are recorded on a net basis.
Revenue Recognition
Insurance/Self-Insurance Liabilities
The preparation of our consolidated financial statements in accordance with U.S. generally accepted
accounting principles (U.S. GAAP) requires that we make estimates and judgments including those
related to revenue recognition, merchandise inventory valuation, impairment of long-lived assets,
insurance/self-insurance liabilities, and income taxes. We base our estimates on historical experience and
on assumptions that we believe to be reasonable and we continue to review and evaluate these
statements. For further information on significant accounting policies, see discussion in Note 1 to the
consolidated financial statements included in this Report.
We have no off-balance sheet arrangements that in the opinion of management have had, or are
reasonably likely to have, a material current or future effect on our financial condition or consolidated
financial statements.
Off-Balance Sheet Arrangements
33
(6) Includes $54 in asset retirement obligations, and $54 in deferred compensation obligations. The total amount excludes $103
of non-current unrecognized tax contingencies and $22 of other obligations due to uncertainty regarding the timing of future
cash payments.
(5) The amounts exclude certain services negotiated at the individual warehouse or regional level that are not significant and
generally contain clauses allowing for cancellation without significant penalty.
(4) Includes build-to-suit lease obligations and contractual interest payments.
(3) Operating lease obligations exclude amounts for common area maintenance, taxes, and insurance and have been reduced
by $131 to reflect sub-lease income.
(2) Includes only open merchandise purchase orders.
(1) Includes contractual interest payments.
$17,799
$3,446
$2,252
Critical Accounting Estimates
113
We use a combination of insurance and self-insurance mechanisms, including for certain risks, a wholly-
owned captive insurance subsidiary and participation in a reinsurance program, to provide for potential
liabilities for workers' compensation, general liability, property damage, directors' and officers' liability,
vehicle liability, and employee health care benefits. Liabilities associated with the risks that we retain are
not discounted and are estimated, in part, by considering historical claims experience, demographic
factors, severity factors and other actuarial assumptions. The estimated accruals for these liabilities could
be significantly affected if future occurrences and claims differ from these assumptions and historical
trends.
The determination of our provision for income taxes requires significant judgment, the use of estimates,
and the interpretation and application of complex tax laws. Significant judgment is required in assessing
the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax
positions. The benefits associated with uncertain tax positions are recorded in our consolidated financial
statements only after determining a more-likely-than-not probability that the positions will withstand
challenge from tax authorities. Additionally, certain of our cumulative foreign undistributed earnings are
considered indefinitely reinvested. These earnings would be subject to U.S. income tax if we changed our
position and could result in a U.S. deferred tax liability. When facts and circumstances change, we
reassess these positions and record any changes in the consolidated financial statements as appropriate.
Executive Vice President, Chief Operating Officer,
Merchandising. Mr. Schutt was Executive Vice President,
Chief Operating Officer, Northern Division and Midwest
Region from 2004 to March 2010.
2004
Dennis R. Zook
Executive Vice President, Chief Operating Officer, Southwest
Division and Mexico.
1993
99
$
56
66
We have adopted a code of ethics for senior financial officers pursuant to Section 406 of the Sarbanes-
Oxley Act. Copies of the code are available free of charge by writing to Secretary, Costco Wholesale
Corporation, 999 Lake Drive, Issaquah, WA 98027. If the Company makes any amendments to this code
(other than technical, administrative, or non-substantive amendments) or grants any waivers, including
implicit waivers, from this code to the CEO, chief financial officer or principal accounting officer and
controller, we will disclose (on our website or in a Form 8-K report filed with the SEC) the nature of the
amendment or waiver, its effective date, and to whom it applies.
Executive Compensation
Information related to our Executive Compensation and Director Compensation is incorporated herein by
reference to Costco's Proxy Statement filed with the Securities and Exchange Commission.
Income Taxes
38
Foreign Currency-Exchange Risk
The nature and amount of our long-term debt may vary as a result of future business requirements,
market conditions, and other factors. As of the end of 2015, the majority of our long-term debt is fixed rate
Senior Notes, carried at $5,596. Fluctuations in interest rates may affect the fair value of the fixed-rate
debt. See Note 4 to the consolidated financial statements included in this Report for more information on
our long-term debt.
Our Canadian and Other International subsidiaries' investments are primarily in money market funds,
bankers' acceptances and bank certificates of deposit, generally denominated in their local currencies.
We performed a sensitivity analysis to determine the impact that a 100 basis-point change in interest
rates would have on the value of our investment portfolio. At the end of 2015, the incremental change in
the fair market value was $27. For those investments that are classified as available-for-sale, the
unrealized gains or losses related to fluctuations in market volatility and interest rates are reflected within
stockholders' equity in accumulated other comprehensive income.
Our Board of Directors have approved a policy that limits investments in the U.S. to direct U.S.
government and government agency obligations, repurchase agreements collateralized by U.S.
government and government agency obligations, and U.S. government and government agency money
market funds. Our wholly-owned captive insurance subsidiary invests in U.S. government and
government agency obligations, corporate notes and bonds, and asset and mortgage-backed securities
with a minimum overall portfolio average credit rating of AA+.
government and agency securities, and asset and mortgage-backed securities with effective maturities of
generally three months to five years at the date of purchase. The primary objective of our investment
activities is to preserve principal and secondarily to generate yields. The majority of our short-term
investments are in fixed interest rate securities. These securities are subject to changes in fair value due
to interest rate fluctuations.
55
35
Our exposure to market risk for changes in interest rates relates primarily to our investment holdings that
are diversified among various instruments considered to be cash equivalents as defined in Note 1 to the
consolidated financial statements included in this Report, as well as short-term investments in
Interest Rate Risk
QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (amounts in millions)
Our exposure to financial market risk results from fluctuations in interest rates and foreign currency
exchange rates. We do not engage in speculative or leveraged transactions or hold or issue financial
instruments for trading purposes.
See Note 1 to the consolidated financial statements included in this Report for a detailed description of
recent accounting pronouncements.
Recent Accounting Pronouncements
Our foreign subsidiaries conduct certain transactions in their non-functional currencies, which exposes us
to fluctuations in exchange rates. We manage these fluctuations, in part, through the use of forward
foreign-exchange contracts, seeking to economically hedge the impact of fluctuations of foreign exchange
on known future expenditures denominated in a non-functional foreign-currency. The contracts are
intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures
made by our international subsidiaries whose functional currency is other than the U.S. dollar. Currently,
these contracts do not qualify for derivative hedge accounting. We seek to mitigate risk with the use of
these contracts and do not intend to engage in speculative transactions. These contracts do not contain
any credit-risk-related contingent features.
$44
While we seek to manage counterparty risk associated with these contracts by limiting transactions to
counterparties with which we have established banking relationships, there can be no assurance that this
practice is effective. These contracts are limited to less than one year in duration. See Note 1 and Note 3
to the consolidated financial statements included in this Report for additional information on the fair value
of unsettled forward foreign-exchange contracts at the end of 2015 and 2014. A hypothetical 10%
strengthening of the functional currency compared to the non-functional currency exchange rates at
August 30, 2015 would have decreased the fair value of the contracts by $88 and resulted in an
unrealized loss in the consolidated statements of income for the same amount.
$50
2014
2015
Total warehouse openings, including relocations....
Other International (2).
(1)
Canada..
United States
Warehouse openings, including relocations
Preopening expenses
Preopening Expenses
29
29
SG&A expenses as a percentage of net sales increased seven basis points. Excluding the effect of
gasoline price deflation on net sales, SG&A expenses as a percentage of adjusted net sales were 9.86%,
an increase of four basis points. This increase was largely due to an increase in central operating costs of
three basis points primarily due to continued investment in modernizing our information systems, primarily
incurred by our U.S. operations. Stock compensation expense was also higher by two basis points due to
accelerated vesting for long service and appreciation in the trading price of our stock at the time of grant,
despite a 14% reduction in the average number of restricted stock units (RSUs) granted to each
participant. Warehouse operating costs were lower by one basis point, primarily resulting from
improvements in payroll in our Canadian operations as a result of leveraging increased sales, partially
offset by increases in employee benefit costs, primarily health care, in our U.S. operations. Changes in
foreign currencies relative to the U.S. dollar decreased our SG&A expenses by $119 in 2014.
2014 vs. 2013
SG&A expenses as a percentage of net sales increased 18 basis points, mostly due to the negative
impact of gasoline price deflation on net sales. Excluding this impact, SG&A expenses as a percentage of
adjusted net sales were 9.82%, an improvement of seven basis points. This was due to lower warehouse
operating costs of 16 basis points, primarily from improvements in payroll expenses in our core business
as a result of leveraging increased sales. This improvement was partially offset by higher central
operating costs of five basis points, predominantly due to increased depreciation and service contract
costs associated with our information systems modernization projects that were placed into service during
the year, primarily incurred by our U.S. operations. Our investment in modernizing our information
systems is ongoing. Higher stock compensation expense also negatively impacted our SG&A expenses
by four basis points, due to an appreciation in the trading price of our stock at the time of grant. Changes
in foreign currencies relative to the U.S. dollar decreased our SG&A expenses by approximately $282 in
2015.
9.82%
9.89%
$52
Commodity Price Risk
and fresh foods categories. Changes in foreign currencies relative to the U.S. dollar negatively impacted
gross margin by approximately $151 in 2014.
Gross margin on a segment basis, when expressed as a percentage of the segment's own sales,
increased in our U.S. operations, primarily due to our softlines and food and sundries categories, partially
offset by a decrease in hardlines and the LIFO charge discussed above. The segment gross margin
percentage in our Canadian operations decreased, primarily due to decreases in hardlines and food and
sundries, partially offset by an increase in fresh foods. The segment gross margin percentage in our Other
International operations increased, primarily due to fresh foods.
Selling, General and Administrative Expenses
SG&A expenses..
2013
SG&A expenses as a percentage of net sales.
2015
$11,445
10.07%
2014
2013
$10,899
2015 vs. 2014
$65
$10,104
$51
2013
$63
2014
2015
2015 vs. 2014
Interest income and other, net.
Other, net
Foreign-currency transaction gains, net.
Interest Income and Other, Net
Interest expense in 2015 primarily relates to $1,100 of 5.5% Senior Notes issued in fiscal 2007, $3,500 of
Senior Notes issued in December 2012, and $1,000 of Senior Notes issued in February 2015 (described
in further detail under the heading "Cash Flows from Financing Activities" and in Note 4 to the
consolidated financial statements included in this Report).
$99
$113
$124
2013
2014
Interest income...
Interest expense
1
2015
11
26
10
730
12
23
17
11
30
26
(1) Includes one relocation and the conversion of an existing warehouse to a business center in 2015.
(2) Includes one relocation in 2015.
Preopening expenses include costs for startup operations related to new warehouses, development in
new international markets, and expansions at existing warehouses. Preopening expenses vary due to the
number of warehouse openings, the timing of the opening relative to our year-end, whether the
warehouse is owned or leased, and whether the opening is in an existing, new, or international market.
Interest Expense
14
Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries
operate membership warehouses based on the concept that offering members low prices on a limited
selection of nationally branded and private-label products in a wide range of merchandise categories will
produce high sales volumes and rapid inventory turnover. At August 30, 2015, Costco operated 686
warehouses worldwide: 480 United States (U.S.) locations (in 43 U.S. states, Washington, D.C., and
Puerto Rico), 89 Canada locations, 36 Mexico locations, 27 United Kingdom (U.K.) locations, 23 Japan
locations, 12 Korea locations, 11 Taiwan locations, 7 Australia locations, and 1 Spain location. The
Company's online business operates websites in the U.S., Canada, U.K., and Mexico.
Use of Estimates
The Company operates on a 52/53 week fiscal year basis with the fiscal year ending on the Sunday
closest to August 31. References to 2015, 2014, and 2013 relate to the 52-week fiscal years ended
August 30, 2015, August 31, 2014, and September 1, 2013, respectively.
Fiscal Year End
Cash and Cash Equivalents
The consolidated financial statements include the accounts of Costco Wholesale Corporation, its wholly-
owned subsidiaries, and subsidiaries in which it has a controlling interest. The Company reports
noncontrolling interests in consolidated entities as a component of equity separate from the Company's
equity. All material inter-company transactions between and among the Company and its consolidated
subsidiaries have been eliminated in consolidation. The Company's net income excludes income
attributable to noncontrolling interests in its operations in Taiwan and Korea. Unless otherwise noted,
references to net income relate to net income attributable to Costco.
Basis of Presentation
The preparation of financial statements in conformity with U.S. generally accepted accounting principles
(U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates and assumptions.
47
Note 1―Summary of Significant Accounting Policies
(amounts in millions, except share, per share, and warehouse count data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COSTCO WHOLESALE CORPORATION
The accompanying notes are an integral part of these consolidated financial statements.
The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with
a maturity of three months or less at the date of purchase, and proceeds due from credit and debit card
transactions with settlement terms of up to one week. Credit and debit card receivables were $1,243 and
$1,383 at the end of 2015 and 2014, respectively.
$11
Description of Business
48
Proceeds from short-term borrowings.
Repurchases of common stock.
$0
Repayments of short-term borrowings
(51)
(103)
(287)
51
68
326
42
Proceeds from issuance of long-term debt
117
3,717
Minimum tax withholdings on stock-based awards.
(178)
(164)
Excess tax benefits on stock-based awards.
86
84
1,125
$109
34
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
(11)
(418)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS
44
(786)
(2,324)
Net cash (used in) provided by financing activities...
14
(70)
34
Other financing activities, net..
(36)
(3,560)
61
(121)
(584)
(2,865)
Cash dividend payments.
(114)
Net (decrease) increase in cash and cash equivalents.
(937)
1,094
$1,001
$86
$109
$869
$1,186
Income taxes, net..
$117
Interest (reduced by $14, $11 and $12, interest capitalized in 2015,
2014 and 2013, respectively)
Cash paid during the year for:
Property acquired under build-to-suit and capital leases..
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
$5,738
$4,801
CASH AND CASH EQUIVALENTS END OF YEAR....
3,528
4,644
5,738
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR
1,116
$4,644
96
(898)
Change in bank checks outstanding
Depreciation and amortization
52 Weeks
Ended
August 30,
2015
52 Weeks
Ended
August 31,
2014
52 Weeks
Ended
September 1,
2013
$2,409
$2,088
$2,061
1,127
1,029
946
Stock-based compensation.
Excess tax benefits on stock-based awards
Other non-cash operating activities, net.
Deferred income taxes
Changes in operating assets and liabilities:
Increase in merchandise inventories
Increase in accounts payable.
394
to net cash provided by operating activities:
Adjustments to reconcile net income including noncontrolling interests
Net income including noncontrolling interests
CASH FLOWS FROM OPERATING ACTIVITIES
(452)
(494)
(494)
Cash dividends declared
BALANCE AT AUGUST 30,
2015.
(2,865)
(2,865)
(2,865)
437,952
327
$2 $5,218
$6,518
$10,617
$226 $10,843
The accompanying notes are an integral part of these consolidated financial statements.
46
46
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in millions)
$(1,121)
(45)
285
(84)
(2,572)
Maturities and sales of short-term investments.
1,434
2,385
Additions to property and equipment
(2,393)
(1,993)
(2,083)
Other investing activities, net....
(20)
(3
19
Net cash used in investing activities
(2,480)
(2,093)
(2,251)
CASH FLOWS FROM FINANCING ACTIVITIES
(2,503)
(1,501)
3,437
3,984
(61)
(5)
22
(7)
(101)
(63)
7
(890)
(86)
(563)
529
718
Other operating assets and liabilities, net...
557
699
386
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments..
4,285
880
2,406
$102,870
(122)
1,193
1,004
22,597
20,509
Total liabilities
COMMITMENTS AND CONTINGENCIES
EQUITY
Preferred stock $.005 par value; 100,000,000 shares authorized; no
shares issued and outstanding..
Common stock $.005 par value; 900,000,000 shares authorized;
5,093
437,952,000 and 437,683,000 shares issued and outstanding
Accumulated other comprehensive loss
Retained earnings..
Total Costco stockholders' equity.
Noncontrolling interests
Total equity
TOTAL LIABILITIES AND EQUITY.
0
2
2
Additional paid-in capital.
4,864
14,412
16,540
Accounts payable...
Current portion of long-term debt.
Accrued salaries and benefits.
Accrued member rewards..
Deferred membership fees
Other current liabilities
Total current liabilities
LONG-TERM DEBT, excluding current portion..
DEFERRED INCOME TAXES AND OTHER LIABILITIES.
$9,011
$8,491
1,283
0
2,468
2,231
813
773
1,269
1,254
1,696
1,663
5,218
4,919
(1,121)
(76)
$110,212
(334)
2,533
2,428
2,286
116,199
112,640
105,156
Merchandise costs.
101,065
98,458
91,948
Selling, general and administrative.
11,445
10,899
10,104
Preopening expenses.
65
63
51
Operating income
$113,666
CURRENT LIABILITIES
2013
August 31,
2014
6,518
7,458
10,617
12,303
226
212
10,843
12,515
$33,440
$33,024
The accompanying notes are an integral part of these consolidated financial statements.
43
REVENUE
Net sales..
Membership fees
Total revenue
OPERATING EXPENSES
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(amounts in millions, except per share data)
52 Weeks Ended 52 Weeks Ended
52 Weeks Ended
August 30,
2015
September 1,
LIABILITIES AND EQUITY
$33,024
$33,440
We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation and
subsidiaries as of August 30, 2015 and August 31, 2014, and the related consolidated statements of
income, comprehensive income, equity, and cash flows for the 52-week periods ended August 30, 2015,
August 31, 2014, and September 1, 2013. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Costco Wholesale Corporation and subsidiaries as of August 30, 2015
and August 31, 2014, and the results of their operations and their cash flows for the 52-week periods
ended August 30, 2015, August 31, 2014 and September 1, 2013, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Costco Wholesale Corporation's internal control over financial reporting as of
August 30, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated October 13, 2015 expressed an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
Seattle, Washington
October 13, 2015
41
KPMG LLP
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Costco Wholesale Corporation:
We have audited Costco Wholesale Corporation's internal control over financial reporting as of August 30,
2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying management's annual
report on internal control over financial reporting included in Item 9A. Our responsibility is to express an opinion
on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of August 30, 2015, based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (2013).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of the Company as of August 30, 2015 and August 31, 2014,
and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each
of the 52-week periods ended August 30, 2015, August 31, 2014 and September 1, 2013, and our report dated
October 13, 2015 expressed an unqualified opinion on those consolidated financial statements.
Seattle, Washington
October 13, 2015
42
42
KPMG LLP
Costco Wholesale Corporation:
COSTCO WHOLESALE CORPORATION
The Board of Directors and Stockholders
40
MANAGEMENT'S REPORTS
Management's Report on the Consolidated Financial Statements
Costco's management is responsible for the preparation, integrity and objectivity of the accompanying
consolidated financial statements and the related financial information. The consolidated financial
statements have been prepared in conformity with U.S. generally accepted accounting principles (U.S.
GAAP) and necessarily include certain amounts that are based on estimates and informed judgments.
The Company's management is also responsible for the preparation of the related financial information
included in this Annual Report on Form 10-K and its accuracy and consistency with the consolidated
financial statements.
The consolidated financial statements have been audited by KPMG LLP, an independent registered
public accounting firm, who conducted their audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). The independent registered public accounting
firm's responsibility is to express an opinion as to the fairness with which such consolidated financial
statements present our financial position, results of operations and cash flows in accordance with U.S.
GAAP.
Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, we performed an evaluation
under the supervision and with the participation of management, including our Chief Executive Officer
and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) or
15d-15(e) under the Securities and Exchange Act of 1934 (the Exchange Act)). Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the
period covered by this Annual Report, our disclosure controls and procedures are effective.
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or
15d-15(f) of the Exchange Act) during our fiscal quarter ended August 30, 2015, that has materially
affected or is reasonably likely to materially affect our internal control over financial reporting.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes
those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable
assurance that our transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles and that our receipts and expenditures are
being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.
39
39
Under the supervision and with the participation of our management, we assessed the effectiveness of
our internal control over financial reporting as of August 30, 2015, using the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-
Integrated Framework (2013). Based on its assessment, management has concluded that our internal
control over financial reporting was effective as of August 30, 2015. The attestation of KPMG LLP, our
independent registered public accounting firm, on the effectiveness of our internal control over financial
reporting is included with the consolidated financial statements in this Report.
Cray Jack
W. Craig Jelinek
President, Chief Executive Officer
and Director
Rudd 24Q
Richard A. Galanti
Executive Vice President, Chief Financial Officer
and Director
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
OTHER INCOME (EXPENSE)
CONSOLIDATED BALANCE SHEETS
August 30,
2015
Buildings and improvements.
12,618
12,522
Equipment and fixtures
5,274
4,845
Construction in progress.
811
592
23,664
22,675
Less accumulated depreciation and amortization.
(8,263)
(7,845)
Net property and equipment.
15,401
14,830
OTHER ASSETS
740
606
TOTAL ASSETS.
4,716
(amounts in millions, except par value and share data)
4,961
PROPERTY AND EQUIPMENT
August 31,
2014
ASSETS
CURRENT ASSETS
Cash and cash equivalents.
$4,801
$5,738
Short-term investments.
1,618
1,577
Receivables, net.
1,224
1,148
Merchandise inventories.
8,908
8,456
Deferred income taxes and other current assets
748
669
Total current assets...
17,299
17,588
Land.
(122)
Interest expense
3,624
30 - -
Repurchases of common
stock
(357)
(4)
(30)
3011
30
(3,560)
(34)
(3,560)
436,839
2 4,670
(122)
6,283
2,058
10,833
2,058
179
330
Cash dividends declared
BALANCE AT SEPTEMBER 1,
2013..
Net income.
802
Foreign-currency translation
adjustment and other, net...
notes......
(85)
$157 $12,518
22
2,061
(278)
285
(278)
(278)
285
285
--
75
- 75
Stock-based compensation....
Stock options exercised,
including tax effects...
1,435
75
Release of vested restricted
stock units (RSUs),
including tax effects..
2,609
(85)
Conversion of convertible
---- 2,039 2,039
Stock-based compensation....
Repurchases of common
(584)
437,683
2 4,919
---- 2,377
(76)
7,458
12,303
2,377
212 12,515
32 2,409
18 -1 - -1
(2,915)
394 (1,045) = (1,045) (18) (1,063)
stock..
Cash dividends declared
BALANCE AT AUGUST 31,
2014
Net income
Foreign-currency translation
adjustment and other, net...
Stock-based compensation....
Stock options exercised,
including tax effects...
Release of vested RSUs,
including tax effects..
Repurchases of common
stock..
989 - 69
2,736 - (122)
(3,456)
(42)
69
69
on - (584) (584)
Stock options exercised,
including tax effects..
Release of vested RSUs,
including tax effects...
Conversion of convertible
notes...
(334)
(299)
---46 -
|
327
971 - 58 58
2,770
(102)
(2) 
-
(85)
30
(34)
(3,560)
11,012
2,088
46
3
49
327
327
58
(102)
— (10
(102)
1
(35)
(334)
Interest income and other, net
adjustment and other, net...
Net income.
(22)
$2,039
NET INCOME PER COMMON SHARE
ATTRIBUTABLE TO COSTCO:
Basic.
Diluted
Shares used in calculation (000's)
$5.41
$4.69
$4.68
$5.37
$4.65
$4.63
Basic..
439,455
438,693
435,741
Diluted
442,716
442,485
440,512
CASH DIVIDENDS DECLARED PER COMMON
SHARE.
$2,058
$6.51
$2,377
(30)
3,220
3,053
(124)
(113)
104
90
(99)
97
INCOME BEFORE INCOME TAXES.
3,604
3,197
3,051
Provision for income taxes.
1,195
1,109
990
Net income including noncontrolling interests.....
2,409
2,088
2,061
Net income attributable to noncontrolling
interests..
(32)
NET INCOME ATTRIBUTABLE TO COSTCO
Foreign-currency translation
$1.33
The accompanying notes are an integral part of these consolidated financial statements.
Foreign-currency translation adjustment and
other, net..
Comprehensive income
Less: Comprehensive income attributable to
noncontrolling interests
COMPREHENSIVE INCOME ATTRIBUTABLE TO
COSTCO
The accompanying notes are an integral part of these consolidated financial statements.
45
45
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(amounts in millions)
Common Stock
Shares
(000's) Amount Capital
Accumulated
Additional
Other
Paid-in Comprehensive
Income (Loss)
Retained
Earnings
Total Costco
Stockholders' Noncontrolling Total
Equity
Interests Equity
BALANCE AT SEPTEMBER 2,
2012
432,350
$2 $4,369
$156
$7,834
$12,361
NET INCOME INCLUDING NONCONTROLLING
INTERESTS
$8.17
$1,761
$1,332
44
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in millions)
52 Weeks Ended
August 30,
2015
52 Weeks Ended
August 31,
$2,409
2014
$2,104
$2,088
$2,061
(1,063)
49
(278)
1,346
2,137
1,783
14
33
22
52 Weeks Ended
September 1,
2013
(481)
Recorded
Unrealized
2,481 2,504
$1,663
$1,696
169
185
122
173
201
250
299
371
396
$578
$491
2014
2015
Other current liabilities.
Other..
Returns reserve
Cash card liability.
Deferred sales.
Insurance-related liabilities..
Accrued sales, income, and other taxes
Other current liabilities consist of the following at the end of 2015 and 2014:
Other Current Liabilities
The Company's wholly-owned captive insurance subsidiary (the captive) receives direct premiums, which
are netted against the Company's premium costs in selling, general and administrative expenses, in the
consolidated statements of income. The captive participates in a reinsurance program that includes other
third-party participants. The reinsurance agreement is one year in duration, and new agreements are
entered into by each participant at their discretion at the commencement of the next calendar year. The
participant agreements and practices of the reinsurance program limit any participating members'
individual risk. Income statement adjustments related to the reinsurance program and related impacts to
the consolidated balance sheets are recognized as information becomes known. In the event the
Company leaves the reinsurance program, the Company is not relieved of its primary obligation to the
policyholders for activity prior to the termination of the annual agreement.
Derivatives
The Company uses a combination of insurance and self-insurance mechanisms, including for certain risks
a wholly-owned captive insurance subsidiary and participation in a reinsurance program, to provide for
potential liabilities for workers' compensation, general liability, property damage, directors' and officers'
liability, vehicle liability, and employee health care benefits. Liabilities associated with the risks that are
retained by the Company are not discounted and are estimated, in part, by considering historical claims
experience, demographic factors, severity factors, and other actuarial assumptions. The estimated
accruals for these liabilities could be significantly affected if future occurrences and claims differ from
these assumptions and historical trends. At the end of 2015 and 2014, these insurance liabilities were
$993 and $815 in the aggregate, respectively, and were included in accrued salaries and benefits and
other current liabilities in the consolidated balance sheets, classified based on their nature.
The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of
business. It manages these fluctuations, in part, through the use of forward foreign-exchange contracts,
seeking to economically hedge the impact of fluctuations of foreign exchange on known future
expenditures denominated in a non-functional foreign-currency. The contracts relate primarily to U.S.
dollar merchandise inventory expenditures made by the Company's international subsidiaries, whose
functional currency is not the U.S. dollar. These contracts do not qualify for derivative hedge accounting.
The Company seeks to mitigate risk with the use of these contracts and does not intend to engage in
speculative transactions. These contracts do not contain any credit-risk-related contingent features. The
aggregate notional amounts of open, unsettled forward foreign-exchange contracts were $889 and $585
at the end of 2015 and 2014, respectively. While the Company seeks to manage counterparty risk
associated with these contracts by limiting transactions to counterparties with which the Company has an
established banking relationship, there can be no assurance that this practice is effective. The contracts
are limited to less than one year in duration. See Note 3 for information on the fair value of unsettled
forward foreign-exchange contracts at the end of 2015 and 2014.
Leases
Stock-based compensation expense is predominantly included in selling, general and administrative
expenses in the consolidated statements of income. See Note 7 for additional information on the
Company's stock-based compensation plans.
Restricted stock units (RSUs) granted to employees generally vest over five years and allow for quarterly
vesting of the pro-rata number of stock-based awards that would vest on the next anniversary of the grant
date in the event of retirement or voluntary termination. The Company does not reduce stock-based
compensation for an estimate of forfeitures, which are inconsequential in light of historical experience and
considering the awards vest on a quarterly basis. Actual forfeitures are recognized as they occur.
Compensation expense for all stock-based awards granted is predominantly recognized using the
straight-line method over the requisite service period for the entire award. The terms of the Company's
stock-based awards for employees and non-employee directors provide for accelerated vesting of a
portion of outstanding shares based on reaching certain cumulative years of service with the Company.
Compensation expense for the accelerated shares is recognized upon achievement of the long service
term. The cumulative amount of compensation cost recognized at any point in time equals at least the
portion of the grant-date fair value of the award that is vested at that date. The fair value of RSUs is
calculated as the market value of the common stock on the measurement date less the present value of
the expected dividends forgone during the vesting period.
Stock-Based Compensation
54
54
The Company's 401(k) Retirement Plan is available to all U.S. employees who have completed 90 days
of employment. The plan allows pre-tax deferrals, a portion of which the Company matches. In addition,
the Company provides each eligible participant an annual discretionary contribution. The Company also
has a defined contribution plan for Canadian employees and contributes a percentage of each
employee's salary. Certain subsidiaries in the Company's Other International operations have defined
benefit and defined contribution plans that are not material. Amounts expensed under all plans were
$454, $436, and $409 for 2015, 2014, and 2013, respectively, and are included in selling, general and
administrative expenses and merchandise costs in the accompanying consolidated statements of income.
Retirement Plans
Selling, general and administrative expenses consist primarily of salaries, benefits and workers'
compensation costs for warehouse employees, other than fresh foods departments and certain ancillary
businesses, as well as all regional and home office employees, including buying personnel. Selling,
general and administrative expenses also include substantially all building and equipment depreciation,
bank charges, utilities, and stock-based compensation expense as well as other operating costs incurred
to support warehouse operations.
Selling, General and Administrative Expenses
The Company has agreements with vendors to receive funds for volume rebates, certain ongoing
programs, and other vendor consideration. Volume rebates or other purchase discounts are evidenced by
signed agreements that are reflected in the carrying value of the inventory when earned or as the
Company progresses towards earning the rebate or discount, and as a component of merchandise costs
as the merchandise is sold. Other vendor consideration is generally recorded as a reduction of
merchandise costs upon completion of contractual milestones, terms of the related agreement, or by
another systematic approach.
Vendor Consideration
Merchandise costs consist of the purchase price of inventory sold, inbound and outbound shipping
charges and all costs related to the Company's depot operations, including freight from depots to selling
warehouses, and are reduced by vendor consideration. Merchandise costs also include salaries, benefits,
depreciation, and utilities on production equipment in fresh foods and certain ancillary departments.
Merchandise Costs
The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the
one-year membership period. The Company's Executive members qualify for a 2% reward on qualified
purchases (up to a maximum reward of approximately $750 per year), which can be redeemed only at
Costco warehouses. The Company accounts for this reward as a reduction in sales. The sales reduction
and corresponding liability (classified as accrued member rewards in the consolidated balance sheets)
are computed after giving effect to the estimated impact of non-redemptions based on historical data. The
net reduction in sales was $1,128, $1,051, and $970 in 2015, 2014, and 2013, respectively.
specifications, or has several but not all of these indicators, revenue is recorded on a gross basis. If the
Company is not the primary obligor and does not possess other indicators of gross reporting as noted
above, it records the net amounts earned, which is reflected in net sales. The Company records related
shipping fees on a gross basis.
53
The Company evaluates whether it is appropriate to record the gross amount of merchandise sales and
related costs or the net amount earned. Generally, when Costco is the primary obligor, is subject to
inventory risk, has latitude in establishing prices and selecting suppliers, can influence product or service
The Company generally recognizes sales, which include shipping fees where applicable, net of returns, at
the time the member takes possession of merchandise or receives services. When the Company collects
payments from customers prior to the transfer of ownership of merchandise or the performance of
services, the amounts received are generally recorded as deferred sales, included in other current
liabilities in the consolidated balance sheets, until the sale or service is completed. The Company
reserves for estimated sales returns based on historical trends in merchandise returns and reduces sales
and merchandise costs accordingly. The sales returns reserve is based on an estimate of the net
realizable value of merchandise inventories to be returned. Amounts collected from members for sales or
value added taxes are recorded on a net basis.
Revenue Recognition
The Company recognizes foreign-currency transaction gains and losses related to revaluing or settling
monetary assets and liabilities denominated in currencies other than the functional currency in interest
income and other, net in the accompanying consolidated statements of income. Generally, this includes
the U.S. dollar cash and cash equivalents and the U.S. dollar payables of consolidated subsidiaries to
their functional currency. Also included are realized foreign-currency gains or losses from settlements of
forward foreign-exchange contracts. These items resulted in net gains of $35, $25, and $37 for 2015,
2014, and 2013, respectively.
The functional currencies of the Company's international subsidiaries are the local currency of the country
in which the subsidiary is located. Assets and liabilities recorded in foreign currencies are translated at the
exchange rate on the balance sheet date. Translation adjustments are recorded in accumulated other
comprehensive income (loss). Revenues and expenses of the Company's consolidated foreign operations
are translated at average exchange rates prevailing during the year.
Foreign Currency
The Company is exposed to fluctuations in prices for the energy it consumes, particularly electricity and
natural gas, which it seeks to partially mitigate through the use of fixed- and variable-price contracts for
certain of its warehouses and other facilities, primarily in the U.S. and Canada. The Company also enters
into variable-priced contracts for purchases of fuel for its gas stations. These contracts meet the
characteristics of derivative instruments, but generally qualify for the "normal purchases or normal sales"
exception under authoritative guidance and thus require no mark-to-market adjustment.
The unrealized gains or losses recognized in interest income and other, net in the accompanying
consolidated statements of income relating to the net changes in the fair value of unsettled forward
foreign-exchange contracts was a net gain of $12 for 2015, and immaterial for 2014 and 2013.
52
The Company leases land and/or buildings at warehouses and certain other office and distribution
facilities, primarily under operating leases. Operating leases expire at various dates through 2064, with
the exception of one lease in the Company's U.K. subsidiary, which expires in 2151. These leases
generally contain one or more of the following options, which the Company can exercise at the end of the
initial lease term: (a) renewal of the lease for a defined number of years at the then-fair market rental rate
or rate stipulated in the lease agreement; (b) purchase of the property at the then-fair market value; or
(c) right of first refusal in the event of a third-party purchase offer.
Insurance/Self-Insurance Liabilities
51
$704
$729
2014
2015
Receivables, net..
Other receivables, net....
Third-party pharmacy receivables.
Reinsurance receivables.
Vendor receivables..
Receivables consist of the following at the end of 2015 and 2014:
Receivables, Net
Current financial liabilities have fair values that approximate their carrying values. Long-term financial
liabilities consist of long-term debt, which is recorded on the balance sheet at issuance price and adjusted
for any applicable unamortized discounts or premiums.
49
49
The Company's valuation techniques used to measure the fair value of money market mutual funds are
based on quoted market prices, such as quoted net asset values published by the fund as supported in
an active market. Valuation methodologies used to measure the fair value of all other non-derivative
financial instruments are based on independent external valuation information. The pricing process uses
data from a variety of independent external valuation information providers, including trades, bid price or
spread, two-sided markets, quotes, benchmark curves including but not limited to treasury benchmarks
and Libor and swap curves, discount rates, and market data feeds. All are observable in the market or
can be derived principally from or corroborated by observable market data. The Company reports
transfers in and out of Levels 1, 2, and 3, as applicable, using the fair value of the individual securities as
of the beginning of the reporting period in which the transfer(s) occurred.
Level 3: Significant unobservable inputs that are not corroborated by market data.
data.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Fair value is estimated by
applying a fair value hierarchy, which requires maximizing the use of observable inputs when measuring
fair value. The three levels of inputs are:
The Company accounts for certain assets and liabilities at fair value. The carrying value of the Company's
financial instruments, including cash and cash equivalents, receivables and accounts payable,
approximate fair value due to their short-term nature or variable interest rates. See Notes 2, 3, and 4 for
the carrying value and fair value of the Company's investments, derivative instruments, and fixed-rate
debt, respectively.
Fair Value of Financial Instruments
The Company periodically evaluates unrealized losses in its investment securities for other-than-
temporary impairment, using both qualitative and quantitative criteria. In the event a security is deemed to
be other-than-temporarily impaired, the Company recognizes the credit loss component in interest income
and other, net in the consolidated statements of income.
In general, short-term investments have a maturity at the date of purchase of three months to five years.
Investments with maturities beyond five years may be classified, based on the Company's determination,
as short-term based on their highly liquid nature and because they represent the investment of cash that
is available for current operations. Short-term investments classified as available-for-sale are recorded at
fair value using the specific identification method with the unrealized gains and losses reflected in
accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of
available-for-sale securities, if any, are determined on a specific identification basis and are recorded in
interest income and other, net in the consolidated statements of income. Short-term investments
classified as held-to-maturity are financial instruments that the Company has the intent and ability to hold
to maturity and are reported net of any related amortization and are not remeasured to fair value on a
recurring basis.
Short-Term Investments
273
respectively, representing the excess of outstanding checks over cash on deposit at the banks on which
the checks were drawn.
253
87
The Company's banking system provides for the daily replenishment of major bank accounts as checks
are presented. Included in accounts payable at the end of 2015 and 2014 are $538 and $588,
Accounts Payable
The Company evaluates long-lived assets for impairment on an annual basis, when relocating or closing
a facility, or when events or changes in circumstances may indicate the carrying amount of the asset
group, generally an individual warehouse, may not be fully recoverable. For asset groups held and used,
including warehouses to be relocated, the carrying value of the asset group is considered recoverable
when the estimated future undiscounted cash flows generated from the use and eventual disposition of
the asset group exceed the respective carrying value. In the event that the carrying value is not
considered recoverable, an impairment loss would be recognized for the asset group to be held and used
equal to the excess of the carrying value above the estimated fair value of the asset group. For asset
groups classified as held-for-sale (disposal group), the carrying value is compared to the disposal group's
fair value less costs to sell. The Company estimates fair value by obtaining market appraisals from third
party brokers or using other valuation techniques. Impairment charges, included in selling, general and
administrative expenses in the consolidated statements of income, in 2015, 2014, and 2013 were
immaterial.
Repair and maintenance costs are expensed when incurred. Expenditures for remodels, refurbishments
and improvements that add to or change the way an asset functions or that extend the useful life are
capitalized. Assets that were removed during the remodel, refurbishment or improvement are retired.
Assets classified as held-for-sale at the end of 2015 and 2014 were immaterial.
The Company capitalizes certain computer software and software development costs incurred in
developing or obtaining computer software for internal use. These costs are included in equipment and
fixtures and amortized on a straight-line basis over the estimated useful lives of the software, generally
three to seven years.
Property and equipment are stated at cost. In general, new building additions are classified into
components, each with its own estimated useful life, generally five to fifty years for buildings and
improvements and three to twenty years for equipment and fixtures. Depreciation and amortization
expense is computed using the straight-line method over estimated useful lives or the lease term, if
shorter. Leasehold improvements made after the beginning of the initial lease term are depreciated over
the shorter of the estimated useful life of the asset or the remaining term of the initial lease plus any
renewals that are reasonably assured at the date the leasehold improvements are made.
Property and Equipment
Due to net deflationary trends, a benefit of $27 was recorded to merchandise costs in both 2015 and
2013. Due to net inflationary trends in 2014, a charge of $28 was recorded to merchandise costs to
increase the cumulative LIFO valuation on merchandise inventories. At the end of 2015 and 2014, the
cumulative impact of the LIFO valuation on merchandise inventories was $82 and $109, respectively.
The Company provides for estimated inventory losses between physical inventory counts as a percentage
of net sales, using estimates based on the Company's experience. The provision is adjusted periodically
to reflect actual physical inventory counts, which generally occur in the second and fourth fiscal quarters.
Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as the
Company progresses towards earning those rebates, provided that they are probable and reasonably
estimable.
60
50
Merchandise inventories are valued at the lower of cost or market, as determined primarily by the retail
inventory method, and are stated using the last-in, first-out (LIFO) method for substantially all U.S.
merchandise inventories. The Company records an adjustment each quarter, if necessary, for the
projected annual effect of inflation or deflation, and these estimates are adjusted to actual results
determined at year-end, after actual inflation rates and inventory levels for the year have been
determined. The Company believes the LIFO method more fairly presents the results of operations by
more closely matching current costs with current revenues. Merchandise inventories for all foreign
operations are primarily valued by the retail inventory method and are stated using the first-in, first-out
(FIFO) method.
$8,908 $8,456
Merchandise inventories
$6,427 $5,952
2014
2015
United States
Foreign....
Merchandise inventories consist of the following at the end of 2015 and 2014:
Merchandise Inventories
Receivables are recorded net of an allowance for doubtful accounts. The allowance is based on historical
experience and application of the specific identification method. Write-offs of receivables were immaterial
for fiscal years 2015, 2014, and 2013.
Vendor receivables include volume rebates or other purchase discounts. Balances are generally
presented on a gross basis, separate from any related payable due. In certain circumstances, these
receivables may be settled against the related payable to that vendor. Reinsurance receivables are held
by the Company's wholly-owned captive insurance subsidiary. The balance primarily represents amounts
ceded through reinsurance arrangements and are reflected on a gross basis, separate from the amounts
assumed under reinsurance, which are presented on a gross basis within other current liabilities in the
consolidated balance sheets. Third-party pharmacy receivables generally relate to amounts due from
members' insurance companies. Other receivables primarily consist of amounts due from governmental
entities, mostly tax-related items.
$1,148
$1,224
104
119
103
The Company accounts for its lease expense with free rent periods and step-rent provisions on a straight-
line basis over the original term of the lease and any extension options that the Company more likely than
not expects to exercise, from the date the Company has control of the property. Certain leases provide for
periodic rental increases based on price indices, or the greater of minimum guaranteed amounts or sales
volume.
124
The Company records an asset and related financing obligation for the estimated construction costs
under build-to-suit lease arrangements where it is considered the owner for accounting purposes, to the
extent the Company is involved in the construction of the building or structural improvements or has
construction risk prior to commencement of a lease. Upon occupancy, the Company assesses whether
Total short-term investments.
Certificates of deposit.
Held-to-maturity:
Total available-for-sale.....
Asset and mortgage-backed securities.
Government and agency securities
Available-for-sale:
2015:
The Company's investments at the end of 2015 and 2014 were as follows:
Note 2-Investments
In May 2014, the FASB issued new guidance on the recognition of revenue from contracts with
customers. The guidance converges the requirements for reporting revenue in addition to requiring
disclosures sufficient to describe the nature, amount, timing, and uncertainty of revenue and cash flows
arising from these contracts. Companies can transition to the standard either retrospectively or as a
cumulative effect adjustment as of the date of adoption. The new standard is effective for fiscal years and
interim periods within those years beginning after December 15, 2017. The Company plans to adopt this
guidance at the beginning of its first quarter of fiscal year 2019. The Company is evaluating the impact of
this standard on its consolidated financial statements and disclosures.
In April 2014, the Financial Accounting Standards Board (FASB) issued guidance that changed the criteria
for reporting discontinued operations, as well as requiring new disclosures regarding discontinued
operations and disposals that do not qualify for discontinued operations reporting. This guidance is
effective for fiscal years beginning after December 15, 2014, with early adoption permitted for disposals
that have not been reported in financial statements previously issued. The Company will adopt this
guidance at the beginning of fiscal year 2016. Adoption is not expected to have a material impact on the
Company's consolidated financial statements or disclosures.
Recent Accounting Pronouncements Not Yet Adopted
Repurchased shares of common stock are retired, in accordance with the Washington Business
Corporation Act. The par value of repurchased shares is deducted from common stock and the excess
repurchase price over par is deducted by allocation to both additional paid-in capital and retained
earnings. The amount allocated to additional paid-in capital is calculated as the current value of additional
paid-in capital per share outstanding and is applied to the number of shares repurchased. Any remaining
amount is allocated to retained earnings. See Note 6 for additional information.
Stock Repurchase Programs
60
56
The computation of basic net income per share uses the weighted average number of shares that were
outstanding during the period. The computation of diluted net income per share uses the weighted
average number of shares in the basic net income per share calculation plus the number of common
shares that would be issued assuming vesting of all potentially dilutive common shares outstanding using
the treasury stock method for shares subject to RSUs and the “if converted” method for the convertible
note securities.
Net Income per Common Share Attributable to Costco
The determination of the Company's provision for income taxes requires significant judgment, the use of
estimates, and the interpretation and application of complex tax laws. Significant judgment is required in
assessing the timing and amounts of deductible and taxable items and the probability of sustaining
uncertain tax positions. The benefits of uncertain tax positions are recorded in the Company's
consolidated financial statements only after determining a more-likely-than-not probability that the
uncertain tax positions will withstand challenge, if any, from tax authorities. Additionally, certain of our
cumulative foreign undistributed earnings are considered indefinitely reinvested. These earnings would be
subject to U.S. income tax if we changed our position and could result in a U.S. tax liability. When facts
and circumstances change, the Company reassesses these probabilities and records any changes in the
consolidated financial statements as appropriate. See Note 8 for additional information.
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributed to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits
and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences and carry-forwards
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A valuation allowance is
established when necessary to reduce deferred tax assets to amounts that are more likely than not
expected to be realized.
$1,415
$306
(4)
0
57
Cost
Basis
Unrealized
Gains, Net
Recorded
Cost
Basis
Total short-term investments.
Total held-to-maturity
Bankers' acceptances.
Certificates of deposit
Held-to-maturity:
Total available-for-sale...
Asset and mortgage-backed securities.
Government and agency securities
Available-for-sale:
2014:
$1,618
16
$4
215
215
1,403
4
1,399
5
0
5
The Company has capital leases for certain warehouse locations, expiring at various dates through 2040.
Capital lease assets are included in land, buildings, and improvements in the accompanying consolidated
balance sheets. Amortization expense on capital lease assets is recorded as depreciation expense and is
predominately included in selling, general and administrative expenses. Capital lease liabilities are
recorded at the lesser of the estimated fair market value of the leased property or the net present value of
the aggregate future minimum lease payments and are included in other current liabilities and deferred
income taxes and other liabilities in the accompanying consolidated balance sheets. Interest on these
obligations is included in interest expense in the consolidated statements of income.
$4
$1,394
Basis
$1,614
5
$1,398
Level 2
$1,577
$1
$1,576
168
168
13
13
155
155
1,409
1,408
4
Gross unrealized gains and losses on available-for-sale securities were not material in 2015, 2014, and
2013. At the end of 2015 and 2014, the Company's available-for-sale securities that were in a continuous
unrealized-loss position were not material, and at the end of 2013, the Company had none. There were
no gross unrealized gains and losses on cash equivalents at the end of 2015, 2014, or 2013.
0
$1
$1,404
Basis
Gains, Net
Income Taxes
Preopening expenses related to new warehouses, new regional offices and other startup operations are
expensed as incurred.
Preopening Expenses
The Company's asset retirement obligations (ARO) are primarily related to leasehold improvements that
at the end of a lease must be removed in order to comply with the lease agreement. These obligations
are recorded as a liability with an offsetting asset at the inception of the lease term based upon the
estimated fair value of the costs to remove the leasehold improvements. These liabilities are accreted
over time to the projected future value of the obligation using the Company's incremental borrowing rate.
The ARO assets are depreciated using the same depreciation method as the respective leasehold
improvement assets and are included with buildings and improvements. Estimated ARO liabilities
associated with these leases amounted to $54 and $55 at the end of 2015 and 2014, respectively, and
are included in deferred income taxes and other liabilities in the accompanying consolidated balance
sheets.
these arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If the
Company continues to be the deemed owner, it accounts for the arrangement as a financing lease.
59
55
$0
1,398
4
The proceeds from sales of available-for-sale securities were $246, $116, and $244 during 2015, 2014,
and 2013, respectively. Gross realized gains or losses from sales of available-for-sale securities were not
material in 2015, 2014, and 2013.
$1,405
Due in one year or less.
Total
Investment in government and agency securities
Investment in asset and mortgage-backed securities.
Forward foreign-exchange contracts, in asset position (2)
Forward foreign-exchange contracts, in (liability) position (2)
Money market mutual funds (1)
2015:
The tables below present information at the end of 2015 and 2014, respectively, regarding the Company's
financial assets and financial liabilities that are measured at fair value on a recurring basis and indicate
the level within the fair value hierarchy reflecting the valuation techniques utilized to determine such fair
value.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
$215
$1,403
The maturities of available-for-sale and held-to-maturity securities at the end of 2015, were as follows:
38
58
38
$1,399
$215
$301
1,064
1,061
Fair Value Held-To-Maturity
Cost Basis
$300
Available-For-Sale
Note 3-Fair Value Measurement
Total..
Due after five years
Due after one year through five years
Level 1
$306
50
Special cash dividend
Forfeited.
376
102.09
(174)
N/A
Outstanding at the end of 2015
The following table summarizes stock-based compensation expense and the related tax benefits under
the Company's plans:
$99.72
The weighted-average grant date fair value of RSUs granted during 2015, 2014, and 2013 was $125.68,
$113.64, and $90.99, respectively. The remaining unrecognized compensation cost related to non-vested
RSUs at the end of 2015 was $640 and the weighted-average period of time over which this cost will be
recognized is 1.7 years. Included in the outstanding balance at the end of 2015 were approximately
2,811,000 RSUs vested but not yet delivered.
Summary of Stock-Based Compensation
87.33
Stock-based compensation expense before income taxes
Less recognized income tax benefit....
Stock-based compensation expense, net of income taxes
Note 8-Income Taxes
9,233
(4,103)
The following table summarizes RSU transactions during 2015:
4,017
•
The following awards were outstanding at the end of 2015:
Income before income taxes is comprised of the following:
RSUS granted to employees and to non-employee directors generally vest over five years and three
years, respectively. Additionally, the terms of the RSUs, including performance-based awards, provide for
accelerated vesting for employees and non-employee directors who have attained 25 or more years and
five or more years of service with the Company, respectively, and provide for vesting upon certain
terminations of employment or service. Recipients are not entitled to vote or receive dividends on non-
vested and undelivered shares. At the end of 2015, 18,308,000 shares were available to be granted as
RSUS under the Seventh Plan.
•
8,698,000 time-based RSUs that vest upon continued employment over specified periods of time;
535,000 performance-based RSUs, of which 281,000 were granted to executive officers subject to
the certification of the attainment of specified performance targets for 2015. This certification
occurred in September 2015, at which time a portion vested as a result of the long service of all
executive officers. The awards vest upon continued employment over specified periods of time.
63
Outstanding at the end of 2014
Granted.
Vested and delivered..
Number of
Units
(in 000's)
9,117
Weighted-Average
Grant Date Fair
Value
$86.92
125.68
2015
(105)
2013
2013
$766
$696
$572
(12)
16
754
591
588
Total federal.
State:
Current
Summary of Restricted Stock Unit Activity
Deferred
Total state
2014
2014
2015
Current
$394 $327 $285
(131) (109) (94)
$263 $218 $191
Domestic (including Puerto Rico).
Foreign
Total
64
...
2015
2014
2013
$2,574 $2,145 $2,070
1,030 1,052
981
$3,604 $3,197 $3,051
The provisions for income taxes for 2015, 2014, and 2013 are as follows:
Federal:
Deferred
As required by the Company's Seventh Plan, in conjunction with the special cash dividend discussed in
Note 6, adjustments were made to awards outstanding on the dividend record date to preserve their value
following the dividend, as follows: (i) the number of shares subject to outstanding RSUs was increased;
and (ii) the exercise prices of outstanding stock options were reduced and the number of shares subject
to such options was increased. Approximately 410,000 stock options were adjusted, and approximately
8,956,000 RSUs were adjusted. These adjustments did not result in additional stock-based compensation
expense, as the fair value of the outstanding awards did not change. As further required by the Seventh
Plan, the maximum number of shares issuable under the Seventh Plan was proportionally adjusted,
which resulted in an additional 750,000 RSU shares available to be granted.
1,100 1,095
62
2019.
2020.
Operating
Leases
Capital
Leases (3)
$187
$24
183
24
176
24
166
23
155
24
2018.
2,097
2016.
2017
61
Thereafter
Foreign:
Total
$1,283
1,100
1,178
83
1,698
805
$6,147
Note 5-Leases
Operating Leases
The aggregate rental expense for 2015, 2014, and 2013 was $252, $230, and $225, respectively. Sub-
lease income, included in interest income and other, net in the accompanying consolidated statements of
income, and contingent rents were not material in 2015, 2014, and 2013, respectively.
Capital and Build-to-Suit Leases
Gross assets recorded under capital and build-to-suit leases were $300 and $200 at the end of 2015 and
2014, respectively. These assets are recorded net of accumulated amortization of $42 and $35 at the end
of 2015 and 2014, respectively.
At the end of 2015, future minimum payments, net of sub-lease income of $131 for all years combined,
under non-cancelable operating leases with terms of at least one year and capital leases were as follows:
452
$2,964
571
Shares
Repurchased
(000's)
Average
Price per
Share
Total Cost
3,456
$142.87
$494
2,915
114.45
334
357
96.41
34
These amounts may differ from the stock repurchase balances in the accompanying consolidated
statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year.
62
2013.
2015..
2014
The Company's stock repurchase program is conducted under a $4,000 authorization by the Board of
Directors approved on April 17, 2015, which expires April 17, 2019. This authorization revoked previously
authorized but unused amounts, totaling $2,528. As of the end of 2015, the total amount repurchased on
the new authorization was $301. The following table summarizes the Company's stock repurchase
activity:
Stock Repurchase Programs
(275)
296
(10)
$286
Thereafter
Total.
Less amount representing interest...
Note 7-Stock-Based Compensation Plans
Net present value of minimum lease payments.
Long-term capital lease obligations less current installments (2).
(1) Included in other current liabilities in the accompanying consolidated balance sheets.
(2) Included in deferred income taxes and other liabilities in the accompanying consolidated balance sheets.
(3) Includes build-to-suit lease obligations.
Note 6-Stockholders' Equity
Dividends
The Company's current quarterly dividend rate is $0.40 per share. In February 2015, the Company paid a
special cash dividend of $5.00 per share, totaling approximately $2,201.
Less current installments (1).
Current
Included in the balance at the end of 2015 and 2014, are $50 and $38, respectively, of tax positions for
which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such
deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the
Total foreign...
Lapse of statute of limitations
Gross unrecognized tax benefit at end of year
2015
2014
$75
$80
26
9
63
10
(1)
(11)
(3)
(11)
(2)
Gross decreases-tax positions in prior years
Settlements..
$158
Gross increases-tax positions in prior years...
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2015 and
2014 is as follows:
90
98
641
607
107
19
(560)
(529)
(200) (193)
$168
$87
The deferred tax accounts at the end of 2015 and 2014 include current deferred income tax assets of
$521 and $448 respectively, included in deferred income taxes and other current assets; non-current
deferred income tax assets of $109 and $68, respectively, included in other assets; and non-current
deferred income tax liabilities of $462 and $429, respectively, included in deferred income taxes and other
liabilities. Included in non-current deferred tax assets for 2015 are $33 of foreign tax credits which expire
in 2025.
The Company has not provided for U.S. deferred taxes on cumulative undistributed earnings of certain
non-U.S. consolidated subsidiaries because its subsidiaries have invested or will invest the undistributed
earnings indefinitely, or the earnings if repatriated would not result in a deferred tax liability. This includes
the remaining undistributed earnings of the Canadian operations that the Company maintains are
indefinitely reinvested, or could be repatriated without resulting in a deferred tax liability. Deferred taxes
are recorded for earnings of foreign operations when it is determined that such earnings are no longer
indefinitely reinvested.
During 2015, the Company repatriated a portion of the earnings in the Canadian operations that, in 2014,
the Company determined were no longer considered indefinitely reinvested. In the fourth quarter of 2015,
the Company changed its position regarding an additional portion of the undistributed earnings of the
Canadian operations, which are no longer considered indefinitely reinvested. Current exchange rates
compared to historical rates when these earnings were generated resulted in an immaterial U.S. benefit,
which was recorded at the end of 2015.
The Company has not provided for U.S. deferred taxes on cumulative undistributed earnings of $2,845
and $3,619 at the end of 2015 and 2014, respectively, of certain non-U.S. consolidated subsidiaries as
such earnings are deemed by the Company to be indefinitely reinvested or the earnings if repatriated
would not result in a deferred tax liability. Because of the availability of U.S. foreign tax credits and
complexity of the computation, it is not practicable to determine the U.S. federal income tax liability that
would be associated with such earnings if such earnings were not deemed to be indefinitely reinvested.
The Company believes that its U.S. current and projected asset position is sufficient to meet its U.S.
liquidity requirements and has no current plans to repatriate for use in the U.S. the cash and cash
equivalents and short-term investments held by these non-U.S. subsidiaries whose earnings are
considered indefinitely reinvested.
Gross unrecognized tax benefit at beginning of year.
Gross increases-current year tax positions..
$85
$75
66
438,693
3,771
21
435,741
4,552
219
Weighted average number of common shares and dilutive potential
of common stock used in diluted net income per share..
442,716
442,485 440,512
Note 10-Commitments and Contingencies
Legal Proceedings
The Company is involved in a number of claims, proceedings and litigation arising from its business and
property ownership. In accordance with applicable accounting guidance, the Company establishes an
accrual for legal proceedings if and when those matters reach a stage where they present loss
contingencies that are both probable and reasonably estimable. There may be exposure to loss in excess
200
67
of any amounts accrued. The Company monitors those matters for developments that would affect the
likelihood of a loss (taking into account where applicable indemnification arrangements concerning
suppliers and insurers) and the accrued amount, if any, thereof, and adjusts the amount as appropriate.
As of the date of this report, the Company has not recorded an accrual with respect to any matter
described below. If the loss contingency at issue is not both probable and reasonably estimable, the
Company does not establish an accrual, but will continue to monitor the matter for developments that will
make the loss contingency both probable and reasonably estimable. In each case, there is a reasonable
possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters
where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of
the accrual) cannot in our view be reasonably estimated because, among other things: (i) the remedies or
penalties sought are indeterminate or unspecified; (ii) the legal and/or factual theories are not well
developed; and/or (iii) the matters involve complex or novel legal theories or a large number of parties.
The Company is a defendant in the following matters, among others:
Numerous putative class actions have been brought around the United States against motor fuel retailers,
including the Company, alleging that they have been overcharging consumers by selling gasoline or
diesel that is warmer than 60 degrees without adjusting the volume sold to compensate for heat-related
expansion or disclosing the effect of such expansion on the energy equivalent received by the consumer.
The Company is named in the following actions: Raphael Sagalyn, et al., v. Chevron USA, Inc., et al.,
Case No. 07-430 (D. Md.); Phyllis Lerner, et al., v. Costco Wholesale Corporation, et al., Case No. 07-
1216 (C.D. Cal.); Linda A. Williams, et al., v. BP Corporation North America, Inc., et al., Case No. 07-179
(M.D. Ala.); James Graham, et al. v. Chevron USA, Inc., et al., Civil Action No. 07-193 (E.D. Va.); Betty A.
Delgado, et al., v. Allsups, Convenience Stores, Inc., et al., Case No. 07-202 (D.N.M.); Gary Kohut, et al.
v. Chevron USA, Inc., et al., Case No. 07-285 (D. Nev.); Mark Rushing, et al., v. Alon USA, Inc., et al.,
Case No. 06-7621 (N.D. Cal.); James Vanderbilt, et al., v. BP Corporation North America, Inc., et al., Case
No. 06-1052 (W.D. Mo.); Zachary Wilson, et al., v. Ampride, Inc., et al., Case No. 06-2582 (D. Kan.); Diane
Foster, et al., v. BP North America Petroleum, Inc., et al., Case No. 07-02059 (W.D. Tenn.); Mara
Redstone, et al., v. Chevron USA, Inc., et al., Case No. 07-20751 (S.D. Fla.); Fred Aguirre, et al. v. BP
West Coast Products LLC, et al., Case No. 07-1534 (N.D. Cal.); J.C. Wash, et al., v. Chevron USA, Inc.,
et al.; Case No. 4:07cv37 (E.D. Mo.); Jonathan Charles Conlin, et al., v. Chevron USA, Inc., et al.; Case
No. 07 0317 (M.D. Tenn.); William Barker, et al. v. Chevron USA, Inc., et al.; Case No. 07-cv-00293
(D.N.M.); Melissa J. Couch, et al. v. BP Products North America, Inc., et al., Case No. 07cv291 (E.D.
Tex.); S. Garrett Cook, Jr., et al., v. Hess Corporation, et al., Case No. 07cv750 (M.D. Ala.); Jeff Jenkins,
et al. v. Amoco Oil Company, et al., Case No. 07-cv-00661 (D. Utah); and Mark Wyatt, et al., v. B. P.
America Corp., et al., Case No. 07-1754 (S.D. Cal.). On June 18, 2007, the Judicial Panel on Multidistrict
Litigation assigned the action, entitled In re Motor Fuel Temperature Sales Practices Litigation, MDL
Docket No 1840, to Judge Kathryn Vratil in the United States District Court for the District of Kansas. On
April 12, 2009, the Company agreed to settle the actions in which it is named as a defendant. Under the
settlement, which was subject to final approval by the court, the Company agreed, to the extent allowed
by law and subject to other terms and conditions in the agreement, to install over five years from the
effective date of the settlement temperature-correcting dispensers in the States of Alabama, Arizona,
California, Florida, Georgia, Kentucky, Nevada, New Mexico, North Carolina, South Carolina, Tennessee,
Texas, Utah, and Virginia. Other than payments to class representatives, the settlement does not provide
for cash payments to class members. On September 22, 2011, the court preliminarily approved a revised
settlement, which did not materially alter the terms. On April 24, 2012, the court granted final approval of
the revised settlement. A class member who objected has filed a notice of appeal from the order
approving the settlement. Plaintiffs have moved for an award of $10 in attorneys' fees, as well as an
68
The Company grants stock-based compensation to employees and non-employee directors. Stock option
awards were granted until the fourth quarter of fiscal 2006, when the Company began awarding RSUs.
Beginning in 2009, RSU grants to all executive officers have been performance-based. Through a series
of shareholder approvals, there have been amended and restated plans and new provisions implemented
by the Company. RSUs held by employees and non-employee directors are subject to quarterly vesting
upon certain terminations of employment or service. Employees who attain certain years of service with
the Company receive shares under accelerated vesting provisions on the annual vesting date rather than
upon retirement. The Seventh Restated 2002 Stock Incentive Plan (Seventh Plan), amended in the
second quarter of fiscal 2015, is the Company's only stock-based compensation plan with shares
available for grant at the end of 2015. Each share issued in respect of stock awards is counted as 1.75
shares toward the limit of shares made available under the Seventh Plan. The Seventh Plan authorized
the issuance of 23,500,000 shares (13,429,000 RSUs) of common stock for future grants in addition to
the shares authorized under the previous plan. The Company issues new shares of common stock upon
exercise of stock options and upon vesting of RSUs. Shares for vested RSUs are generally delivered to
participants annually, net of shares equal to the minimum statutory withholding taxes.
3,249
12
2020.
Conversion of convertible notes.
439,455
disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the
payment of cash to the taxing authority to an earlier period. The Company has recorded an offsetting
long-term asset of $48 for amounts included in the balance at the end of 2015. Offsetting long-term
assets were not material at the end of 2014.
The total amount of such unrecognized tax benefits that, if recognized, would favorably affect the effective
income tax rate in future periods is $98 and $47 at the end of 2015 and 2014, respectively.
Accrued interest and penalties related to income tax matters are classified as a component of income tax
expense. Interest and penalties recognized by the Company were not material in 2015 and 2014. Accrued
interest and penalties were not material at the end of 2015 and 2014.
The Company is currently under audit by several taxing jurisdictions in the United States and in several
foreign countries. Some audits may conclude in the next 12 months and the unrecognized tax benefits we
have recorded in relation to the audits may differ from actual settlement amounts. is not practical to
estimate the effect, if any, of any amount of such change during the next 12 months to previously
recorded uncertain tax positions in connection with the audits. The Company does not anticipate that
there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next
12 months.
The Company files income tax returns in the United States, various state and local jurisdictions, in
Canada and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject
to U.S. federal, state or local examination for years before fiscal 2007. The Company is currently subject
to examination in Canada for fiscal years 2011 to present and in California for fiscal years 2007 to
present. No other examinations are believed to be material.
Note 9-Net Income per Common and Common Equivalent Share
The following table shows the amounts used in computing net income per share and the effect on net
income and the weighted average number of shares of potentially dilutive common shares outstanding
(shares in 000's):
2015
2014
2013
Net income available to common stockholders after assumed
conversions of dilutive securities.
$2,377
$2,058
$2,039
Weighted average number of common shares used in basic net
income per common share
RSUs
Deferred
$90
2015
$1,109
$990
Tax benefits associated with the exercise of employee stock programs were allocated to equity
attributable to Costco in the amount of $86, $84, and $59, in 2015, 2014, and 2013, respectively.
The reconciliation between the statutory tax rate and the effective rate for 2015, 2014, and 2013 is as
follows:
2015
2014
2013
Federal taxes at statutory rate.
$1,262
35.0% $1,119 35.0% $1,068 35.0%
State taxes, net
85
2.3
66
2.1
66
$1,195
2.1
289
309
Total provision for income taxes
131
107
109
1
4
132
104
113
399
369
302
(90)
45
(13)
414
2014
Foreign taxes, net.
(3.5)
$1,195
33.2% $1,109
34.7% $990
32.4%
The Company's provision for income taxes for 2015 and 2013 was favorably impacted by a $57 and $62
tax benefit in connection with the special cash dividend of $5.00 and $7.00 per share, respectively. These
dividends were paid by the Company to employees, who through the Company's 401(k) Retirement Plan
owned 29,000,000 and 22,600,000 shares of Company stock through an ESOP in 2015 and 2013,
respectively. Dividends paid on these shares are deductible for U.S. income tax purposes. There was no
similar special cash dividend in 2014.
The components of the deferred tax assets (liabilities) are as follows:
Equity compensation...
Deferred income/membership fees.
Accrued liabilities and reserves.
Other..
Property and equipment.
Merchandise inventories..
Net deferred tax assets.
99
65
Total
(125)
0.2
0.6
(85)
(2.7)
(87)
(2.8)
Employee stock ownership plan (ESOP).
1.7% Senior Notes due December 2019
(1.8)
(11)
(0.3)
(65)
(2.1)
Other.....
39
1.2
20
8
2019..
(66)
2017
Short-Term Borrowings
The Company enters into various short-term bank credit facilities, totaling $407 and $451 in 2015 and
2014, respectively. At the end of 2015 and 2014, there were no outstanding borrowings under these credit
facilities.
In 2015, the maximum and average amounts outstanding during the fiscal year under all short-term
borrowing arrangements were immaterial. In 2014, maximum and average amounts outstanding for Japan
bank borrowings were $93 and $67, respectively, and had a weighted average interest rate of 0.55%
during the fiscal year. The maximum and average amounts outstanding for the U.K. bank overdraft facility
during 2014 were $18 and $7, respectively, and had a weighted average interest rate of 1.54% during the
fiscal year.
Long-Term Debt
On February 17, 2015, the Company issued $1,000 in aggregate principal amount of Senior Notes
(February 2015 Notes), as follows: $500 of 1.75% Senior Notes due February 15, 2020; and $500 of
2.25% Senior Notes due February 15, 2022. Interest is due semi-annually on February 15 and August 15;
the first payment was made on August 15, 2015. The Company, at its option, may redeem the February
2015 Notes at any time, in whole or in part, at the redemption price plus accrued and unpaid interest to
59
the date of redemption. The redemption price is equal to the greater of 100% of the principal amount of
the notes to be redeemed or the sum of the present value of the remaining scheduled payments of
principal and interest to maturity. The Company will be required to offer to purchase the February 2015
Notes, at a price of 101% of the principal amount plus accrued and unpaid interest to the date of
repurchase, upon certain events as defined by the terms of the February 2015 Notes. The discount and
issuance costs associated with the February 2015 Notes are being amortized to interest expense over the
term of the notes, which are valued using Level 2 inputs.
Note 4-Debt
In December 2012, the Company issued $3,500 in aggregate principal amount of Senior Notes
(December 2012 Notes) as follows: $1,200 of 0.65% Senior Notes due December 7, 2015; $1,100 of
1.125% Senior Notes due December 15, 2017; and $1,200 of 1.7% Senior Notes due December 15,
2019. Interest is payable semi-annually. The Company, at its option, may redeem the December 2012
Notes at any time, in whole or in part, at a redemption price plus accrued interest. The redemption price is
equal to the greater of 100% of the principal amount of the December 2012 Notes to be redeemed or the
sum of the present value of the remaining scheduled payments of principal and interest to maturity.
Additionally, the Company will be required to make an offer to purchase the December 2012 Notes at a
price of 101% of the principal amount plus accrued and unpaid interest to the date of repurchase, upon
certain events as defined by the terms of the December 2012 Notes. The discount and issuance costs
associated with the December 2012 Notes are being amortized to interest expense over the terms of the
notes. The December 2012 Notes are valued using Level 2 inputs.
Other long-term debt consisted primarily of promissory notes and term loans issued by the Company's
Japanese subsidiary. These notes and term loans are valued primarily using Level 3 inputs. In May 2015,
the Company's Japanese subsidiary issued approximately $125 of 0.79% promissory notes through a
private placement, which are included in other long-term debt in the table below. Interest is payable semi-
annually, and principal is due in May 2025. These notes are valued using Level 3 inputs.
60
60
The estimated fair value of the Company's debt was based primarily on reported market values, recently
completed market transactions, and estimates based upon interest rates, maturities, and credit. The
carrying value and estimated fair value at the end of 2015 and 2014 consisted of the following:
2015
2014
Carrying
Value
In February 2007, the Company issued $1,100 of 5.5% Senior Notes due March 15, 2017 (2007 Senior
Note). Interest is payable semi-annually. The Company, at its option, may redeem the 2007 Senior Note
at any time, in whole or in part, at a redemption price plus accrued interest. The redemption price is equal
to the greater of 100% of the principal amount of the 2007 Senior Note to be redeemed or the sum of the
present value of the remaining scheduled payments of principal and interest to maturity. Additionally, the
Company will be required to make an offer to purchase the 2007 Senior Note at a price of 101% of the
principal amount plus accrued and unpaid interest to the date of repurchase, upon certain events as
defined by the terms of the 2007 Senior Note. The discount and issuance costs associated with the 2007
Senior Note are being amortized to interest expense over the term of the note. This note is valued using
Level 2 inputs.
Financial assets measured at fair value on a nonrecurring basis include held-to-maturity investments that
are carried at amortized cost and are not remeasured to fair value on a recurring basis. There were no fair
value adjustments to these financial assets during 2015 and 2014. See Note 4 for discussion on the fair
value of long-term debt.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During and at the end of both 2015 and 2014, the Company did not hold any Level 3 financial assets and
liabilities that were measured at fair value on a recurring basis. There were no transfers in or out of Level
1, 2, or 3 during 2015 and 2014.
2018.
2014:
(1)
Money market mutual funds (1
Investment in government and agency securities
Investment in asset and mortgage-backed securities.
Forward foreign-exchange contracts, in asset position
Forward foreign-exchange contracts, in (liability) position (2)
Total.
Level 1
Level 2
$312
$0
1,405
3
0
(3)
$312
$1,409
(1) Included in cash and cash equivalents in the accompanying consolidated balance sheets.
(2) The asset and the liability values are included in deferred income taxes and other current assets and other current liabilities,
respectively, in the accompanying consolidated balance sheets. See Note 1 for additional information on derivative
instruments.
Fair
Value
Carrying
Value
Nonfinancial assets measured at fair value on a nonrecurring basis include items such as long-lived
assets that are measured at fair value resulting from an impairment, if deemed necessary. Fair value
adjustments to nonfinancial assets during 2015 and 2014 were immaterial.
0.65% Senior Notes due December 2015
497
510
Total long-term debt
6,147
6,188
5,093
Less current portion
1,283
1,284
0
Long-term debt, excluding current portion ......
$4,864 $4,904
$5,093
$5,217
Maturities of long-term debt during the next five fiscal years and thereafter are as follows:
Fair
Value
2016.
555
551
5,217
1.125% Senior Notes due December 2017
$1,201 $1,199 $1,203
Other long-term debt..
5.5% Senior Notes due March 2017.
1,099
1,171
1,099 1,223
1,100
1,097
$1,200
1,198
1,198 1,186
1.75% Senior Notes due February 2020.
500
494
2.25% Senior Notes due February 2022.
499
484
1,186
Yves Thomas
Country Manager - Japan
Ken J. Theriault
GMM - Non-Foods - Canadian Division
Jack Weisbly
Mauricio Talayero
GMM-Optical, Optical Labs, Mini-labs
Country Manager - France
Chief Financial Officer - Mexico
& Gasoline - Canadian Division
Keith H. Thompson
Azmina K. Virani
Todd Thull
Construction
Adrian Thummler
Operations Mexico
Diane Tucci
Country Manager - Spain
Gary Swindells
Construction
-
Debbie Sarter
Steve Supkoff
GMM Corporate Non-Foods
Operations - Bay Area Region
Operations - Los Angeles Region
Janet Shanks
GMM - Fresh Foods - Canadian Division
Geoff Shavey
GMM-Corporate Non-Foods
Louie Silveira
Operations - Midwest Region
Operations Ecommerce
David L. Skinner
James Stafford
GMM-Foods - Northeast Region
Richard Stephens
Operations Pharmacy
Kimberley L. Suchomel
GMM - International
John Sullivan
Associate General Counsel & Chief
Compliance Officer
Operations - Eastern Canada Region
Shannon West
CANADIAN DIVISION
Operations - Northeast Region
Craig Wilson
Hyatt Regency Bellevue
900 Bellevue Way NE
Bellevue, Washington 98004
Independent Public Accountants
KPMG LLP
1918 Eighth Avenue, Suite 2900
Seattle, WA 98101
Corporate Office
999 Lake Drive
Issaquah, WA 98027
(425) 313-8100
Division and Regional Offices
EASTERN DIVISION
Northeast Region
45940 Horseshoe Drive, Suite 150
Sterling, VA 20166
Southeast Region
3980 Venture Drive NW, #W100
Duluth, GA 30096
Drew Sakuma
Eastern Region
415 West Hunt Club Road West
Ottawa, ON K2E 1C5, Canada
Friday, January 29, 2016 at 4:00 PM
Annual Meeting
1701 Dallas Parkway, Suite 201
Plano, TX 75093
Texas Region
Food Safety & Quality Assurance
Charlie A. Winters
-
Operations Fresh Meat, Produce
& Service Deli
Earl Wiramanaden
GMM - Fresh Foods - Asia/Australia
74
ADDITIONAL INFORMATION
A copy of Costco's annual report to the Securities and Exchange Commission on Form 10-K and
quarterly reports on Form 10-Q will be provided to any shareholder upon written request directed to
Investor Relations, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027.
Internet users can access recent sales and earnings releases, the annual report and SEC filings, as well
as our Costco Online web site, at http://www.costco.com. E-mail users may direct their investor relations
questions to investor@costco.com. All of the Company's filings with the SEC may be obtained at the
SEC's Public Reference Room at Room 1580, 100 F Street NE, Washington, DC 20549. For information
regarding the operation of the SEC's Public Reference Room, please contact the SEC at 1-800-SEC-
0330. Additionally, the SEC maintains an internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.
GMM-Corporate Non-Foods
Rich Wilcox
NORTHERN DIVISION
Northwest Region
1045 Lake Drive
Issaquah, WA 98027
Midwest Region
1901 West 22nd Street, 2nd Floor
Oak Brook, IL 60523
SOUTHWEST DIVISION
Los Angeles Region
11000 Garden Grove Blvd., #201
Garden Grove, CA 92843
San Diego Region
4649 Morena Blvd.
San Diego, CA 92117
Bay Area Region
2820 Independence Drive
Livermore, CA 94551
Information Systems
James Hayes
Operations - Northeast Region
Aldyn J. Royes
Operations
- Northeast Region
Thomas J. Fox
GMM - Bakery & Food Court
Jack S. Frank
Real Estate Development - West
Lorelle S. Gilpin
Marketing - - Canadian Division
Joseph Grachek III
Merchandise Accounting Controller
Darby Greek
Operations Bay Area Region
Nancy Griese
GMM - Corporate Foods
Martin Groleau
GMM - Non-Foods - Canadian Division
Peter Gruening
GMM-Costco Travel
William Hanson
GMM - Hardlines - Canadian Division
Anthony Fontana
Operations - Western Canada Region
Murray T. Fleming
GMM - Corporate Non-Foods
Christopher E. Fleming
Timothy K. Farmer
GMM - Foods - San Diego Region
Michael G. Casebier
Operations - Texas Region
Jeffrey M. Cole
Gasoline, Car Wash & Mini-labs
Julie L. Cruz
Operations - Southeast Region
Wendy Davis
-
Operations Midwest Region
Russ Decaire
GMM - Foods & Sundries -
GMM - Foods - Midwest Region
Northwest Region
Operations - Southeast Region
Gino Dorico
Operations - Eastern Canada Region
Heather Downie
Operations - Western Canada Region
Preston Draper
Country Manager - Korea
Debbie Ells
GMM-Softlines - Canadian Division
Liz Elsner
International Ecommerce
Frank Farcone
Operations - Los Angeles Region
Gerard J. Dempsey
Operations - Southeast Region
Chris Rylance
Doris E. Harley
Operations - Northwest Region
Timothy Haser
Operations - Bakery & Food Court
Daniel McMurray
Operations Midwest Region
David Messner
Real Estate Development
Sarah Mogk
Operations - Depots
Tim Murphy
GMM - Foods - Bay Area Region
Robert Murvin
GMM - Foods - Texas Region
Robert E. Nelson
Financial Planning & Investor Relations
Pietro Nenci
GMM - Foods & Sundries, Quality
Assurance, Food Safety & Business
Delivery Canadian Division
Patrick J. Noone
Country Manager - Australia
Frank Padilla
GMM-Corporate Produce &
Fresh Meat
Daniel Parent
Operations - Eastern Canada Region
Shawn Parks
Operations - Los Angeles Region
Michael Parrott
GMM-Corporate Non-Foods
Steven D. Powers
Operations - Southeast Region
Paul Pulver
Operations - Los Angeles Region
Susan McConnaha
GMM - Corporate Foods
Mark Maushund
GMM - Merchandising - Mexico
Tracy Mauldin-Avery
Operations - Northeast Region
Steve Mantanona
Information Systems
Western Region
Operations -
- Northwest Region
Graham E. Hillier
GMM - Ecommerce - Canadian Division
Daniel M. Hines
Financial Accounting Controller
GMM - Foods - Southeast Region
David Harruff
Mitzi Hu
Ross A. Hunt
Human Resources, Finance & IS -
Canadian Division
Jeff Ishida
Real Estate - Eastern Division
Arthur D. Jackson, Jr.
Administration & Community Giving
Harold E. Kaplan
Corporate Treasurer
Gary Kotzen
GMM Global Sourcing
William Koza
Operations - Midwest Region
Robert Leuck
GMM - Imports
4500 Still Creek Drive, Unit A
Burnaby, BC V5C 0E5, Canada
FSC
Japan Region
Additions to property and equipment..
1,029
150
124
755
Depreciation and amortization..
3,220
544
796
1,880
Operating income.
$112,640
$14,220
$17,943
$80,477
Total revenue..
2014
1,245
204
544
1,993
1,810
Operating income.
$105,156
$12,484
$17,179
$75,493
Total revenue..
2013
33,440
33,024
4,892
21,929
Total assets...
14,830
3,036
1,662
10,132
Net property and equipment.
6,203
756
6,435
23,397
$14,507
$17,341
$84,351
Total revenue..
2015
Total
Other
International
Operations
Canadian
Operations
United States
Operations
The Company and its subsidiaries are principally engaged in the operation of membership warehouses in
the U.S., Canada, Mexico, U.K., Japan, Australia, and Spain and through majority-owned subsidiaries in
Taiwan and Korea. The Company's reportable segments are largely based on management's organization
of the operating segments for operational decisions and assessments of financial performance, which
considers geographic locations. The material accounting policies of the segments are the same as
described in Note 1. All material inter-segment net sales and expenses have been eliminated in
computing total revenue and operating income. Certain operating expenses, predominantly stock-based
compensation, are incurred on behalf of the Company's Canadian and Other International operations, but
are included in the U.S. operations because those costs are not allocated internally and generally come
under the responsibility of the Company's U.S. management team.
Note 11-Segment Reporting
The Company does not believe that any pending claim, proceeding or litigation, either alone or in the
aggregate, will have a material adverse effect on the Company's financial position; however, it is possible
that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that
might be material to the results of an individual fiscal quarter.
The Company has received from the Drug Enforcement Administration subpoenas and administrative
inspection warrants concerning the Company's fulfillment of prescriptions related to controlled substances
and related practices. Offices of the United States Attorney in various districts have communicated to the
Company their belief that the Company has committed civil regulatory violations concerning these
subjects. The Company is seeking to cooperate with these processes.
The Company has received notices from most states stating that they have appointed an agent to
conduct an examination of the books and records of the Company to determine whether it has complied
with state unclaimed property laws. In addition to seeking the turnover of unclaimed property subject to
escheat laws, the states may seek interest, penalties, costs of examinations, and other relief. Certain
states have separately also made requests for payment by the Company concerning a specific type of
property, some of which have been paid in immaterial amounts.
award of costs and payments to class representatives. The Company has opposed the motion. On March
20, 2014, the Company filed a notice invoking a “most favored nation” provision under the settlement,
under which it seeks to adopt provisions in later settlements with certain other defendants, an invocation
that class counsel opposed. The motion was denied on January 23, 2015. Final judgment was entered on
September 22, 2015, and the Company intends to appeal.
69
69
$116,199
Operating income.
2,308
771
Total assets..
15,401
3,205
1,381
10,815
Net property and equipment.
2,393
671
3,608
148
Additions to property and equipment..
1,127
160
119
848
Depreciation and amortization.
3,624
545
1,574
487
3,053
Depreciation and amortization..
La Herradura 52760
Huixquilucan, Mexico
Costco Shareholder Relations
P. O. Box 30170
College Station, TX 77842-3170
Telephone: (800) 249-8982
TDD for Hearing Impaired: (800) 490-1493
Outside U.S.: (201) 680-6578
Website: https://www.computershare.com/investor
Stock Exchange Listing
The NASDAQ Global Select Market
Stock Symbol: COST
75
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COSTCO
WHOLESALE
Deborah Calhoun
www.fsc.org
Col. San Fernando
Boulevard Magnocentro #4
Mexico Region
28906 Getafe, Madrid, Spain
3-1-4 Ikegami-Shincho
Kawasaki-ku Kawasaki-shi
Kanagawa, 210-0832 Japan
Transfer Agent
Computershare
Korea Region
40, Iljik-ro
Gwangmyeong-si
Gyeonggi-do, 14347, Korea
Taiwan Region
MIX
255 Min Shan Street
Neihu, Taipei, Taiwan 114
17-21 Parramatta Rd.
Lidcombe, NSW, 2141, Australia
France Region
Route de l'Orme des Merisiers
Immeuble le Thalés
Parc des Algorithmes
91190 Saint-Aubin, France
Spain Region
Calle Agustín de Betancourt, 17
Polígono Empresarial Los
Gavilanes
Australia Region
Paper from
responsible sources
FSC® C101537
5,146
4,529
20,608
Total assets..
13,881
2,608
1,621
9,652
30,283
Net property and equipment...
807
186
1,090
Additions to property and equipment..
946
127
123
696
2,083
INTERNATIONAL DIVISION
United Kingdom Region
213 Hartspring Lane
Watford, England
WD25 8JS
The following table summarizes the percentage of net sales by major item category:
Sundries
Fourth
Quarter
(16 Weeks)
52 Weeks Ended August 30, 2015
First
Quarter
The two tables that follow reflect the unaudited quarterly results of operations for 2015 and 2014.
Note 12-Quarterly Financial Data (Unaudited)
(12 Weeks)
16% 17% 17%
11% 11% 11%
Foods.
14% 13% 13%
21% 21% 22%
2015 2014 2013
22% 22% 21%
70
70
Ancillary and Other.
Softlines....
Fresh Foods
Hardlines
16% 16% 16%
Operations - Texas Region
VICE PRESIDENTS
Information Systems
$25,233
561
550
549
$25,756
$24,468
Membership fees.
Net sales.
REVENUE
Total
(52 Weeks)
$34,755
768
Fourth
Quarter
(16 Weeks)
Second
Quarter
(12 Weeks)
(12 Weeks)
First
Quarter
52 Weeks Ended August 31, 2014
Note 12-Quarterly Financial Data (Unaudited) (Continued)
71
Kimberly F. Brown
(1) Includes a $57 tax benefit recorded in the second quarter in connection with the special cash dividend paid to employees
through the Company's 401(k) Retirement Plan.
$6.51
Third
Quarter
(12 Weeks)
$110,212
Total revenue.
25,017
8
24
Preopening expenses..
10,899
3,380
2,487
2,531
2,501
administrative
Selling, general and
98,458
31,037
22,554
23,043
21,824
Merchandise costs
OPERATING EXPENSES
2,428
112,640
35,523
25,794
26,306
$0.40
$0.40
(2)
$5.355
Basic...
COSTCO:
SHARE ATTRIBUTABLE TO
NET INCOME PER COMMON
$2,377
$767
$516
$598
$496
TO COSTCO.
NET INCOME ATTRIBUTABLE
(32)
(11)
(3)
(9)
(9)
noncontrolling interests.
Net income attributable to
2,409
778
519
$1.13
16
$1.36
$1.75
$0.355
PER COMMON SHARE
CASH DIVIDENDS DECLARED
442,716
439,455
438,835
442,404
440,070
443,132
442,896
442,210
Diluted
440,384
438,760
Basic...
Shares used in calculation (000's)
$5.37
$1.73
$1.17
$1.35
$1.12
Diluted
$5.41
$1.17
607
15
Operating income
437,970
Basic..
Shares used in calculation (000's)
$4.65
$1.58
$1.07
$1.05
$0.96
Diluted
439,776
$4.69
$1.08
$1.05
$0.97
Basic....
COSTCO:
SHARE ATTRIBUTABLE TO
NET INCOME PER COMMON
$2,058
$697
$1.59
439,446
437,875
438,693
DIRECTORS AND OFFICERS
Daniel J. Evans (a)(c)
Former President of Yahoo! Inc.
Principal of Deck3 Ventures LLC;
Susan L. Decker (a)
Co-Founder, Chairman of the Board, Costco
Jeffrey H. Brotman
72
$1.33
$0.355
$0.355
$0.31
$0.31
PER COMMON SHARE
CASH DIVIDENDS DECLARED
442,485
441,887
442,720
442,829
442,420
Diluted
$473
$463
$425
TO COSTCO..
659
TAXES
INCOME BEFORE INCOME
90
30
12
30
18
Interest income and other, net.
(113)
(35)
(25)
(26)
(27)
Interest expense.
OTHER INCOME (EXPENSE)
3,220
1,091
737
724
668
728
63
724
3,197
NET INCOME ATTRIBUTABLE
(30)
(8)
(6)
(10)
(6)
noncontrolling interests.
Net income attributable to
2,088
705
479
473
431
noncontrolling interests.
Net income including
1,109
381
245
255
228
Provision for income taxes.
1,086
505
(2) Includes the special cash dividend of $5.00 per share paid in February 2015.
Net income including
Richard A. Galanti
Executive Vice President, Chief Financial Officer
Jaime Gonzalez
Senior Vice President, General Manager – Mexico
Bruce Greenwood
Senior Vice President, General Manager - Los Angeles
Region
Robert D. Hicok
Senior Vice President, General Manager - San Diego Region
Dennis A. Hoover
Senior Vice President, General Manager - Bay Area Region
W. Craig Jelinek
Senior Vice President, General Manager - Midwest Region
President and Chief Executive Officer
Senior Vice President, Merchandising - Non-Foods &
Ecommerce
Dennis E. Knapp
Senior Vice President, Merchandising - Foods & Sundries
Paul W. Latham
Senior Vice President, Membership, Marketing & Services
Franz E. Lazarus
Executive Vice President, Administration
Jeffrey R. Long
Senior Vice President, General Manager - Northeast Region
Jeffrey B. Lyons
Senior Vice President, Merchandising - Fresh Foods
John D. McKay
James Klauer
John B. Gaherty
Senior Vice President, Merchandising – Non-Foods &
Ecommerce
Richard Delie
(a) Audit Committee
(b) Compensation Committee
(c) Nominating and Governance Committee
* 2015 Committee Chair
EXECUTIVE AND SENIOR OFFICERS
Senior Vice President, National Merchandising -
Canadian Division
Jeffrey H. Brotman
Chairman of the Board
Donald E. Burdick
Senior Vice President, International Ecommerce
Patrick J. Callans
Senior Vice President, Human Resources and
Risk Management
Roger A. Campbell
Richard Chang
Senior Vice President, International Operations
Senior Vice President, General Manager - Asia
Richard C. Chavez
Senior Vice President, Costco Wholesale Industries &
Business Development
Victor A. Curtis
Senior Vice President, Pharmacy
Executive Vice President, COO - Northern Division
Russ D. Miller
Senior Vice President, General Manager - Western
Canada Region
Ali Moayeri
Senior Vice President, Construction
Executive Vice President, COO - Merchandising
John D. Thelan
Senior Vice President, Depots & Traffic
Ron M. Vachris
Senior Vice President, Real Estate
Richard L. Webb
Senior Vice President, General Manager - Texas Region
Dennis R. Zook
Executive Vice President, COO - Southwest Division
& Mexico
73
Jeffrey Abadir
Operations - Bay Area Region
Claudine Adamo
GMM Corporate Non-Foods
Jim Andruski
GMM - Foods & Sundries - Western
Canada Region
Marc-André Bally
GMM - Business Centers -
Canadian Division
Bryan Blank
Operations - San Diego Region
Christopher Bolves
Operations - Northwest Region
Timothy Bowersock
Douglas W. Schutt
Executive Chairman of Frontier Communications
Board Committees
Senior Vice President, Information Systems
Senior Vice President, General Manager - Southeast Region
Paul G. Moulton
Executive Vice President, Chief Information Officer
James P. Murphy
noncontrolling interests.
Richard J. Olin
Senior Vice President, General Counsel
Mario Omoss
Senior Vice President, General Manager - Northwest Region
Stephen M. Pappas
Senior Vice President, General Manager - Europe
David S. Petterson
Senior Vice President, Corporate Controller
Joseph P. Portera
Executive Vice President, COO - Eastern & Canadian
Divisions and Chief Diversity Officer
Pierre Riel
Senior Vice President, General Manager - Eastern
Canada Region
Ginnie Roeglin
Senior Vice President, Ecommerce, Publishing &
Costco Travel
Timothy L. Rose
Executive Vice President, Ancillary Businesses,
Manufacturing & Business Centers
Yoram B. Rubanenko
James W. Rutherford
Maggie A. Wilderotter
Executive Vice President, COO - International
Co-Founder, former President and CEO, Costco
John W. Stanton
Interest expense.
OTHER INCOME (EXPENSE)
3,624
1,156
821
877
770
Operating income.
65
27
14
9
15
Preopening expenses.
11,445
3,499
2,579
2,671
2,696
administrative
Selling, general and
(26)
101,065
(27)
(124)
Chairman of Trilogy International Partners, Inc.;
Chairman of Trilogy Equity Partners
1,195
378
280
BOARD OF DIRECTORS
263 (1)
274
Provision for income taxes.
3,604
1,156
799
870
779
TAXES
INCOME BEFORE INCOME
104
40
9
20
35
Interest income and other, net.
(40)
31,096
(31)
23,897
Senator and Governor of the State of Washington
Richard A. Galanti
Executive Vice President and Chief Financial
Officer, Costco
Hamilton E. James
President and Chief Operating Officer,
The Blackstone Group
W. Craig Jelinek
Richard M. Libenson
A Founder, former Director and Executive Officer of
The Price Company
John W. Meisenbach
President of MCM, A Meisenbach Company
Andree T. Brien
Charles T. Munger(a)*(b)
Vice Chairman of the Board of Berkshire Hathaway Inc.;
Chairman of the Board of Daily Journal Corporation
Jeffrey S. Raikes (c)*
Founder and CEO of the Raikes Foundation; Former
CEO of the Bill and Melinda Gates Foundation
Jill S. Ruckelshaus (b)(c)
22,687
Director, various non-profit organizations
James D. Sinegal
Chairman, Daniel J. Evans Associates; Former U.S.
Second
Quarter
(12 Weeks)
President and Chief Executive Officer, Costco
26,866
Third
Quarter
(12 Weeks)
OPERATING EXPENSES
2,533
116,199
35,778
26,101
27,454
Total revenue..
785
584
Merchandise costs
582
23,385
582
$113,666
$34,993
$25,517
$26,872
$26,284
Membership fees..
Net sales..
REVENUE
Total
(52 Weeks)
Watford
Izumi
Markham
YUCATÁN (1)
We operate membership warehouses based on the concept that offering our members low prices on a limited
selection of nationally branded and private-label products in a wide range of merchandise categories will
produce high sales volumes and rapid inventory turnover. When combined with the operating efficiencies
achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-
service warehouse facilities, these volumes and turnover enable us to operate profitably at significantly lower
gross margins (net sales less merchandise costs) than most other retailers. We generally sell inventory before
we are required to pay for it, even while taking advantage of early payment discounts when available. To the
extent that sales increase and inventory turnover becomes more rapid, more inventory is financed through
payment terms provided by suppliers rather than by our working capital.
Caguas
Carolina
Thurrock
Kaminoyama
Iruma
London
North London
Wembly
Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983 in
Seattle, Washington. We are principally engaged in the operation of membership warehouses in the United
States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan, Australia, Spain, and through
majority-owned subsidiaries in Taiwan and Korea. Costco operated 715, 686, and 663 warehouses worldwide
at August 28, 2016, August 30, 2015, and August 31, 2014, respectively. Our common stock trades on the
NASDAQ Global Select Market, under the symbol "COST."
E. Bayamón
W. Bayamón
VERACRUZ (2)
Veracruz
Xalapa
BUSINESS OVERVIEW
Forward-Looking Statements
Certain statements contained in this Report constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. They include statements that address activities, events, conditions or
developments that we expect or anticipate may occur in the future and may relate to such matters as sales
growth, changes in comparable sales, cannibalization of existing locations by new openings, price or fee
changes, earnings performance, earnings per share, stock-based compensation expense, warehouse
openings and closures, capital spending, the effect of adopting certain accounting standards, future financial
reporting, financing, margins, return on invested capital, strategic direction, expense controls, membership
renewal rates, shopping frequency, litigation, modernization of information systems, and the demand for our
products and services. Forward-looking statements may also be identified by the words "believe," "project,"
"expect," "anticipate,” “estimate,” “intend,” “strategy,” “future," "opportunity,” “plan,” “may,” “should," "will,"
"would," "will be," "will continue," "will likely result,” and similar expressions. Such forward-looking statements
involve risks and uncertainties that may cause actual events, results, or performance to differ materially from
those indicated by such statements, including, without limitation, the factors set forth in the section titled "Risk
Factors", and other factors noted in the section titled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in the consolidated financial statements and related notes in this
Report. Forward-looking statements speak only as of the date they are made, and we do not undertake to
update them, except as required by law.
General
We report on a 52/53-week fiscal year, consisting of thirteen, four-week periods and ending on the Sunday
nearest the end of August. The first three quarters consist of three periods each, and the fourth quarter
consists of four periods (five weeks in the thirteenth period in a 53-week year). The material seasonal impact
in our operations is an increased level of net sales and earnings during the winter holiday season. References
to 2016, 2015, and 2014 relate to the 52-week fiscal years ended August 28, 2016, August 30, 2015, and
August 31, 2014, respectively.
We buy most of our merchandise directly from manufacturers and route it to a cross-docking consolidation
point (depot) or directly to our warehouses. Our depots receive large shipments from manufacturers and
quickly ship these goods to our individual warehouses. This process maximizes freight volume and handling
efficiencies, eliminating many of the costs associated with traditional multiple-step distribution channels.
Sunbury
Mérida
Imizu
Milton Keynes
Sheffield
Southampton
Gifu Hashima
Our average warehouse space is approximately 144,000 square feet, with newer units slightly larger. Floor
plans are designed for economy and efficiency in the use of selling space, the handling of merchandise, and
the control of inventory. Because shoppers are attracted principally by the quality of merchandise and the
Farnborough
Liverpool
Manchester
Oldham
Reading
Querétaro
QUINTANA ROO (1)
Cancún
SAN LUIS POTOSÍ (1)
San Luis Potosí
SINALOA (1)
Culiacan
Kitchener
SONORA (1)
Pewaukee
Pleasant Prairie
Sun Prairie
WASHINGTON, D.C. (1)
Washington, D.C.
Guelph
Hiroshima
Kanata
Hisayama
PUERTO RICO (4)
Kingston
Hitachinaka
Hermosillo
6
2014
Marketing activities for new locations generally include community outreach to local businesses in new and
existing markets and direct mail to prospective new members. Ongoing promotional programs primarily relate
to coupon mailers, The Costco Connection (a magazine we publish for our members), and promotional e-
mails to members.
Total cardholders......
2016
2015
2014
36,800
10,800
34,000 31,600
86,700
10,600 10,400
47,600 44,600 42,000
39,100 36,700
81,300
34,400
76,400
Paid cardholders are eligible to upgrade to an Executive membership in the U.S. and Canada, for an
additional annual fee of $55, and in Mexico and the U.K., for which the additional annual fee varies. Executive
members earn a 2% reward on qualified purchases (up to a maximum reward of $750 per year in our U.S.
and Canadian operations and varies in our Other International operations), which can be redeemed only at
Costco warehouses. This program also offers (except in Mexico) additional savings and benefits on various
business and consumer services, such as auto and home insurance, the Costco auto purchase program and
check printing services. The services are generally provided by third-parties and vary by state and country.
Executive members represented 39% of paid cardholders at the end of 2016, 2015, and 2014. Executive
members generally spend more than other members, and where executive memberships are offered the
percentage of our net sales attributable to these members continues to increase.
Household cards.
Labor
Full-time employees.
Part-time employees
Total employees..
2016
2015
126,000 117,000 112,000
92,000 88,000 83,000
218,000 205,000 195,000
Approximately 15,000 employees, in a minority of our locations, are represented by the International
Brotherhood of Teamsters. We consider our employee relations to be very good.
Competition
Our industry is highly competitive, based on factors such as price, merchandise quality and selection,
location, and customer service. We compete on a worldwide basis with global, national, and regional
8
Chiba New Town
Chubu
Our employee count was as follows:
availability of low prices, our warehouses are not elaborate. By strictly controlling the entrances and exits of
our warehouses and using a membership format, we have limited inventory losses (shrinkage) to amounts
well below those of typical discount retail operations.
Total paid members.
Gold Star
Our warehouses on average operate on a seven-day, 70-hour week. Gasoline operations generally have
extended hours. Because the hours of operation are shorter than other retailers, and due to other efficiencies
inherent in a warehouse-type operation, labor costs are lower relative to the volume of sales. Merchandise is
generally stored on racks above the sales floor and displayed on pallets containing large quantities, thereby
reducing labor required. In general, with variations by country, our warehouses accept certain debit and credit
cards, co-branded Costco credit cards, cash, or checks.
Our strategy is to provide our members with a broad range of high-quality merchandise at prices we believe
are consistently lower than elsewhere. We seek to limit specific items in each product line to fast-selling
models, sizes, and colors. We carry an average of approximately 3,700 active stock keeping units (SKUs) per
warehouse in our core warehouse business, significantly less than other broadline retailers. Many
consumable products are offered for sale in case, carton, or multiple-pack quantities only.
In keeping with our policy of member satisfaction, we generally accept returns of merchandise. On certain
electronic items, we typically have a 90-day return policy and provide, free of charge, technical support
services, as well as an extended warranty. Additional third-party warranty coverage is sold on certain
electronic items.
We offer merchandise in the following categories:
•
Foods (including dry foods, packaged foods, and groceries)
•
•
Sundries (including snack foods, candy, alcoholic and nonalcoholic beverages, and cleaning supplies)
Hardlines (including major appliances, electronics, health and beauty aids, hardware, and garden and
patio)
Softlines (including apparel and small appliances)
•
Business, including add-ons.
Fresh Foods (including meat, produce, deli, and bakery)
•
Other (including gas stations and pharmacy)
Ancillary businesses within or next to our warehouses provide expanded products and services and
encourage members to shop more frequently. We sell gasoline in all countries except Mexico, Korea, and
Taiwan and operated 508, 472, and 445 gas stations at the end of 2016, 2015, and 2014, respectively.
Ancillary businesses also include optical dispensing centers, food courts, and hearing-aid centers.
Our online businesses, which include e-commerce, business delivery, and travel, operate websites in all
countries except Japan, Australia, and Spain. They provide our members additional products and services,
typically not found in our warehouses. Net sales for our online business were approximately 4% of our net
sales in 2016 and 3% in 2015 and 2014, respectively.
We have direct buying relationships with many producers of national brand-name merchandise. We do not
obtain a significant portion of merchandise from any one supplier. We generally have not experienced
difficulty in obtaining sufficient quantities of merchandise, and believe that if one or more of our current
sources of supply became unavailable, we would be able to obtain alternative sources without substantial
disruption of our business. We also purchase private label merchandise, as long as quality and member
demand are comparable and the value to our members is greater as compared to brand-name items.
7
Certain financial information for our segments and geographic areas is included in Note 11 to the consolidated
financial statements included in this Report.
Membership
Our members may utilize their memberships at any of our warehouses worldwide. Gold Star memberships are
available to individuals; Business memberships are limited to businesses, including individuals with a
business license, retail sales license or other evidence of business existence. Business members have the
ability to add additional cardholders (add-ons). Add-ons are not available for Gold Star members. Our annual
fee for these memberships is $55 in our U.S. and Canadian operations and varies by country in our Other
International operations. All paid memberships include a free household card.
Our member renewal rate was 90% in the U.S. and Canada, and 88% on a worldwide basis in 2016. The
majority of members renew within six months following their renewal date. Therefore, our renewal rate is a
trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting
date.
Our membership was made up of the following (in thousands):
•
Gloucester
Anjou
Boisbriand
Boucherville
Amagasaki
Mobile
Huntsville
Hoover
ALABAMA (4)
U.S.A. (506)
2
723 LOCATIONS A
HAWAII
Montgomery
ALASKA
JAPAN
TAIWAN
SOUTH
KOREA
WHOLESALE
COSTCO
3
President and Chief Executive Officer
Craig Jelinek
AUSTRALIA
Cray Jelek
Ску
ALASKA (3)
Anchorage
N. Anchorage
Juneau
Avondale
Manteca
Los Feliz
Livermore
Lodi
La Quinta
Lancaster
Lake Elsinore
Laguna Niguel
Laguna Marketplace
ARIZONA (18)
La Mesa
La Habra
Inglewood
Irvine
Huntington Beach
Hayward Bus. Ctr.
Hawthorne Bus. Ctr.
Hayward
Gilbert
Chandler
Cave Creek Road
Lakewood
Merced
سلسلول
Янва
2014 2015 2016
Fiscal Year
2012 2013
0
10.40%
9.4%
9.6%
9.8%
9.81% 9.82%
Dear Costco Shareholders,
9.89%
10.07%
10.2%
10.4%
10.6%
Selling, General and
Administrative Expenses
At Fiscal Year End
2016
2015
10.0%
Jeff Brotman
Chairman of the Board
December 15, 2016
Forty years ago the membership warehouse club was born in a converted aircraft building in San Diego,
California under the Price Club name. That same building produced annual sales in fiscal 2016 of nearly
$250 million part of Costco's record sales of $116.1 billion - generated by 715 warehouses, each
averaging $159 million in annual sales, and operating globally in several countries throughout the world.
These results were achieved in a year of retail volatility, along with weaker foreign currencies and falling
prices in our gasoline operations - factors that together negatively impacted both sales and net income
by over 4%. Total sales in 2016 still increased two percent; and comparable sales, while flat year-over-
year on a reported basis, increased four percent excluding the impacts of gasoline prices and foreign
currencies. Net income remained strong in 2016, coming in at $2.35 billion or $5.33 per share.
Best Regards,
As always, we extend our best wishes to you and your families for a joyous holiday season and a happy,
healthy and prosperous New Year!
We appreciate the trust you, our shareholders, have placed in our management team; and on behalf of
our 225,000 employees around the world, we thank you for your continued support.
Preserving and enhancing our Costco culture and core values developed over the past forty years was a
pervasive theme throughout 2016, and remains a primary emphasis as Costco moves into its fifth decade
of operations. We seek to exceed the expectations of all our stakeholders. This is our challenge for 2017
and beyond; and we are confident that the entrepreneurial and innovative spirit at every level and in every
region of our global company will sustain our growth and allow us to continue to perform at the same high
levels achieved historically.
We continue to seek to build and operate our business in a responsible and sustainable manner. In this
regard, we are committed to enhancing the sustainability of our business, which involves many
dimensions, including our workforce, a continuing supply of merchandise, a supply chain that protects the
environment as well as the workers and animals in the supply chain, and the efficient use and reuse of
resources associated with our operations. Our members, employees, shareholders, and others are
increasingly focused on sustainability; as are we. An updated and expanded review of our current efforts
and activities, entitled "Sustainability Commitment", is available on our Costco.com website.
Earlier this year, Jill Ruckelshaus retired from our Board of Directors after twenty years of dedicated
service. We want to thank Jill for the significant contributions she made during her two decades on our
Board.
Our ancillary businesses, encompassing gas station operations, pharmacies, optical and hearing aid
centers, food courts, one-hour photo labs, car washes and travel are all key components of our
warehouses. These operations produced strong sales and profits performance in 2016; and helped drive
incremental sales throughout the warehouse. We include many of these ancillary offerings in new
warehouse openings, whenever possible; as well as add these operations to existing locations, as part of
planned remodels and relocations.
Costco's e-commerce business grew 15% in 2016 to nearly $4 billion in sales. We began the fiscal year
operating online sites in the U.S., Canada, the U.K. and Mexico; and launched our Korea and Taiwan
sites during this fiscal year. During the year and into fiscal 2017 we continue to focus on three primary
areas of our e-commerce business. First has been improving merchandising. We have added more
exciting, higher-end branded merchandise on an everyday basis; and we have improved our in-stock
availability on high velocity items, with more planned into the upcoming calendar year. Second, we are
continuing to improve the member experience and functionality of our site, including better search
capability, a streamlined checkout process, a simpler and more automated returns process and easier
member tracking of orders. Third, we have improved our distribution logistics, increasing the number of
distribution points from where we fulfill online orders, for closer and faster delivery times.
Kirkland Signature golf ball, and several apparel items including girls activewear and expanded womens
activewear. A number of new Kirkland Signature food items were also introduced, with a strong emphasis
on organics, including: nut bars, protein bars, quinoa, raw honey, Greek yogurt, and hummus, as well as
a couple of organic pet supplies. New branded items now offered at Costco include apparel items under
the Spyder brand name and kitchen and bath products under the Kohler name.
-
2
In 2016, our membership base grew by 7% to nearly 48 million member households, representing more
than 87 million Costco cardholders worldwide. Importantly, member loyalty remained strong in 2016. Our
U.S. and Canada members, representing over 85% of total Company sales, renewed at a 90% annual
rate; and members worldwide at an 88% annual rate. Total membership revenue in 2016 amounted to
$2.6 billion; and our Executive Member program continues to grow. It is now offered in the U.S., Canada,
Mexico, and the U.K., and represents nearly one-third of our member base and two-thirds of total
Company sales.
This past June, we successfully completed the transition to our new co-branded Citi/Visa Anywhere Card,
and began accepting all Visa cards in the U.S. and Puerto Rico. We are very excited about this new
program; and are pleased with the results to date. It significantly increases the cash rewards earned by
Costco members using the new card for purchases at Costco and elsewhere; and it lowers our effective
costs of card acceptance.
Now three months into the new fiscal year, our 2017 plans call for 31 new openings, and extending our
global footprint into two more countries: France and Iceland; bringing us to nearly 750 warehouses
operating worldwide by fiscal year end. All told, in fiscal 2017 we plan to open 16 new warehouses in the
U.S., eight in Canada, and one each in Taiwan, Korea, Japan, Australia, and Mexico; as well as France
(near Paris) and Iceland (near Reykjavik) openings.
Of the twenty-nine new locations opened in 2016, twenty-one of these were in the U.S., including four
Costco Business Centers. Two new locations were opened in both Canada and Japan; and one new
warehouse was opened in the U.K., Taiwan, Australia, and Spain. Last April, we opened in Tulsa,
Oklahoma, which had record new member sign-ups for a U.S. opening. We are now operating in 44
states and Puerto Rico, as well as in Canada, Mexico, the U.K., Spain, Korea, Japan, Taiwan, and
Australia. Additionally, we now operate ecommerce websites in the U.S., Canada, the U.K., Mexico,
Korea and Taiwan.
-
-
Costco's growth and evolution to the forefront of retailing has been accomplished with the same mission
and set of core values that we have adhered to since the opening of our first warehouse: to continually
provide quality goods and services to our members at the lowest possible prices. The execution of this
mission has become increasingly demanding as we expand globally, encounter aggressive and new
forms of competition – both domestically and abroad and comply with the varied rules and regulations
of each country in which we operate; all while taking care of our members and our employees, and
establishing and growing relationships with our many suppliers throughout the world.
A record $2.65 billion was invested in our business in 2016. Thirty-three warehouses including four
relocations were opened; our depot (distribution) and transportation systems were expanded; numerous
remodels and facilities upgrades were completed; and the upgrading of our IT infrastructure continued. In
addition, over $1.2 billion was returned to shareholders in the form of dividends ($746 million) and stock
buy-backs ($486 million).
On the merchandising front, we continue to expand our Kirkland Signature product offerings, as well as
offerings of brand-named items. This past year, new Kirkland Signature items included the launch of our
Mission Valley
Modesto
Montclair
S.W. Tucson
Westminster
Oxnard
N.W. Tucson
Timnath
Novato
Tucson
Thornton
Pacoima
Norwalk
Thomas Road
Northridge
Tempe
Sheridan
Scottsdale
Parker
Prescott
N. Phoenix
Superior
Phoenix Bus. Ctr.
Palm Desert
Alhambra
Corona
Culver City
Concord
Commerce Bus. Ctr.
Clovis
City of Industry
Citrus Heights
Chula Vista
Chino Hills
CALIFORNIA (122)
Chico
Carlsbad
Cal Expo
Burbank
S.W. Bakersfield
Bakersfield
Azusa
Antioch
Almaden
Carmel Mountain
Phoenix
Paradise Valley
Mesa
Westminster - Bus. Ctr.
Kapolei
Westlake Village
Kailua-Kona
Vista
Iwilei
Visalia
Hawaii Kai
Kauai
HAWAII (7)
Perimeter
Morrow Bus. Ctr.
Gwinnett
Mall of Georgia
Fort Oglethorpe
Vacaville
Vallejo
Van Nuys
Victorville
Tustin Ranch
Morena
Montebello
Town Center
Woodland
Maui
Woodland Hills
Glendale
S.E. Gilbert
Douglas County
Gypsum
S.W. Denver
Bus. Ctr.
Denver
East Colorado Springs
Colorado Springs
Twin Falls
Pocatello
Nampa
Aurora
Coeur d'Alene
Arvada
Boise
COLORADO (14)
IDAHO (5)
Yorba Linda
Waipio
2014
2013
2012
7.100
6%
7%
7%
8%
37
Price Changes
Price Changes
W/FX & Gas
6%
W/O FX & Gas
39
Comparable Sales Growth
Fiscal Year
At Fiscal Year End
2016
2015
2014
2013
10%
2012
35
4%
34.000
31.600
28.900
Gold Star Members
Membership
25
25
27 -26.700
6%
29
31
33
Millions
4%
-4%
-2%
0%
2%
29
2016
2015
2014
686
634
600
608
625
650
663
675
FINANCIAL HIGHLIGHTS
Warehouses in Operation
725
Number of Warehouses
Percent Increase
65
2 № 3 3 3 2 6 6
67
42
37
700
(723 at 12/31/16)
125
715
2013
2012
0
0
90
95
100 97.062
102.870
105
110
110.212
113.666
115
116.073
2,300
2,500
Net Sales
120
$ Billions
$ Millions
Cypress
Danville
Net Income
2,039
Fiscal Year
$130 $137 $131 $139 $146 $155 $160 $164 $162 $159
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
715
Totals
151
139 139
148
$94 106 122 135 144
$100 107 130 146 155 157 158 155
$86 83 99 116 128 136 144 146 147
140 135 144 151 160 168 175 175 174
$130
*First year sales annualized.
2011-2016 results include Mexico.
2007 & Before 512
2008
20
2009
13
2010
$103 120 130 136
21
2011
26
130
1
Millions
7.300
6.900
6.0
6.2
6.4
6.400
6.6
6.600
Percent of Net Sales
Business Members
2016
2014 2015
2013
2012
0
2,350
2,377
6.8
Fiscal Year
$105 115 124 128
15
2012
2013
2012
2016
2015
2014
2013
2012
0
2014
7.0
7.4
36.800
7.6
1,500
1,700
1,709
1,900
2,058
7,2
2015
2016
Fiscal Year
116
$99 109 113
26
2013
$108 109 115
30
2014
85
$83
23
2015
$87
29
2016
# of
Whses
Year
Opened
(Sales In Millions)
Average Sales Per Warehouse*
At Fiscal Year End
2,100
El Camino
Moreno Valley
Mountain View
Poway
Holbrook
Lawrence
S. Orlando
KENTUCKY (4)
Manhattan
OREGON (13)
S. Orlando
Bus. Ctr.
Kalispell
Missoula
Florence
Lexington
Pembroke Pines
Pompano Beach
NEBRASKA (2)
La Vista
Omaha
NEVADA (7)
Carson City
Melville
Albany
Nanuet
Nesconset
New Rochelle
Aloha
Palm Beach Gardens
Bend
E. Orlando
Helena
Eureka
Fairfield
Folsom
Fontana
Foster City
Fountain Valley
Fremont
Fresno
Commack
Santa Maria
Santa Rosa
Royal Palm Beach
Sarasota Square Mall
Tallahassee
GEORGIA (11)
Alpharetta
Augusta
Brookhaven
Cumberland Mall
Cumming
Louisville
Louisville II
LOUISIANA (3)
Baton Rouge
Lafayette
New Orleans
MARYLAND (10)
Arundel Mills
Beltsville
Brandywine
Columbia
Overland Park
Wichita
Santee
Signal Hill
Clackamas
Port Chester
Eugene
S OF DECEMBER 31, 2016
NEWFOUNDLAND
UNITED
KINGDOM
SPAIN
SCOTLAND (3)
Aberdeen
Edinburgh
10
3
PUERTO
Wilsonville
RICO
WALES (1)
Cardiff
SPAIN (2)
Getafe
Seville
CANADA (94)
ALBERTA (16)
E. Calgary
N. Calgary
N.W. Calgary
S. Calgary
Glasgow
Yonkers
Warrenton
Westbury
Centennial
Queens
Hillsboro
Henderson
Rego Park
Medford
Las Vegas Bus. Ctr.
Riverhead
Portland
Reno
Rochester
Roseburg
Sparks
Staten Island
Salem
Summerlin
Syracuse
Tigard
NEW HAMPSHIRE (1)
Nashua
El Centro
Edmonton
Tustin
Turlock
Maple Grove
Maplewood
Rochester
St. Louis Park
MISSOURI (5)
Independence
Kansas City
Manchester
S. St. Louis
St. Peters
MONTANA (5)
Billings
NEW JERSEY (19)
Brick Township
Bridgewater
N. Brunswick
Clifton
Edison
Flemington
MINNESOTA (8)
Baxter
Burnsville
Coon Rapids
Eden Prairie
Hackensack Bus. Ctr.
Hazlet
Manahawkin
Marlboro
Mount Laurel
Ocean Township
N. Plainfield
Princeton
Teterboro
Union
Wayne
Wharton
NEW MEXICO (3)
Albuquerque
E. Hanover
N.W. Albuquerque
Shelby Township
Wyoming
Livonia II
Fort Wayne
N.W. Indianapolis
S. Indianapolis
Merrillville
Mishawaka
IOWA (2)
Coralville
Des Moines
KANSAS (3)
Lenexa
Frederick
Gaithersburg
Glen Burnie
Wheaton
White Marsh
Woodmore Twn Ctr.
MASSACHUSETTS (6)
Avon
Danvers
Madison Heights
Pittsfield Township
Roseville
Dedham
W. Springfield
Waltham
MICHIGAN (13)
Auburn Hills
Bloomfield
Commerce Township
Grand Rapids
Green Oak Township
Kalamazoo
Livonia I
Everett
S.E. Albuquerque
NEW YORK (18)
Brooklyn
Tulsa
Bozeman
Naples
Santa Clara
Santa Clarita
Santa Cruz
Simi Valley
N. Fresno
OKLAHOMA (1)
Stockton
Sunnyvale
Garden Grove
Temecula
Gilroy
Torrance
Goleta
Tracy
Hanford
Fullerton
Toledo
Strongsville
Springdale
3
MÉXICO
11
NORTH CAROLINA (8)
Apex
Charlotte
Durham
Greensboro
Matthews
Raleigh
Wilmington
Winston-Salem
NORTH DAKOTA (1)
West Fargo
OHIO (12)
Avon
Boston Heights
Centerville
Columbus
N.W. Columbus
Deerfield Township
Easton
Mayfield Heights
Perrysburg
Hawthorne
35
N. Edmonton
Sudbury
Gig Harbor
Kelowna
Issaquah
Langford
Montgomeryville
Robinson
Sanatoga
West Homestead
Southlake
SOUTH CAROLINA (5)
Columbia
Greenville
Myrtle Beach
Spartanburg
SOUTH DAKOTA (1)
Sioux Falls
TENNESSEE (5)
Brentwood
Farragut
Charleston
Orland Park
East Peoria
Kamloops
Sonterra Park
Taichung
Tainan
Taoyuan
West Plano
PENNSYLVANIA (11)
Bucks County
Concordville
Cranberry
Harrisburg
King of Prussia
Lancaster
Lower Macungie
Fife - Bus. Ctr.
Sugar Land
The Woodlands
Rockwall
Covington
Everett
N.W. San Antonio
Selma
Federal Way
Courtenay
Willowbrook
Niles
Oak Brook
Lincoln Park
Melrose Park
Mettawa
Mount Prospect
Naperville
Lake Zurich
San Luis Obispo
San Marcos
Sand City
San Juan Capistrano
San Leandro
N.E. San Jose
San Jose
S. San Francisco
San Francisco
San Dimas
S.E. San Diego
CONNECTICUT (6)
San Diego Bus. Ctr.
Salinas
Sacramento
Roseville
Redwood City
Richmond
Rohnert Park
Redding
Rancho del Rey
Rancho Cucamonga
Rancho Cordova
San Bernardino
Brookfield
Enfield
Milford
Lake in the Hills
Chicago South Loop
Glenview
Bedford Park-Bus. Ctr.
Bloomingdale
Bolingbrook
ILLINOIS (19)
Miami Lakes
N. Miami Beach
Miami
Lantana
Kendall
E. Jacksonville
Fort Myers
Estero
Davie
Clearwater
Brandon
Altamonte Springs
Boca Raton
Norwalk
Waterbury
DELAWARE (1)
Christiana
FLORIDA (23)
Barrhaven
Barrie
Brampton
Burlington
Downsview
Etobicoke
New Britain
Toluca
E. Markham
Mississauga Central
Mississauga North
Mississauga South
Nepean
Newmarket
Oshawa
Peterborough
Richmond Hill
St. Catharines
Scarborough
Shih Chih
Interlomas
Brossard
Candiac
Chicoutimi
Red Deer
Rocky View
Sherwood Park
Drummondville
St. Albert
N. Riverside
Gatineau
Levis
BRITISH COLUMBIA (14)
Abbotsford
Burnaby
Marché Central
Montréal
Pointe Claire
Québec
Laval
Sainte-Foy
QUÉBEC (21)
Medicine Hat
Vaughan
Waterloo
Windsor
Kanazawa Seaside
Kawasaki
Kitakyushu
Kobe Seishin
Maebashi Gunma
Makuhari
Okotoks
Nonoichi
Shin Misato
Tamasakai
Tomiya
Tsukuba
Yawata Kyoto
Zama
S. Edmonton
W. Edmonton
Grande Prairie
Lethbridge
Sapporo
Saint-Hubert
Saint-Jérôme
Sherbrooke
Juarez
COAHUILA (1)
Saltillo
GUANAJUATO (3)
Celaya
León
León II
JALISCO (3)
Guadalajara
Guadalajara II
Puerto Vallarta
MÉXICO (4)
Arboledas
Terrebonne
Chiayi
Chihuahua
Trois-Rivières-Ouest
Vaudreuil
Chungli South
Hsinchu
SASKATCHEWAN (3)
Kaohsiung
Regina
Saskatoon
North Kaohsiung
Neihu
Chung Ho
CHIHUAHUA (2)
Cabo San Lucas
SUR (1)
SOUTH
KOREA (12)
Busan
Cheonan
Daegu
Daejeon
Euijeongbu
Gongse
Gwangmyeong
Ilsan
Sangbong
Ulsan
Yangjae
Yangpyung
TAIWAN (12)
Beitou
MÉXICO (36)
AGUASCALIENTES (1)
Aguascalientes
BAJA CALIFORNIA (4)
Ensenada
Mexicali
Tijuana
Tijuana II
BAJA CALIFORNIA
Satélite
Schaumburg
INDIANA (6)
Castleton
St. Charles
East Plano
S. Jordan
W. Bountiful
UTAH (11)
Pharr
Pearland
Lubbock
Lehi
Lewisville
Houston
Galleria
Frisco
N. Fort Worth
Fort Worth
El Paso
Humble
Bunker Hill
Cedar Park
Duncanville
Murray
Kennewick
Spanish Fork
Spokane
Sandy
Silverdale
Salt Lake City
Sequim
S. Ogden
St. George
Seattle
Marysville
Lynnwood Bus. Ctr.
Lynnwood
Lacey
Kirkland
Orem
N. Spokane
N.E. Memphis
S.E. Memphis
W. Nashville
TEXAS (27)
Arlington
Austin
S. Austin
COSTCO
Market for Costco Common Stock, Dividend Policy and Stock Repurchase Program...
Five Year Operating and Financial Highlights.
18
20
Management's Discussion and Analysis of Financial Condition and Results of Operations
Executive Officers and Corporate Governance...
Management's Reports .......
17
Reports of Independent Registered Public Accounting Firm...
Notes to Consolidated Financial Statements.
Directors and Officers of the Company.
Additional Information
21
33
34
Consolidated Financial Statements......
Annual
Report
2016
9
4
WHOLESALE
FISCAL YEAR ENDED AUGUST 28, 2016
2016
THE COMPANY
Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983 in
Seattle, Washington. In October 1993, Costco merged with The Price Company, which had pioneered the
membership warehouse concept in 1976, to form Price/Costco, Inc., a Delaware corporation. In January
1997, after the spin-off of most of its non-warehouse assets to Price Enterprises, Inc., the Company changed
its name to Costco Companies, Inc. On August 30, 1999, the Company reincorporated from Delaware to
Washington and changes its name to Costco Wholesale Corporation, which trades on the NASDAQ Global
Select Market under the symbol "COST."
As of December 2016, the company operated a chain of 723 warehouse in 44 states, Washington, D.C., and
Puerto Rico (506 locations), nine Canadian provinces (94 locations), Mexico (36 locations), the United
Kingdom (28 locations), Japan (25 Locations), Korea (12 locations), Taiwan (12 locations, through a 55%-
owned subsidiary), Australia (eight locations) and Spain (two locations). The Company's online business
operates websites in the U.S, Canada, U.K., Mexico, Korea and Taiwan.
6
CONTENTS
Letter to Shareholders
Map of Warehouse Locations
Business Overview.......
Risk Factors.
Properties: Warehouses, Administration and Merchandise Distribution Properties..........
2
Financial Highlights
West Valley
Puyallup
Redmond
VERMONT (1)
Colchester
VIRGINIA (17)
Chantilly
Charlottesville
Chesterfield
Fairfax
Fredericksburg
Harrisonburg
Adelaide
Chingford
SOUTH AUSTRALIA (1)
Chester
Bristol
North Lakes
Monterrey III
Tacoma
Sydney
Monterrey II
Monterrey
NUEVO LEÓN (3)
MORELOS (1)
Cuernavaca
Morelia
QUEENSLAND (1)
Coventry
PUEBLA (1)
VICTORIA (3)
Leicester
Leeds
Hayes
JAPAN (25)
Haydock
Ancaster
Gateshead
Ringwood
QUERÉTARO (1)
Moorabbin
ONTARIO (31)
Ajax
Derby
Melbourne
Puebla
Croydon
MICHOACÁN (1)
MÉXICO, D.F. (3)
Соара
Mixcoac
Polanco
Birmingham
KINGDOM (28)
Richmond
Prince George
Port Coquitlam
Langley
Nanaimo
Bellevue
Grafton
Grand Chute
Menemonee Falls
Middleton
New Berlin
Tukwila
Tumwater
Union Gap
Vancouver
E. Vancouver
E. Wenatchee
Woodinville
WISCONSIN (9)
Clarkston
ENGLAND (24)
Bellingham
Aurora Village
WASHINGTON (31)
Winchester
Sterling
Pentagon City
Potomac Mills
W. Henrico
Leesburg
Manassas
Mount Vernon
Newington
Newport News
Norfolk
Surrey
Vancouver
Burlington
MANITOBA (3)
Winnipeg
Willingdon
UNITED
Auburn
NEW SOUTH WALES (2)
AUSTRALIA (8)
S. Saskatoon
NOVA SCOTIA (2)
Dartmouth
Halifax
AUS CAP TER (1)
Canberra
NEWFOUNDLAND
Fredericton
Moncton
Saint John
NEW BRUNSWICK (3)
S. Winnipeg
AND LABRADOR (1)
St. John's
E. Winnipeg
We may not timely identify or effectively respond to consumer trends, which could negatively affect
our relationship with our members, the demand for our products and services, and our market share.
It is difficult to consistently and successfully predict the products and services our members will desire. Our
success depends, in part, on our ability to identify and respond to trends in demographics and consumer
preferences. Failure to timely identify or effectively respond to changing consumer tastes, preferences
(including those relating to sustainability of product sources and animal welfare) and spending patterns could
negatively affect our relationship with our members, the demand for our products and services and our market
share. If we are not successful at predicting our sales trends and adjusting our purchases accordingly, we
Imay have excess inventory, which could result in additional markdowns and reduce our operating
performance. This could have an adverse effect on net sales, gross margin and operating income.
If our merchandise offerings, including food and prepared food products for human consumption, drugs,
children's products, pet products, and durable goods, do not meet or are perceived not to meet applicable
safety standards or our members' expectations regarding safety, we could experience lost sales, increased
costs, and legal and reputational losses. The sale of these items involves the risk of health-related illness or
injury to our members. Such illnesses or injuries could result from tampering by unauthorized third parties,
product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other
agents, or residues introduced during the growing, manufacturing, storage, handling and transportation
phases, or faulty design. Our vendors are generally contractually required to comply with product safety laws,
and we are dependent on them to ensure that the products we buy comply with all safety standards. While we
are subject to governmental inspection and regulations and work to comply in all material respects with
applicable laws and regulations, we cannot be sure that consumption or use of our products will not cause a
health-related illness or injury in the future or that we will not be subject to claims, lawsuits, or government
investigations relating to such matters resulting in costly product recalls and other liabilities that could
adversely affect our business and results of operations. Even if a product liability claim is unsuccessful or is
not fully pursued, related negative publicity could adversely affect our reputation with existing and potential
members and our corporate and brand image, and these effects could be long term.
We might sell unsafe products, resulting in illness or injury to our members, harm to our reputation,
and litigation.
subject to additional rules, regulations, compliance requirements, and higher fraud losses. For certain
payment methods, we pay interchange and other related card acceptance fees, along with additional
transaction processing fees. We rely on third parties to provide payment transaction processing services,
including the processing of credit and debit cards, and our proprietary cash card, and it could disrupt our
business if these companies become unwilling or unable to provide these services to us. We are also subject
to payment card association rules and network operating rules, including data security rules, certification
requirements and rules governing electronic funds transfers, which could change over time. For example, we
are subject to Payment Card Industry Data Security Standards ("PCI DSS"), which contain compliance
guidelines and standards with regard to our security surrounding the physical and electronic storage,
processing and transmission of individual cardholder data. As of October 1, 2015, the payment card industry
shifted the liability of certain credit card transactions to retailers who are not able to process Europay,
MasterCard, Visa ("EMV”) chip-enabled card transactions. As a result, before our implementation of the EMV
technology is complete, we may be liable for costs incurred by payment card issuing banks or other third
parties for fraudulent transactions initiated through EMV chip-enabled cards before our implementation of
EMV chip technology. Implementation of the EMV chip technology and receipt of final certification is subject to
hardware installation, software modification, and certification with our third-party transaction service providers.
If we fail to comply with these rules or transaction processing requirements, we may not be able to accept
certain payment methods. In addition, if our internal systems are breached or compromised, we may be liable
for card re-issuance costs, subject to fines and higher transaction fees and lose our ability to accept credit
and/or debit card payments from our members, and our business and operating results could be adversely
affected.
We accept payments using a variety of methods, including cash and checks, a select variety of credit and
debit cards, and our proprietary cash card. As we offer new payment options to our members, we may be
We are subject to payment-related risks.
The use of data by our business and our business associates is regulated at the national and state or local
level in all of our operating countries. Privacy and information security laws and regulations change, and
compliance with them may result in cost increases due to necessary systems changes and the development
of new processes. If we or those with whom we share information fail to comply with these laws and
regulations, our reputation could be damaged, possibly resulting in lost future business, and we could be
subjected to additional legal risk as a result of non-compliance.
12
Our security measures may be undermined due to the actions of outside parties, employee error, internal or
external malfeasance, or otherwise, and, as a result an unauthorized party may obtain access to our data
systems and misappropriate business and personal information. Because the techniques used to obtain
unauthorized access, disable or degrade service, or sabotage systems change frequently and may not
immediately produce signs of intrusion, we may be unable to anticipate these techniques, timely discover or
counter them, or implement adequate preventative measures. Any such breach or unauthorized access could
result in significant legal and financial exposure, damage to our reputation, and potentially have an adverse
effect on our business.
11
If we do not successfully develop and maintain a relevant multichannel experience for our members,
our results of operations could be adversely impacted.
General economic factors, domestically and internationally, may adversely affect our business,
financial condition, and results of operations.
Inability to attract, train and retain highly qualified employees could adversely impact our business,
financial condition and results of operations.
Our success depends on the continued contributions of members of our senior management and other key
operations, merchandising and administrative personnel, and the loss of these contributions could have a
material adverse effect on our business. We must attract, train and retain a large and growing number of
qualified employees, while controlling related labor costs and maintaining our core values. Our ability to
control labor and benefit costs is subject to numerous external factors, including regulatory changes,
prevailing wage rates, and healthcare and other insurance costs. We compete with other retail and non-retail
businesses for these employees and invest significant resources in training and motivating them. There is no
assurance that we will be able to attract or retain highly qualified employees in the future, which could have a
material adverse effect on our business, financial condition and results of operations.
Market and Other External Risks
We face strong competition from other retailers and warehouse club operators, which could adversely
affect our business, financial condition and results of operations.
The retail business is highly competitive. We compete for members, employees, sites, products and services
and in other important respects with a wide range of local, regional and national wholesalers and retailers,
both in the United States and in foreign countries, including other warehouse club operators, supermarkets,
supercenters, department and specialty stores, gasoline stations, and internet retailers. Such retailers and
warehouse club operators compete in a variety of ways, including merchandise pricing, selection and
availability, services, location, convenience, store hours, and the attractiveness and ease of use of websites
and mobile applications. The evolution of retailing in online and mobile channels has improved the ability of
customers to comparison shop with digital devices, which has enhanced competition. Some competitors may
have greater financial resources, better access to merchandise and greater market penetration than we do.
Our inability to respond effectively to competitive pressures, changes in the retail markets and member
expectations could result in lost market share and negatively affect our financial results.
Higher energy and gasoline costs, inflation, levels of unemployment, healthcare costs, consumer debt levels,
foreign-currency exchange rates, unsettled financial markets, weaknesses in housing and real estate markets,
reduced consumer confidence, changes related to government fiscal and tax policies, sovereign debt crises,
and other economic factors could adversely affect demand for our products and services or require a change
in the mix of products we sell. Prices of certain commodity products, including gasoline and other food
products, are historically volatile and are subject to fluctuations arising from changes in domestic and
international supply and demand, labor costs, competition, market speculation, government regulations, taxes
and periodic delays in delivery. Rapid and significant changes in commodity prices may affect our sales and
profit margins. These factors could also increase our merchandise costs and selling, general and
administrative expenses, and otherwise adversely affect our operations and financial results. General
13
economic conditions can also be affected by the outbreak of war, acts of terrorism, or other significant national
or international events.
We receive, retain, and transmit personal information about our members and entrust that information to third-
party business associates, including cloud service providers that perform activities for us. Our warehouse and
online businesses depend upon the secure transmission of encrypted confidential information over public
networks, including information permitting cashless payments. A compromise of our security systems or those
of our business associates, that results in our members' information being obtained by unauthorized persons,
could adversely affect our reputation with our members and others, as well as our operations, results of
operations, financial condition and liquidity, and could result in litigation against us or the imposition of
penalties. In addition, a breach could require that we expend significant additional resources related to the
security of information systems and could disrupt our operations.
Vendors may be unable to supply us with quality merchandise at the right prices in a timely manner or
may fail to adhere to our high standards, resulting in adverse effects on our business, merchandise
inventories, sales, and profit margins.
Multichannel retailing is rapidly evolving and we must keep pace with changing member expectations and
new developments by our competitors. Our members, especially younger members, are increasingly using
computers, tablets, mobile phones, and other devices to shop and to interact with us through social media. As
part of our multichannel strategy, we are making technology investments in our websites and mobile
applications. If we are unable to make, improve, or develop relevant member-facing technology in a timely
manner, our ability to compete and our results of operations could be adversely affected.
If we do not maintain the privacy and security of member-related and other business information, we
could damage our reputation with members, incur substantial additional costs, and become subject to
litigation.
Total Warehouses
in Operation
Given the very high volume of transactions we process each year it is important that we maintain
uninterrupted operation of our business-critical computer systems. Our computer systems, including our back-
up systems, are subject to damage or interruption from power outages, computer and telecommunications
failures, computer viruses, internal or external security breaches, catastrophic events such as fires,
earthquakes, tornadoes and hurricanes, and errors by our employees. If our systems are damaged or cease
to function properly, we may have to make significant investments to fix or replace them, and we may suffer
interruptions in our operations in the interim. Any material interruption in our computer systems could have a
material adverse effect on our business and results of operations.
We depend heavily on our ability to purchase merchandise in sufficient quantities at competitive prices. As
these quantities continue to grow, we have no assurances of continued supply, pricing or access to new
products, and any vendor could at any time change the terms upon which it sells to us or discontinue selling
to us. Member demands may lead to out-of-stock positions of our merchandise leading to loss of sales and
profits.
Total
wholesalers and retailers, including supermarkets, supercenters, department and specialty stores, gasoline
stations, internet retailers, and operators selling a single category or narrow range of merchandise.
Competitors such as Wal-Mart, Target, Kroger, and Amazon.com are among our significant general
merchandise retail competitors. We also compete with warehouse club operations (primarily Wal-Mart's Sam's
Club and BJ's Wholesale Club), and nearly every major U.S. metropolitan area has multiple club operations.
Intellectual Property
We believe that, to varying degrees, our trademarks, trade names, copyrights, proprietary processes, trade
secrets, patents, trade dress, domain names and similar intellectual property add significant value to our
business and are important to our success. We have invested significantly in the development and protection
of our well-recognized brands, including the Costco WholesaleⓇ series of trademarks and our private label
brand, Kirkland Signature®. We believe that Kirkland Signature products are premium products, offered to our
members at prices that are generally lower than those for similar national brand products and that they help
lower costs, differentiate our merchandise offerings from other retailers, and generally earn higher margins.
We expect to continue to increase the sales penetration of our private label items.
We rely on trademark and copyright laws, trade secret protection, and confidentiality, license and other
agreements with our suppliers, employees and others to protect our intellectual property rights. The
availability and duration of trademark registrations vary by country; however, trademarks are generally valid
and may be renewed indefinitely as long as they are in use and their registrations are properly maintained.
RISK FACTORS
The risks described below could materially and adversely affect our business, financial condition and results
of operations. These risks are not the only risks that we face. We could also be affected by additional factors
that apply to all companies operating in the U.S. and globally, as well as other risks that are not presently
known to us or that we currently consider to be immaterial. These Risk Factors should be carefully reviewed
in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and related notes in this Report.
Business and Operating Risks
We are highly dependent on the financial performance of our U.S. and Canadian operations.
Our financial and operational performance is highly dependent on our U.S. and Canadian operations, which
comprised 87% and 84% of net sales and operating income in 2016, respectively. Within the U.S., we are
highly dependent on our California operations, which comprised 31% of U.S. net sales in 2016. Our California
market, in general, has a larger percentage of higher volume warehouses as compared to our other domestic
markets. Any substantial slowing or sustained decline in these operations could materially adversely affect our
business and financial results. Declines in financial performance of our U.S. operations, particularly in
California, and our Canadian operations could arise from, among other things: slow growth or declines in
comparable warehouse sales (comparable sales); negative trends in operating expenses, including increased
labor, healthcare and energy costs; failing to meet targets for warehouse openings; cannibalizing existing
locations with new warehouses; shifts in sales mix toward lower gross margin products; changes or
uncertainties in economic conditions in our markets, including higher levels of unemployment and depressed
home values; and failing to consistently provide high quality products and innovative new products to retain
our existing member base and attract new members.
We are currently making, and will continue to make, significant technology investments to improve or replace
critical information systems and processing. Failure to monitor and choose the right investments and
implement them at the right pace would be harmful. The risk of system disruption is increased when
significant system changes are undertaken, although we believe that our change management process will
mitigate this risk. Excessive technological change could impact the effectiveness of adoption, and could make
it more difficult for us to realize benefits from the technology. Targeting the wrong opportunities, failing to make
the best investments, or making an investment commitment significantly above or below our needs could
result in the loss of our competitive position and adversely impact our financial condition and results of
operations. Additionally, the potential problems and interruptions associated with implementing technology
initiatives could disrupt or reduce the efficiency of our operations in the short term. These initiatives might not
provide the anticipated benefits or may provide them on a delayed schedule or at a higher cost.
We may be unsuccessful implementing our growth strategy, including expanding our business, both
in existing markets and in new markets, which could have an adverse impact on our business,
financial condition and results of operations.
Our growth is dependent, in part, on our ability to acquire property and build or lease new warehouses and
regional depots. We compete with other retailers and businesses for suitable locations. Local land use and
other regulations restricting the construction and operation of our warehouses and depots, as well as local
community actions opposed to the location of our warehouses or depots at specific sites and the adoption of
local laws restricting our operations and environmental regulations, may impact our ability to find suitable
locations, and increase the cost of sites and of constructing, leasing and operating our warehouses and
depots. We also may have difficulty negotiating leases or purchase agreements on acceptable terms. In
addition, certain jurisdictions have enacted or proposed laws and regulations that would prevent or restrict the
operation or expansion plans of certain large retailers and warehouse clubs, including us, within their
jurisdictions. Failure to effectively manage these and other similar factors may affect our ability to timely build
or lease and operate new warehouses and depots, which could have a material adverse effect on our future
growth and profitability.
We seek to expand in existing markets to attain a greater overall market share. A new warehouse may draw
members away from our existing warehouses and adversely affect comparable sales performance and
member traffic at those existing warehouses.
We also intend to continue to open warehouses in new markets. Associated risks include: difficulties in
attracting members due to a lack of familiarity with us, attracting members of other wholesale club operators,
our lack of familiarity with local member preferences, and seasonal differences in the market. In addition,
entry into new markets may bring us into competition with new competitors or with existing competitors with a
large, established market presence. We cannot ensure that our new warehouses and new websites will be
profitably deployed and, as a result, our future profitability could be delayed or otherwise materially adversely
affected.
Our failure to maintain membership loyalty and brand recognition could adversely affect our
results of operations.
Membership loyalty and growth are essential to our business model. The extent to which we achieve growth
in our membership base, increase the penetration of our Executive members, and sustain high renewal rates
materially influences our profitability. Damage to our brands or reputation may negatively impact comparable
sales, diminish member trust, and reduce member renewal rates and, accordingly, net sales and membership
fee revenue, negatively impacting our results of operations.
In addition, we sell many products under our private label Kirkland Signature brand. Maintaining consistent
product quality, competitive pricing, and availability of our Kirkland Signature products for our members is
essential to developing and maintaining member loyalty. These products also generally carry higher margins
than national brand products carried in our warehouses and represent a growing portion of our overall sales.
If the Kirkland Signature brand experiences a loss of member acceptance or confidence, our sales and gross
margin results could be adversely affected.
Disruptions in our depot operations could adversely affect sales and member satisfaction.
We depend on the orderly operation of the merchandise receiving and distribution process, primarily through
our depots. Although we believe that our receiving and distribution process is efficient, unforeseen disruptions
in operations due to fires, tornadoes and hurricanes, earthquakes or other catastrophic events, labor issues or
other shipping problems may result in delays in the delivery of merchandise to our warehouses, which could
adversely affect sales and the satisfaction of our members.
We rely extensively on computer systems to process transactions, compile results, and manage our
business. Failure or disruption of our primary and back-up systems could adversely affect our
business. A failure to adequately update our existing systems and implement new systems could
harm our business and adversely affect our results of operations.
10
9
We purchase our merchandise from numerous domestic and foreign manufacturers and importers and have
thousands of vendor relationships. Our inability to acquire suitable merchandise on acceptable terms or the
loss of key vendors could negatively affect us. We may not be able to develop relationships with new vendors,
and products from alternative sources, if any, may be of a lesser quality or more expensive than those from
existing vendors. Because of our efforts to adhere to high quality standards for which available supply may be
limited, particularly for certain food items, the large volume we demand may not be consistently available.
Our suppliers (and those they depend upon for materials and services) are subject to risks, including labor
disputes, union organizing activities, financial liquidity, inclement weather, natural disasters, supply
constraints, and general economic and political conditions that could limit their ability to timely provide us with
acceptable merchandise. For these or other reasons, one or more of our suppliers might not adhere to our
quality control, legal, regulatory, labor, environmental or animal welfare standards. These deficiencies may
delay or preclude delivery of merchandise to us and might not be identified before we sell such merchandise
to our members. This failure could lead to recalls and litigation, and otherwise damage our reputation and our
brands, increase our costs, and otherwise adversely impact our business.
Low
We may pay for products we purchase for sale in our warehouses around the world with a currency other than
the local currency of the country in which the goods will be sold. Currency fluctuations may increase our cost
of goods and may not be passed on to members. Consequently, fluctuations in currency exchange rates may
adversely affect our results of operations.
17
MARKET FOR COSTCO COMMON STOCK
Market Information and Dividend Policy
Our common stock is traded on the NASDAQ Global Select Market under the symbol "COST." On October 4,
2016, we had 8,572 stockholders of record. The following table shows the quarterly high and low closing
prices as reported by NASDAQ for each quarter during the last two fiscal years and the quarterly cash
dividend declared per share of our common stock.
2016:
Fourth Quarter.
Third Quarter
Second Quarter..
First Quarter
At the end of 2016, our warehouses contained approximately 103.2 million square feet of operating floor
space: 73.3 million in the U.S.; 12.6 million in Canada; and 17.3 million in Other International locations.
Additionally, we operate regional depots for the consolidation and distribution of most merchandise shipments
to the warehouses, and various processing, packaging, and other facilities to support ancillary and other
businesses, which includes our online business. We operate 24 depots consisting of approximately 10.1
million square feet. Our executive offices are located in Issaquah, Washington, and we operate 18 regional
offices in the U.S., Canada and Other International locations.
2015:
Third Quarter.
Second Quarter....
First Quarter
(1) Includes a special cash dividend of $5.00 per share.
Price Range
High
Other
International
Cash
Dividends
Declared
..$ 169.04 $ 141.29 $
0.450
Fourth Quarter..
158.25
(1) Net of closings and relocations.
123
2015.
12
1
10
23
686
2016.
21
2
723
6
715
2017 (expected through 12/31/2016)...
5
3
8
723
Total
506
94
29
146.44
0.450
168.87
August 1-August 28, 2016.
Total fourth quarter..
Total Number
of Shares
Purchased
416,000
Average
Price Paid
per Share
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Program
Maximum Dollar
Value of Shares
that May Yet be
Purchased
under the
Program
$3,292
1111
234,000
July 4-July 31, 2016.
$146.08
154.81
66,000
$3,256
66,000
164.12
$3,245
140,000
167.34
140,000
Fluctuations in foreign exchange rates may adversely affect our results of operations.
During 2016, our international operations, including Canada, generated 27% and 39% of our net sales and
operating income, respectively. Our international operations have accounted for an increasingly larger portion
of our warehouses and we plan to continue expanding them. Our operations in countries other than the U.S.
are conducted primarily in the local currencies of those countries. Our consolidated financial statements are
denominated in U.S. dollars, and to prepare those financial statements we must translate the financial
statements of our international operations from local currencies into U.S. dollars using exchange rates for the
current period. Future fluctuations in currency exchange rates over time that are unfavorable to us may
adversely affect the financial performance of our Canadian and Other International operating segments and
have a corresponding adverse period-over-period effect on our results of operations. As we continue to
expand internationally, our exposure to fluctuations in foreign exchange rates may increase.
234,000
June 6-July 3, 2016
May 9-June 5, 2016
Period
143.28
0.400
163.10
138.30
0.400
146.89
132.71
0.400
153.14
143.05
0.400
155.92
137.31
5.355
(1)
140.01
121.35
0.355
Payment of future dividends is subject to declaration by the Board of Directors. Factors considered in
determining dividends include our profitability and expected capital needs. Subject to these qualifications, we
presently expect to continue to pay dividends on a quarterly basis.
Issuer Purchases of Equity Securities
The following table sets forth information on our common stock repurchase program activity for the fourth
quarter of fiscal 2016 (dollars in millions, except per share data):
663
29
416,000
3
At August 28, 2016 we operated 715 membership warehouses:
United States and Puerto Rico.
Canada.
Mexico
United Kingdom..........
Japan
Korea
Taiwan
Australia
PROPERTIES
Spain..
NUMBER OF WAREHOUSES
(1) 98 of the 147 leases are land-only leases, where Costco owns the building.
Own Land
and Building
407
80
36
22
11
Lease Land
and/or
Total
Warehouse Properties
16
Our business requires compliance with many laws and regulations. Failure to achieve compliance could
subject us to lawsuits and other proceedings, and lead to damage awards, fines, penalties, and remediation
costs. We are, or may become involved, in a number of legal proceedings and audits including grand jury
investigations, government and agency investigations, and consumer, employment, tort, unclaimed property
laws, and other litigation (see discussion of Legal Proceedings in Note 10 to the consolidated financial
statements included in this Report). We cannot predict with certainty the outcomes of these legal proceedings
and other contingencies, including environmental remediation and other proceedings commenced by
governmental authorities. The outcome of some of these legal proceedings, audits, unclaimed property laws,
and other contingencies could require us to take, or refrain from taking, actions which could negatively affect
our operations or could require us to pay substantial amounts of money, adversely affecting our financial
condition and results of operations. Additionally, defending against these lawsuits and proceedings may
involve significant expense and diversion of management's attention and resources.
Natural disasters or other catastrophic events could negatively affect our business, financial
condition, and results of operations.
9
Natural disasters, such as hurricanes, typhoons or earthquakes, particularly in California or Washington state,
where our centralized operating systems and administrative personnel are located, could negatively affect our
operations and financial performance. Such events could result in physical damage to one or more of our
properties, the temporary closure of one or more warehouses or depots, the temporary lack of an adequate
work force in a market, the temporary or long-term disruption in the supply of products from some local or
14
overseas suppliers, the temporary disruption in the transport of goods to or from overseas, delays in the
delivery of goods to our warehouses or depots within the countries in which we operate, and the temporary
reduction in the availability of products in our warehouses. Public health issues, whether occurring in the U.S.
or abroad, could disrupt our operations, disrupt the operations of suppliers or members, or have an adverse
impact on consumer spending and confidence levels. These events could also reduce demand for our
products or make it difficult or impossible to receive products from suppliers. We may be required to suspend
operations in some or all of our locations, which could have a material adverse effect on our business,
financial condition and results of operations.
Factors associated with climate change could adversely affect our business.
We use natural gas, diesel fuel, gasoline, and electricity in our distribution and warehouse operations.
Increased U.S. and foreign government and agency regulations to limit carbon dioxide and other greenhouse
gas emissions may result in increased compliance costs and legislation or regulation affecting energy inputs
that could materially affect our profitability. In addition, climate change could affect our ability to procure
needed commodities at costs and in quantities we currently experience. We also sell a substantial amount of
gasoline, the demand for which could be impacted by concerns about climate change and which also could
face increased regulation. Climate change may be associated with extreme weather conditions, such as more
intense hurricanes, thunderstorms, tornadoes, and snow or ice storms, as well as rising sea levels. Extreme
weather conditions increase our costs and resulting damage to our properties may not be fully insured.
Failure to meet market expectations for our financial performance could adversely affect the market
price and volatility of our stock.
Legal and Regulatory Risks
Our international operations subject us to risks associated with the legislative, judicial, accounting,
regulatory, political and economic factors specific to the countries or regions in which we operate
which could adversely affect our business, financial condition and results of operations.
During 2016, we operated 214 warehouses in eight countries outside of the U.S. and we plan to continue
expanding our international operations. Future operating results internationally could be negatively affected by
a variety of factors, many similar to those we face in the U.S., certain of which are beyond our control. These
factors include political conditions, economic conditions, regulatory constraints, currency regulations, and
other matters in any of the countries or regions in which we operate, now or in the future. Other factors that
may impact international operations include foreign trade, monetary and fiscal policies and the laws and
regulations of the U.S. and foreign governments, agencies and similar organizations, and risks associated
with having major facilities located in countries which have been historically less stable than the U.S. Risks
inherent in international operations also include, among others, the costs and difficulties of managing
international operations, adverse tax consequences, and greater difficulty in enforcing intellectual property
rights.
Changes in accounting standards and subjective assumptions, estimates and judgments by
management related to complex accounting matters could significantly affect our financial condition
and results of operations.
Accounting principles and related pronouncements, implementation guidelines, and interpretations we apply
to a wide range of matters that are relevant to our business, including, but not limited to, revenue recognition,
merchandise inventories, vendor rebates and other vendor consideration, impairment of long-lived assets,
15
self-insurance liabilities, and income taxes are highly complex and involve many subjective assumptions,
estimates and judgments by our management. Changes in these rules or their interpretation or changes in
underlying assumptions, estimates or judgments by our management could significantly change our reported
or expected financial performance.
Provisions for losses related to self-insured risks are generally based upon independent actuarially
determined estimates. The assumptions underlying the ultimate costs of existing claim losses can be highly
unpredictable, which can affect the liability recorded for such claims. For example, variability in health care
cost inflation rates inherent in these claims can affect the amounts recognized. Similarly, changes in legal
trends and interpretations, as well as changes in the nature and method of how claims are settled can impact
ultimate costs. Although our estimates of liabilities incurred do not anticipate significant changes in historical
trends for these variables, any changes could have a considerable effect upon future claim costs and
currently recorded liabilities and could materially impact our consolidated financial statements.
We could be subject to additional income tax liabilities.
We compute our income tax provision based on enacted tax rates in the countries in which we operate. As the
tax rates vary among countries, a change in earnings attributable to the various jurisdictions in which we
operate could result in an unfavorable change in our overall tax provision. Additionally, changes in the enacted
tax rates, adverse outcomes in tax audits, including transfer pricing disputes, or any change in the
pronouncements relating to accounting for income taxes could have a material adverse effect on our financial
condition and results of operations.
Significant changes in, or failure to comply with, federal, state, regional, local and international laws
and regulations relating to the use, storage, discharge and disposal of hazardous materials,
hazardous and non-hazardous wastes and other environmental matters could adversely impact our
business, financial condition and results of operations.
We are subject to a wide variety of federal, state, regional, local and international laws and regulations
relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous
wastes and other environmental matters. Failure to comply with these laws could result in significant costs to
satisfy environmental compliance, remediation or compensatory requirements, or the imposition of severe
penalties or restrictions on operations by governmental agencies or courts that could adversely affect our
business, financial condition and results of operations.
We are involved in a number of legal proceedings and audits and some of these outcomes could
adversely affect our business, financial condition and results of operations.
Building
(1)
We believe that the price of our stock generally reflects high market expectations for our future operating
results. Any failure to meet or delay in meeting these expectations, including our comparable sales growth
rates, membership renewal rates, gross margin, earnings, earnings per share, new warehouse openings, or
dividend or stock repurchase policies could cause the market price of our stock to decline.
94 501
Information related to our Equity Compensation Plans is incorporated herein by reference to Costco's
Proxy Statement filed with the Securities and Exchange Commission.
Equity Compensation Plans
(1) Our repurchase program is conducted under a $4,000 authorization approved by our Board of Directors in April 2015, which
expires in April 2019.
856,000
$153.34
856,000
$3,222
2012 and prior.
439
18
82
608
2013.
12
17
11
26
Total
634
2014.
87 608
Canada
3
Openings by Fiscal Year(1)
United States
-
11
111
61723
36
28
14
25
12
5
8
The following schedule shows warehouse openings for the past five fiscal years and expected warehouse
openings through December 31, 2016:
5
12
-
715
91
568
2
147
2
excluding the impact of changes in foreign
currency and gasoline prices..
BALANCE SHEET DATA
Net property and equipment
Total assets.
4 %
7%
6%
6%
6%
.$ 17,043
33,163
29,936
4,986
$ 15,401
33,017
4,852
$ 14,830 $ 13,881 $ 12,961
32,662
5,084
26,827
4,061
3%
Total Company..
3 %
5%
6%
7%
(3)%
(5)%
2%
9%
Increase in Total Company comparable sales
8%
(3)%
1%
3%
0 %
1 %
4%
6%
7%
(3)%
12,079
26
$ 12,303 $ 10,833
(4)
(3)
(1)
0
(1)
715
686
663
634
608
47,600
44,600
42,000
39,000
36,900
1 %
(2) Includes 50% of the results of Costco Mexico's operations in fiscal 2012 prior to the July acquisition of our former joint venture
partner's 50% equity interest. The remainder of fiscal 2012 and thereafter include 100% of Costco Mexico's results of operations.
(3) Includes net sales from warehouses and websites operating for more than one year. For fiscal 2013 and 2012, the prior year
includes the comparable 52 and 53 weeks, respectively.
17
$ 10,617
26
33
1,380
$ 12,361
Long-term debt, excluding current portion .....
Costco stockholders' equity
WAREHOUSE INFORMATION
Warehouses in Operation
Beginning of year.
Opened(4)
Closed (4)
End of year
MEMBERSHIP INFORMATION
Total paid members (000's).....
(1) Net sales less merchandise costs.
686
663
634
608
592
30
Other International..
Membership fees.
United States
Our U.S. internet website is www.costco.com. We make available through the Investor Relations section of
that site, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, Proxy Statements and Forms 3, 4 and 5, and any amendments to those reports, as soon as
reasonably practicable after filing such materials with, or furnishing such documents to, the Securities and
Exchange Commission (SEC). The information found on our website is not part of this or any other report filed
with or furnished to the SEC. In addition, the public may read and copy any materials we file with the SEC at
the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
also maintains an internet site that contains reports, proxy and information statements, and other information
regarding issuers, such as the Company, that file electronically with the SEC at www.sec.gov.
19
FIVE YEAR OPERATING AND FINANCIAL HIGHLIGHTS
The following table sets forth information concerning our consolidated financial condition, operating results,
and key operating metrics. This information should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations, included in this Report, and our consolidated
financial statements and notes thereto, included in this Report.
SELECTED FINANCIAL DATA
(dollars in millions, except per share data)
Aug. 28,
2016
As of and for the year ended
(52 weeks)
Aug. 30,
2015
(52 weeks)
Aug. 31,
2014
(52 weeks)
Sept. 1,
2013
(52 weeks)
Sept. 2,
2012
(53 weeks)
RESULTS OF OPERATIONS
Net sales.
116,073
2,646
$ 113,666
2,533
Available Information
$ 110,212
2,428
The graph assumes the investment of $100 in Costco common stock, the S&P 500 Index and the Peer
Group Index on August 28, 2011 and reinvestment of all dividends.
Costco Wholesale Corporation
(4) Includes warehouse relocations and closures.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG COSTCO WHOLESALE CORPORATION,
S&P 500 INDEX AND PEER GROUP INDEX
Dollars
300
250
200
150
100
50
0
8/28/11
9/2/12
9/1/13
8/31/14
8/30/15
8/28/16
--Peer Group Index ----S&P 500
Canada.
$ 102,870
2,286
2,075
2,058
2,039
1,709
Net income per diluted common share
attributable to Costco
5.33
5.37
4.65
4.63
3.89
Cash dividends declared per common
share.
1.70
6.51
1.33
8.17
1.03
Changes in comparable sales (3)
2,377
$ 97,062
2,350
3,220 $ 3,053 $ 2,759
Gross margin (1) as a percentage of net sales
11.35 %
11.09 %
10.66%
10.62%
10.55%
Selling, general and administrative
expenses as a percentage of net sales.....
10.40 %
10.07 %
9.89%
9.82%
9.81%
Operating income
3,672
$
3,624
$
Net income attributable to Costco (2)
20
Changes in net sales:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SG&A expenses as a percentage of net sales increased 18 basis points, mostly due to the negative impact of
gasoline price deflation on net sales. Excluding this impact, SG&A expenses as a percentage of adjusted net
sales were 9.82%, an improvement of seven basis points. This was due to lower warehouse operating costs
of 16 basis points, primarily from improvements in payroll expenses in our core business as a result of
leveraging increased sales. This improvement was partially offset by higher central operating costs of five
basis points, predominantly due to increased depreciation and service contract costs associated with our
information systems modernization projects that were placed into service during the year, primarily incurred by
our U.S. operations. Higher stock compensation expense also negatively impacted our SG&A expenses by
four basis points, due to an appreciation in the trading price of our stock at the time of grant. Changes in
foreign currencies relative to the U.S. dollar decreased our SG&A expenses by approximately $282 in 2015.
Preopening Expenses
Preopening expenses
Warehouse openings, including relocations
United States
Canada.
Other International..
2016
2015
2014
$ 78 $ 65 $ 63
25
14
17
2
2015 vs. 2014
1
6
11
10
33
26
30
Total warehouse openings, including relocations..........
Preopening expenses include costs for startup operations related to new warehouses, including relocations,
development in new international markets, and expansions at existing warehouses. Preopening expenses
vary due to the number of warehouse openings, the timing of the opening relative to our year-end, whether
the warehouse is owned or leased, and whether the opening is in an existing, new, or international market.
Interest Expense
Interest expense
2016
2015
2014
133 $
3
25
25
SG&A expenses as a percentage of net sales increased 33 basis points compared to 2015. Excluding the
negative impact of gasoline price deflation on net sales, SG&A expenses as a percentage of adjusted net
sales were 10.20%, an increase of 13 basis points. This was largely due to: higher central operating costs of
six basis points, predominantly due to costs associated with our information systems modernization, including
increased depreciation for projects placed in service, incurred by our U.S. operations; and higher stock
compensation expense of four basis points, due to appreciation in the trading price of our stock at the time of
grant. Our investment in modernizing our information systems is ongoing and expected to continue to
negatively impact SG&A expenses. Charges for non-recurring legal and regulatory matters during 2016
negatively impacted SG&A expenses by two basis points. Our warehouse operating costs were higher by one
basis point due to higher payroll and employee benefit costs, primarily health care, in our U.S. operations.
This increase was partially offset by lower payroll expense as a percentage of net sales in our Canadian
operations. Changes in foreign currencies relative to the U.S. dollar decreased our SG&A expenses by
approximately $211 in 2016.
$
12,601
$
11,754
11.35%
11.09%
10.66%
The gross margin of our core merchandise categories (food and sundries, hardlines, softlines and fresh
foods), when expressed as a percentage of core merchandise sales (rather than total net sales), increased 13
basis points, primarily due to increases in these categories other than fresh foods. This measure eliminates
the impact of changes in sales penetration and gross margins from our warehouse ancillary and other
businesses.
Total gross margin percentage increased 26 basis points compared to 2015. Excluding the impact of gasoline
price deflation on net sales, gross margin as a percentage of adjusted net sales was 11.14%, an increase of
five basis points. A larger LIFO benefit in 2016 compared to 2015 positively contributed three basis points.
The LIFO benefit resulted largely from lower costs for merchandise inventories, primarily in food and sundries
and gasoline. Our core merchandise categories positively contributed one basis point, primarily due to an
increase in hardlines, partially offset by food and sundries due to a decrease in sales penetration. Warehouse
24
24
ancillary and other business gross margin positively contributed one basis point, primarily due to hearing aids
and e-commerce businesses, partially offset by our gasoline business. Changes in foreign currencies relative
to the U.S. dollar negatively impacted gross margin by approximately $286 in 2016.
Gross margin on a segment basis, when expressed as a percentage of the segment's own sales and
excluding the impact of gasoline price deflation on net sales (segment gross margin percentage), increased
in our U.S. operations, predominately due to a positive contribution from our core merchandise categories,
primarily hardlines and softlines, and the LIFO benefit discussed above. The segment gross margin
percentage in our Canadian operations decreased, primarily due to a decrease in all core merchandise
categories, except hardlines, partially offset by increases in warehouse ancillary and other businesses,
primarily pharmacy and e-commerce businesses. The segment gross margin percentage in Other
International operations decreased in all merchandise categories, except fresh foods, which was higher.
2015 vs. 2014
The gross margin of our core merchandise categories (food and sundries, hardlines, softlines and fresh
foods), when expressed as a percentage of core merchandise sales, increased five basis points, primarily due
to increases in softlines and food and sundries, partially offset by a decrease in fresh foods.
Our gross margin percentage increased 43 basis points compared to 2014 and most of the improvement was
derived from the impact of gasoline price deflation on net sales. Excluding this impact, gross margin as a
percentage of adjusted net sales was 10.81%, an increase of 15 basis points from the prior year. This
increase was predominantly due to: an increase in our warehouse ancillary and other business gross margin
of 23 basis points, due primarily to our gasoline business; partially offset by a negative contribution from core
merchandise categories of 12 basis points, as a result of a decrease in their sales penetration. A LIFO benefit
in 2015 compared to a charge in 2014 positively contributed five basis points. The LIFO benefit resulted
largely from lower costs of gasoline. Changes in foreign currencies relative to the U.S. dollar negatively
impacted gross margin by approximately $359 in 2015.
Segment gross margin percentage increased in our U.S. operations, primarily due to our gasoline business
and the LIFO benefit discussed above. The segment gross margin percentage in our Canadian operations
decreased across our core merchandise categories. The segment gross margin percentage in our Other
International operations decreased, primarily in food and sundries.
9.89%
10.07%
10,899
$
11,445
$
124 $
12,068
10.40%
2015
2016
2016 vs. 2015
SG&A expenses as a percentage of net sales.
SG&A expenses.
Selling, General and Administrative Expenses
2014
13,172
113
Interest Income and Other, Net
34.7%
In 2015, our provision was favorably impacted by net tax benefits of $68, primarily due to a tax benefit
recorded in connection with a special cash dividend paid to employees through our 401(K) Retirement Plan.
Dividends paid on these shares are deductible for U.S. income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our significant sources and uses of cash and cash equivalents:
Net cash provided by operating activities.....
Net cash used in investing activities.
Net cash used in financing activities.
2016
2015
2014
3,292 $
(2,345)
(2,419)
4,285 $
(2,480)
3,984
(2,093)
(2,324)
(786)
Our primary sources of liquidity are cash flows generated from warehouse operations, cash and cash
equivalents and short-term investments. Cash and cash equivalents and short-term investments were $4,729
and $6,419 at the end of 2016 and 2015, respectively. Of these balances, approximately $1,071 and $1,243
at the end of 2016 and 2015, respectively, represented unsettled credit and debit card receivables. These
receivables generally settle within one week. Cash and cash equivalents were positively impacted by changes
in exchange rates by $50 in 2016 and negatively impacted by $418 and $11 in 2015 and 2014, respectively.
We have not provided for U.S. deferred taxes on cumulative undistributed earnings of certain non-U.S.
consolidated subsidiaries, including the remaining undistributed earnings of our Canadian operations,
because our subsidiaries have invested or will invest the undistributed earnings indefinitely, or the earnings, if
repatriated would not result in an adverse tax consequence. Although we have historically asserted that
certain non-U.S. undistributed earnings will be permanently reinvested, we may repatriate such earnings to
the extent we can do so without an adverse tax consequence. If we determine that such earnings are no
longer indefinitely reinvested, deferred taxes, to the extent required and applicable, are recorded at that time.
During 2016, we repatriated the earnings in our Canadian operations that in 2015 were no longer considered
indefinitely reinvested. Subsequent to the end of the fiscal year, we determined that a portion of the
undistributed earnings in our Canadian operations could be repatriated without adverse tax consequences.
Accordingly, we no longer consider that portion to be indefinitely reinvested.
1,109
Management believes that our cash position and operating cash flows will be sufficient to meet our liquidity
and capital requirements for the foreseeable future. We believe that our U.S. current and projected asset
position is sufficient to meet our U.S. liquidity requirements and have no current plans to repatriate for use in
the U.S. cash and cash equivalents and short-term investments held by these non-U.S. consolidated
subsidiaries whose earnings are considered indefinitely reinvested. Cash and cash equivalents and short-
term investments held at these subsidiaries with earnings considered to be indefinitely reinvested totaled
$1,535 at August 28, 2016.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $3,292 in 2016, compared to $4,285 in 2015. Our cash flow
provided by operations is primarily derived from net sales and membership fees. Cash flow used in operations
generally consists of payments to our merchandise vendors, warehouse operating costs including payroll and
employee benefits, credit and debit card processing fees, and utilities. Cash used in operations also includes
payments for income taxes. The decrease in net cash provided by operating activities for 2016 when
compared to 2015 was primarily due to accelerated vendor payments of approximately $1,700 made in the
last week of fiscal 2016, in advance of implementing our modernized accounting system at the beginning of
fiscal 2017.
Cash Flows from Investing Activities
Net cash used in investing activities totaled $2,345 in 2016 compared to $2,480 in 2015. Cash flow used in
investing activities is primarily related to funding warehouse expansion and remodeling activities. Net cash
flows from investing activities also included purchases and maturities of short-term investments.
Capital Expenditure Plans
We opened 29 new warehouses and relocated four warehouses in 2016 and plan to open up to 31 new
warehouses and relocate up to three warehouses in 2017. Our primary requirement for capital is acquiring
land, buildings, and equipment for new and remodeled warehouses. To a lesser extent, capital is required for
initial warehouse operations, the modernization of our information systems, and working capital. In 2016 we
spent $2,649 on capital expenditures, and it is our current intention to spend approximately $2,600 to $2,800
during fiscal 2017. These expenditures are expected to be financed with cash from operations, existing cash
and cash equivalents, and short-term investments. There can be no assurance that current expectations will
be realized and plans are subject to change upon further review of our capital expenditure needs.
Cash Flows from Financing Activities
Net cash used in financing activities totaled $2,419 in 2016 compared to $2,324 in 2015. The primary uses of
cash in 2016 were related to the $1,200 repayment of our 0.65% Senior Notes in December 2015, dividend
payments of $746, repurchases of common stock, and payment of withholding taxes on stock-based awards.
Net cash used in financing activities in 2015 included a $5.00 per share special cash dividend, totaling
approximately $2,201, partially offset by the issuance of $1,000 in Senior Notes.
In March 2016, our Japanese subsidiary issued approximately $103 of 0.63% Guaranteed Senior Notes
through a private placement. Additionally, in June 2016, our Japanese subsidiary issued approximately $93 of
zero percent Guaranteed Senior Notes through a private placement. Interest on both issuances are payable
semi-annually, and principal is due in March 2026 and June 2021, respectively.
Stock Repurchase Programs
During 2016 and 2015, we repurchased 3,184,000 and 3,456,000 shares of common stock, at an average
price of $149.90 and $142.87, totaling approximately $477 and $494, respectively. The remaining amount
available to be purchased under our approved plan was $3,222 at the end of 2016. Purchases are made from
time-to-time, as conditions warrant, in the open market or in block purchases and pursuant to plans under
SEC Rule 10b5-1. Repurchased shares are retired, in accordance with the Washington Business Corporation
Act.
Dividends
Cash dividends paid in 2016 totaled $1.70 per share, as compared to $6.51 per share in 2015, which included
a special cash dividend of $5.00 per share. In April 2016, our Board of Directors increased our quarterly cash
dividend from $0.40 to $0.45 per share.
28
27
1,195 $
33.2%
2014
2015
Interest income...
Foreign-currency transaction gains, net....
Other, net.
Interest income and other, net..
2016 vs. 2015
2016
2015
2014
41 $
28
50 $
47
52
26
11
7
12
.$
80 $
34.3%
1,243
2016
Effective tax rate
Provision for income taxes
Provision for Income Taxes
Interest expense in 2016 primarily relates to Senior Notes issued by the Company (described in further detail
under the heading "Cash Flows from Financing Activities" and in Note 4 to the consolidated financial
statements included in this Report). The increase in interest expense is primarily due to the Senior Notes
issued in February 2015.
The increase in net foreign-currency transaction gains was primarily attributable to favorable mark-to-market
adjustments for forward foreign exchange contracts compared to the prior year. The increase was also
attributable to net gains on the revaluation or settlement of monetary assets and liabilities during the year.
of monetary assets and liabilities by our Canadian and Other International operations. See Derivatives and
Foreign Currency sections in Note 1 of this Report.
26
26
The decrease in interest income in 2016 is attributable to lower average cash and investment balances, due
in part to the payment of the outstanding principal balance and interest on the 0.65% Senior Notes in the
second quarter of 2016 (see discussion in Note 4 of this Report). Foreign-currency transaction gains, net
include mark-to-market adjustments for forward foreign-exchange contracts and the revaluation or settlement
90
104 $
2015 vs. 2014
98,458
101,065
102,901
2016
2015
2014
Net Sales..
U.S..
Canada..
.$ 116,073
$ 113,666
$
110,212
3 %
5 %
7%
(2)%
Net Sales
(3)%
Other International..
4 %
2 %
14%
Total Company
2 %
3 %
7%
Changes in comparable sales:
U.S..
Canada.
Other International.
Total Company.
Increases in comparable sales excluding the impact
of changes in foreign currency and gasoline prices:
5%
RESULTS OF OPERATIONS
22
22
(amounts in millions, except per share, membership fee, and warehouse count data)
OVERVIEW
We believe that the most important driver of our profitability is sales growth, particularly comparable sales
growth. We define comparable sales as sales from warehouses open for more than one year, including
remodels, relocations and expansions, as well as online sales related to websites operating for more than one
year. Comparable sales growth is achieved through increasing shopping frequency from new and existing
members and the amount they spend on each visit (average ticket). Sales comparisons can also be
particularly influenced by certain factors that are beyond our control: fluctuations in currency exchange rates
(with respect to the consolidation of the results of our international operations); and changes in the cost of
gasoline and associated competitive conditions (primarily impacting our U.S. and Canadian operations). The
higher our comparable sales exclusive of these items, the more we can leverage certain of our selling,
general and administrative expenses, reducing them as a percentage of sales and enhancing profitability.
Generating comparable sales growth is foremost a question of making available to our members the right
merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long term.
Another substantial factor in sales growth is the health of the economies in which we do business, especially
the United States. Sales growth and gross margins are also impacted by our competition, which is vigorous
and widespread, across a wide range of global, national and regional wholesalers and retailers. While we
cannot control or reliably predict general economic health or changes in competition, we believe that we have
been successful historically in adapting our business to these changes, such as through adjustments to our
pricing and to our merchandise mix, including increasing the penetration of our private label items.
Our philosophy is to provide our members with quality goods and services at the most competitive prices. We
do not focus in the short term on maximizing prices charged, but instead seek to maintain what we believe is
a perception among our members of our "pricing authority" - consistently providing the most competitive
values. Our investments in merchandise pricing can, from time to time, include reducing prices on
merchandise to drive sales or meet competition and holding prices steady despite cost increases instead of
passing the increases on to our members, all negatively impacting near-term gross margin as a percentage of
net sales (gross margin percentage). We believe that our gasoline business draws members but it generally
has a significantly lower gross margin percentage relative to our non-gasoline business. A higher penetration
of gasoline sales will generally lower our gross margin percentage. Rapidly changing gasoline prices may
significantly impact our near-term net sales growth. Generally, rising gasoline prices benefit net sales growth
which, given the higher sales base, negatively impacts our gross margin percentage but decreases our
selling, general and administrative expenses as a percentage of net sales. A decline in gasoline prices has
the inverse effect.
We also achieve sales growth by opening new warehouses. As our warehouse base grows, available and
desirable potential sites become more difficult to secure, and square footage growth becomes a
comparatively less substantial component of growth. The negative aspects of such growth, however, including
lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing
warehouses when openings occur in existing markets, are increasingly less significant relative to the results of
our total operations. Our rate of square footage growth is generally higher in foreign markets, due to the
smaller base in those markets, and we expect that to continue. Our online business growth both domestically
and internationally has also increased our sales.
Our membership format is an integral part of our business model and has a significant effect on our
profitability. This format is designed to reinforce member loyalty and provide continuing fee revenue. The
extent to which we achieve growth in our membership base, increase penetration of our Executive members,
and sustain high renewal rates, materially influences our profitability.
Our financial performance depends heavily on our ability to control costs. While we believe that we have
achieved successes in this area historically, some significant costs are partially outside our control, most
particularly health care and utility expenses. With respect to expenses relating to the compensation of our
employees, our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that
achieving our longer-term objectives of reducing employee turnover and enhancing employee satisfaction
21
24
requires maintaining compensation levels that are better than the industry average for much of our workforce.
This may cause us, for example, to absorb costs that other employers might seek to pass through to their
workforces. Because our business is operated on very low margins, modest changes in various items in the
income statement, particularly merchandise costs and selling, general and administrative expenses, can have
substantial impacts on net income.
Our operating model is generally the same across our U.S., Canada, and Other International operating
segments (see Note 11 to the consolidated financial statements included in this Report). Certain countries in
the Other International segment have relatively higher rates of square footage growth, lower wages and
benefit costs as a percentage of country sales, and/or less or no direct membership warehouse competition.
Additionally, we operate our lower-margin gasoline business in all countries except Mexico, Korea, and
Taiwan.
In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies
relative to the U.S. dollar, which are references to the differences between the foreign-exchange rates we use
to convert the financial results of our international operations from local currencies into U.S. dollars for
financial reporting purposes. This impact of foreign-exchange rate changes is calculated based on the
difference between the current period's currency exchange rates and that of the comparable prior period. The
impact of changes in gasoline prices on net sales is calculated based on the difference between the current
period's average price per gallon sold and that of the comparable prior period.
Our fiscal year ends on the Sunday closest to August 31. Fiscal years 2016, 2015 and 2014 were 52-week
fiscal years ending on August 28, 2016, August 30, 2015 and August 31, 2014, respectively. Certain
percentages presented are calculated using actual results prior to rounding. Unless otherwise noted,
references to net income relate to net income attributable to Costco.
Highlights for fiscal year 2016 included:
•
•
•
In June 2016, we transitioned to our new Citibank-Visa exclusive co-branded credit card in the U.S.
(described in further detail in this Report).
In December 2015, we paid the outstanding principal balance and associated interest on the 0.65%
Senior Notes of approximately $1,204, from our cash and cash equivalents and short-term investments;
The Board of Directors approved an increase in the quarterly cash dividend from $0.40 to $0.45 per
share in April 2016; and
Changes in foreign currencies relative to the U.S. dollar adversely impacted diluted earnings per share
by $0.24, largely driven by changes in the Canadian dollar and Mexican peso;
Net income decreased 1% to $2,350, or $5.33 per diluted share compared to $2,377, or $5.37 per
diluted share in 2015. The 2015 results were positively impacted by a $57 tax benefit, or $0.13 per
diluted share, in connection with the special cash dividend paid to the Company's 401(k) Plan
participants;
Selling, general and administrative (SG&A) expenses as a percentage of net sales increased 33 basis
points, largely driven by the impact of gasoline price deflation on net sales;
Gross margin percentage increased 26 basis points, primarily from the impact of gasoline price deflation
on net sales;
U.S..
Net sales increased 2% to $116,073, driven by sales at new warehouses opened in 2015 and 2016,
while comparable sales were flat. Net and comparable sales results were negatively impacted by
changes in most foreign currencies relative to the U.S. dollar and decreases in the price of gasoline;
Membership fee revenue increased 4% to $2,646, primarily due to membership sign-ups at existing and
new warehouses and executive membership upgrades, partially offset by the negative impact of
changes in most foreign currencies relative to the U.S. dollar;
•
•
•
•
•
•
We opened 29 net new warehouses in 2016, 21 in the U.S., two in Canada, and six in our Other
International segment, compared to 23 net new warehouses in 2015;
Canada.
Other International......
Total Company.
Comparable sales increased 1% during 2015 and were positively impacted by an increase in shopping
frequency partially offset by a decrease in the average ticket. The average ticket and comparable sales results
were negatively impacted by changes in foreign currencies relative to the U.S. dollar and a decrease in
gasoline prices. Changes in comparable sales also includes the negative impact of cannibalization.
Membership Fees
Membership fees
Membership fees increase
Membership fees as a percentage of net sales
2016 vs. 2015
2016
2,646
4%
2.28%
2015
2,533
4%
2.23%
2014
2,428
6%
2.20%
113,666
116,073 $
2014
2015
2016
2016 vs. 2015
Comparable Sales
Gross margin percentage..
Less merchandise costs
Net sales.
Gross Margin
Membership fees increased 4% in 2015. This increase was primarily due to membership sign-ups at existing
and new warehouses and increased number of upgrades to our higher-fee Executive Membership program.
These increases were partially offset by changes in foreign currencies relative to the U.S. dollar, which
negatively impacted membership fees by approximately $76 in 2015.
2015 vs. 2014
The increase in membership fees was primarily due to membership sign-ups at existing and new warehouses
and increased number of upgrades to our higher-fee Executive Membership program. These increases were
partially offset by changes in foreign currencies relative to the U.S. dollar, which negatively impacted
membership fees by approximately $52 in 2016. At the end of 2016, our member renewal rates were 90% in
the U.S. and Canada and 88% worldwide.
Gross margin.....
20
$2,027, Mexico of $385, and Japan of $368. Changes in gasoline prices negatively impacted net sales by
approximately $2,902, or 263 basis points, due to a 22% decrease in the average sales price per gallon.
Net sales increased $3,454 or 3% during 2015. This was attributable to sales at new warehouses opened in
2014 and 2015 and a 1% increase in comparable sales. Changes in foreign currencies relative to the U.S.
dollar negatively impacted net sales by approximately $3,344, or 303 basis points, compared to 2014. The
negative impact was attributable to all foreign countries in which we operate, predominantly Canada of
2016 vs. 2015
Net Sales
1 %
3 %
5%
(3)%
(5)%
2%
(3)%
(3)%
3%
0 %
1 %
4%
3 %
6 %
5%
Net Sales
2015 vs. 2014
Comparable sales were flat during 2016 and were positively impacted by an increase in shopping frequency
offset by a decrease in the average ticket. The average ticket and comparable sales results were negatively
impacted by changes in foreign currencies relative to the U.S. dollar and a decrease in gasoline prices.
Changes in comparable sales also includes the negative impact of cannibalization (established warehouses
losing sales to our newly opened locations).
Comparable Sales
Net sales increased $2,407 or 2% during 2016. This was attributable to sales at new warehouses opened in
2015 and 2016. Comparable sales were flat. Changes in foreign currencies relative to the U.S. dollar
negatively impacted net sales by approximately $2,690, or 237 basis points, compared to 2015. The negative
impact was attributable to most foreign countries in which we operate, predominantly Canada of $1,646,
Mexico of $550, and UK of $224. Changes in gasoline prices negatively impacted net sales by approximately
$2,194, or 193 basis points, due to a 19% decrease in the average sales price per gallon.
6%
23
7 %
4%
6 %
4 %
9%
8 %
8 %
4 %
110,212
Performance Graph
The following graph compares the cumulative total shareholder return (stock price appreciation plus
dividends) on our common stock for the last five years with the cumulative total return of the S&P 500 Index
and the following group of peer companies (based on weighted market capitalization) selected by the
Company: Amazon.com, Inc.; The Home Depot, Inc.; Lowe's Companies; Best Buy Co., Inc.; Staples Inc.;
Target Corporation; Kroger Company; and Wal-Mart Stores, Inc. The information provided is from August 28,
2011 through August 28, 2016.
88
59
Paul G. Moulton...
James P. Murphy.
Joseph P. Portera
Timothy L. Rose.
Ron M. Vachris...
Dennis R. Zook
Executive Vice President, Chief Information Officer. Mr. Moulton
was Executive Vice President, Real Estate Development from 2001
until March 2010.
Executive Vice President, Chief Operating Officer, International. Mr.
Murphy was Senior Vice President, International, from 2004 to
October 2010.
Executive Vice President, Chief Operating Officer, Eastern and
Canadian Divisions. Mr. Portera has held these positions since
1994, and has been the Chief Diversity Officer since 2010.
Executive Vice President, Ancillary Businesses, Manufacturing, and
Business Centers. Mr. Rose was Senior Vice President,
Merchandising, Food and Sundries and Private Label from 1995 to
December 2012.
Executive Vice President, Chief Operating Officer, Merchandising.
Mr. Vachris was Senior Vice President, Real Estate Development,
from August 2015 to June 2016, and Senior Vice President,
General Manager, Northwest Region from 2010 to July 2015.
Executive Vice President, Chief Operating Officer, Southwest
Division and Mexico.
2001
99
65
2011
63
1994
64
2013
64
59
2010
Executive Vice President, Chief Operating Officer, Northern
Division. Mr. McKay was Senior Vice President, General Manager,
Northwest Region from 2000 to March 2010.
John D. McKay..
Other Information
In February 2015, we entered into a Co-Branded Credit Card Program Agreement (the "Program Agreement")
with Citibank, N.A. ("Citi”). Under the terms of the Program Agreement, Citi became the exclusive issuer of
our co-branded credit cards to our members. Additionally, Visa U.S.A. Inc. became the credit card network for
Costco in the United States and Puerto Rico. Citi purchased the current co-branded credit card portfolio from
American Express in June 2016. On June 20, 2016, we began accepting all Visa cards, including the Citi co-
branded credit cards, replacing American Express. We receive various forms of consideration under the
Program Agreement. The initial term of the Program Agreement is ten years.
Under the Program Agreement, Costco earns a royalty on purchases made with the co-branded card other
than from Costco ("external spend"). The royalty varies based on the amount of external spend in relation to
total spend. In addition, Costco will fund a portion of the loyalty reward cardholders earn under the program
on external spend. Loyalty rewards under the program are as follows: 4% on eligible gasoline purchases, 3%
on restaurant and eligible travel purchases, 2% on all purchases from Costco and Costco.com, and 1% on all
other purchases. These rewards may be adjusted over the term of the program. The loyalty rewards earned
by co-branded cardholders will be in the form of certificates redeemable at Costco, for cash or merchandise.
Costco also receives a bounty on approved new credit card accounts acquired through Costco channels.
Additionally, the base discount Costco pays related to Visa acceptance is lower than previously paid for
American Express acceptance.
32
2
EXECUTIVE OFFICERS AND CORPORATE GOVERANCE
The executive officers of Costco, their position, and ages are listed below. All executive officers have 25
or more years of service with the Company.
Name
W. Craig Jelinek.
Position
President and Chief Executive Officer. Mr. Jelinek has been
President and Chief Executive Officer since January 2012 and a
director since February 2010. He was President and Chief
Operating Officer from February 2010 to December 2011. Prior to
that he was Executive Vice President, Chief Operating Officer,
Merchandising since 2004.
Jeffrey H. Brotman......... Chairman of the Board. Mr. Brotman is a co-founder of Costco and
has been a director since its inception.
Richard A. Galanti Executive Vice President and Chief Financial Officer. Mr. Galanti
has been a director since January 1995.
Franz E. Lazarus Executive Vice President, Administration. Mr. Lazarus was Senior
Vice President, Administration-Global Operations from 2006 to
September 2012.
Executive
Officer
Since
1995
Age
64
1983 74
1993
660
2012 69
2016
51
1993 67
We have adopted a code of ethics for senior financial officers pursuant to Section 406 of the Sarbanes-
Oxley Act. Copies of the code are available free of charge, by writing to Secretary, Costco Wholesale
Corporation, 999 Lake Drive, Issaquah, WA 98027. If the Company makes any amendments to this code
(other than technical, administrative, or non-substantive amendments) or grants any waivers, including
implicit waivers, from this code to the CEO, chief financial officer or principal accounting officer and
controller, we will disclose (on our website or in a Form 8-K report filed with the SEC) the nature of the
amendment or waiver, its effective date, and to whom it applies.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Costco Wholesale Corporation and subsidiaries as of August 28, 2016 and August 30,
2015, and the results of their operations and their cash flows for the 52-week periods ended August 28, 2016,
August 30, 2015 and August 31, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Costco Wholesale Corporation's internal control over financial reporting as of August 28,
2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
October 11, 2016 expressed an unqualified opinion on the effectiveness of the Company's internal control
over financial reporting.
Seattle, Washington
October 11, 2016
35
55
KPMG LLP
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Costco Wholesale Corporation:
We have audited Costco Wholesale Corporation's internal control over financial reporting as of August 28,
2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management
is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying management's annual
report on internal control over financial reporting included in Item 9A. Our responsibility is to express an
opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of August 28, 2016, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of the Company as of August 28, 2016 and August 30,
2015, and the related consolidated statements of income, comprehensive income, equity, and cash flows for
each of the 52-week periods ended August 28, 2016, August 30, 2015 and August 31, 2014, and our report
dated October 11, 2016 expressed an unqualified opinion on those consolidated financial statements.
Seattle, Washington
October 11, 2016
36
KPMG LLP
COSTCO WHOLESALE CORPORATION
CONSOLIDATED BALANCE SHEETS
We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation and
subsidiaries as of August 28, 2016 and August 30, 2015, and the related consolidated statements of income,
comprehensive income, equity, and cash flows for the 52-week periods ended August 28, 2016, August 30,
2015 and August 31, 2014. These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated financial statements based on
our audits.
We are exposed to fluctuations in prices for energy that we consume, particularly electricity and natural gas,
which we seek to partially mitigate through fixed-price contracts for certain of our warehouses and other
facilities, predominately in the U.S. and Canada. We also enter into variable-priced contracts for some
purchases of electricity and natural gas, in addition to fuel for our gas stations, on an index basis. These
contracts meet the characteristics of derivative instruments, but generally qualify for the "normal purchases or
normal sales" exception under authoritative guidance and require no mark-to-market adjustment.
Costco Wholesale Corporation:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Executive Compensation
Information related to our Executive Compensation and Director Compensation is incorporated herein by
reference to Costco's Proxy Statement filed with the Securities and Exchange Commission.
33
33
MANAGEMENT'S REPORTS
Management's Report on the Consolidated Financial Statements
Costco's management is responsible for the preparation, integrity and objectivity of the accompanying
consolidated financial statements and the related financial information. The consolidated financial statements
have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) and
necessarily include certain amounts that are based on estimates and informed judgments. The Company's
management is also responsible for the preparation of the related financial information included in this Annual
Report on Form 10-K and its accuracy and consistency with the consolidated financial statements.
The consolidated financial statements have been audited by KPMG LLP, an independent registered public
accounting firm, who conducted their audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). The independent registered public accounting firm's
responsibility is to express an opinion as to the fairness with which such consolidated financial statements
present our financial position, results of operations and cash flows in accordance with U.S. GAAP.
Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, we performed an evaluation under
the supervision and with the participation of management, including our Chief Executive Officer and Chief
Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under
the Securities and Exchange Act of 1934 (the Exchange Act)). Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this
Annual Report, our disclosure controls and procedures are effective.
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or
15d-15(f) of the Exchange Act) during our fiscal quarter ended August 28, 2016, that has materially affected or
is reasonably likely to materially affect our internal control over financial reporting.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. GAAP and includes those policies and
procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect
our transactions and the dispositions of our assets; (2) provide reasonable assurance that our transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles and that our receipts and expenditures are being made only in accordance
with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, we assessed the effectiveness of our
internal control over financial reporting as of August 28, 2016, using the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework
(2013). Based on its assessment, management has concluded that our internal control over financial reporting
was effective as of August 28, 2016. The attestation of KPMG LLP, our independent registered public
accounting firm, on the effectiveness of our internal control over financial reporting is included with the
consolidated financial statements in this Report.
Cray Jelek
W. Craig Jelinek
President, Chief Executive Officer and Director
Rudd 24Q
Richard A. Galanti
Executive Vice President, Chief Financial
Officer and Director
34
34
The Board of Directors and Stockholders
Commodity Price Risk
Our foreign subsidiaries conduct certain transactions in their non-functional currencies, which exposes us to
fluctuations in exchange rates. We manage these fluctuations, in part, through the use of forward foreign-
exchange contracts, seeking to economically hedge the impact of these fluctuations on known future
expenditures denominated in a non-functional foreign-currency. The contracts are intended primarily to
economically hedge exposure to U.S. dollar merchandise inventory expenditures made by our international
subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts do not qualify
for derivative hedge accounting. We seek to mitigate risk with the use of these contracts and do not intend to
engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features.
We seek to manage counterparty risk associated with these contracts by limiting transactions to
counterparties with which we have established banking relationships. There can be no assurance that this
practice is effective. These contracts are limited to less than one year. See Note 1 and Note 3 to the
consolidated financial statements included in this Report for additional information on the fair value of
unsettled forward foreign-exchange contracts at the end of 2016 and 2015. A hypothetical 10% strengthening
of the functional currency compared to the non-functional currency exchange rates at August 28, 2016 would
have decreased the fair value of the contracts by $56 and resulted in an unrealized loss in the consolidated
statements of income for the same amount.
Foreign Currency-Exchange Risk
200
379
337
2,204
3,120
obligations.
Capital lease obligations (4).
700
31
159 160
57
|
757
63
593
748
Purchase obligations
(equipment services
and other)
Other (6)
Total
5,456
458
998
6,831
Bank Credit Facilities and Commercial Paper Programs
We maintain bank credit facilities for working capital and general corporate purposes. At August 28, 2016, we
had borrowing capacity within these facilities of $429, of which $358 was maintained by our international
operations. Of the $358, $177 is guaranteed by the Company. There were no outstanding short-term
borrowings under the bank credit facilities at the end of 2016 and 2015.
The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $153. The
outstanding commitments under these facilities at the end of 2016 totaled $96, including $94 in standby letters
of credit with expiration dates within one year. The bank credit facilities have various expiration dates, all
within one year, and we generally intend to renew these facilities prior to their expiration. The amount of
borrowings available at any time under our bank credit facilities is reduced by the amount of standby and
commercial letters of credit then outstanding.
Contractual Obligations
As of August 28, 2016, our commitments to make future payments under contractual obligations were as
follows:
Payments Due by Fiscal Year
Contractual obligations
2017
2018 to 2019
2020 to 2021
2022 and
thereafter
Total
Purchase obligations
(merchandise)
Long-term debt (2).
Operating leases (3)
Construction and land
6,828 $
1,221
3 $
1,392
-
$
1,845
98
61
618
We account for membership fee revenue, net of refunds, on a deferred basis, whereby revenue is recognized
ratably over one year. Our Executive members qualify for a 2% reward on qualified purchases (up to a
maximum reward of approximately $750 per year in the U.S. and Canada and varies in our Other
International operations), which can be redeemed only at Costco warehouses. We account for this reward as
a reduction in sales. The sales reduction and corresponding liability are computed after giving effect to the
estimated impact of non-redemptions based on historical data.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market, as determined primarily by the retail
inventory method, and are stated using the last-in, first-out (LIFO) method for substantially all U.S.
merchandise inventories. Merchandise inventories for all foreign operations are primarily valued by the retail
inventory method and are stated using the first-in, first-out (FIFO) method. We record an adjustment each
quarter, if necessary, for the estimated effect of inflation or deflation, and these estimates are adjusted to
actual results determined at year-end. We believe the LIFO method more fairly presents the results of
operations by more closely matching current costs with current revenues.
We provide for estimated inventory losses (shrink) between physical inventory counts as a percentage of net
sales. The provision is adjusted to reflect results of the actual physical inventory counts, which generally occur
in the second and fourth quarters of the year.
Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as we progress
toward earning those rebates, provided they are probable and reasonably estimable. Other consideration
received from vendors is generally recorded as a reduction of merchandise costs upon completion of
contractual milestones, terms of agreement, or other systematic approaches.
Impairment of Long-Lived Assets
We evaluate our long-lived assets for impairment on an annual basis, when relocating or closing a facility, or
when events or changes in circumstances occur that may indicate the carrying amount of the asset group,
generally an individual warehouse, may not be fully recoverable. Our judgments are based on existing market
30
50
and operational conditions. Future events could cause us to conclude that impairment factors exist, requiring
a downward adjustment of these assets to their then-current fair value.
Insurance/Self-Insurance Liabilities
We use a combination of insurance and self-insurance mechanisms, including for certain risks, a wholly-
owned captive insurance subsidiary and participation in a reinsurance program, to provide for potential
liabilities for workers' compensation, general liability, property damage, directors' and officers' liability, vehicle
liability, and employee health care benefits. Liabilities associated with the risks that we retain are not
discounted and are estimated, in part, by considering historical claims experience, demographic factors,
severity factors and other actuarial assumptions. The estimated accruals for these liabilities could be
significantly affected if future occurrences and claims differ from these assumptions and historical trends.
Income Taxes
The determination of our provision for income taxes requires significant judgment, the use of estimates, and
the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing
and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The
benefits associated with uncertain tax positions are recorded in our consolidated financial statements only
after determining a more-likely-than-not probability that the positions will withstand challenge from tax
authorities. When facts and circumstances change, we reassess these positions and record any changes in
the consolidated financial statements as appropriate. Additionally, our cumulative foreign undistributed
earnings were considered indefinitely reinvested as of August 28, 2016. These earnings would be subject to
U.S. income tax if we changed our position and could result in a U.S. deferred tax liability. Although we have
historically asserted that certain non-U.S. undistributed earnings will be permanently reinvested, we may
repatriate such earnings to the extent we can do so without an adverse tax consequence.
Recent Accounting Pronouncements
See Note 1 to the consolidated financial statements included in this Report for a detailed description of recent
accounting pronouncements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (amounts in millions)
Our exposure to financial market risk results from fluctuations in interest rates and foreign currency exchange
rates. We do not engage in speculative or leveraged transactions or hold or issue financial instruments for
trading purposes.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our investment holdings that are
diversified among various instruments considered to be cash equivalents as defined in Note 1 to the
consolidated financial statements included in this Report, as well as short-term investments in government
and agency securities, and asset and mortgage-backed securities with effective maturities of generally three
months to five years at the date of purchase. The primary objective of our investment activities is to preserve
principal and secondarily to generate yields. The majority of our short-term investments are in fixed interest
rate securities. These securities are subject to changes in fair value due to interest rate fluctuations.
Our policy limits investments in the U.S. to direct U.S. government and government agency obligations,
repurchase agreements collateralized by U.S. government and government agency obligations, and U.S.
government and government agency money market funds. Our wholly-owned captive insurance subsidiary
invests in U.S. government and government agency obligations, corporate notes and bonds, and asset and
mortgage-backed securities with a minimum overall portfolio average credit rating of AA+. Our Canadian and
Other International subsidiaries' investments are primarily in money market funds, bankers' acceptances, and
bank certificates of deposit, generally denominated in local currencies.
31
A 100 basis-point change in interest rates as of the end of 2016 would have an incremental change in fair
market value of $22. For those investments that are classified as available-for-sale, the unrealized gains or
losses related to fluctuations in market volatility and interest rates are reflected within stockholders' equity in
accumulated other comprehensive income.
The nature and amount of our long-term debt may vary as a result of business requirements, market
conditions, and other factors. As of the end of 2016, the majority of our long-term debt is fixed rate Senior
Notes, carried at $4,390. Fluctuations in interest rates may affect the fair value of the fixed-rate debt. See
Note 4 to the consolidated financial statements included in this Report for more information on our long-term
debt.
We evaluate whether it is appropriate to record the gross amount of merchandise sales and related costs or a
net amount. Generally, when we are the primary obligor, subject to inventory risk, have latitude in establishing
prices and selecting suppliers, influence product or service specifications, or have several but not all of these
indicators, revenue is recorded on a gross basis. If we are not the primary obligor and do not possess other
indicators of gross reporting as noted above, we record a net amount, which is reflected in net sales. We
record related shipping fees on a gross basis.
We generally recognize sales, which include shipping fees where applicable, net of returns, at the time the
member takes possession of merchandise or receives services. When we collect payment from members
prior to the transfer of ownership of merchandise or the performance of services, the amount is generally
recorded as deferred sales in the consolidated balance sheets until the sale or service is completed. We
provide for estimated sales returns based on historical trends and reduce sales and merchandise costs
accordingly. Our sales returns reserve is based on an estimate of the net realizable value of merchandise
inventories to be returned. Amounts collected from members for sales and value added taxes are recorded on
a net basis.
Revenue Recognition
The preparation of our consolidated financial statements in accordance with U.S. generally accepted
accounting principles (U.S. GAAP) requires that we make estimates and judgments, including those related to
revenue recognition, merchandise inventory valuation, impairment of long-lived assets, insurance/self-
insurance liabilities, and income taxes. We base our estimates on historical experience and on assumptions
that we believe to be reasonable, and we continue to review and evaluate these statements. For further
information on significant accounting policies, see discussion in Note 1 to the consolidated financial
statements included in this Report.
18
26
11
71
126
..$
9,456 $
2,016 $
2,317 $
3,867 $
(amounts in millions, except par value and share data)
17,656
Includes contractual interest payments and excludes deferred issuance costs.
(3) Operating lease obligations exclude amounts for common area maintenance, taxes, and insurance and have been reduced by
$129 to reflect sub-lease income.
(4) Includes build-to-suit lease obligations and contractual interest payments.
(5) The amounts exclude certain services negotiated at the individual warehouse or regional level that are not significant and
generally contain clauses allowing for cancellation without significant penalty.
(6) Includes $64 in asset retirement obligations, and $62 in deferred compensation obligations. The total amount excludes $51 of
non-current unrecognized tax contingencies and $29 of other obligations due to uncertainty regarding the timing of future cash
payments.
Off-Balance Sheet Arrangements
In the opinion of management, we have no off-balance sheet arrangements, that have had, or are reasonably
likely to have, a material current or future effect on our financial condition or financial statements other than
the operating leases included in the table above and discussed in Note 1 and Note 5 to the consolidated
financial statements included in this Report.
29
29
Critical Accounting Estimates
(1) Includes only open merchandise purchase orders.
ASSETS
Diluted
August 30,
2,533
2,428
118,719
116,199
112,640
Merchandise costs.
102,901
101,065
98,458
Selling, general and administrative.
12,068
11,445
10,899
Preopening expenses
78
65
63
Operating income
3,672
3,624
3,220
2,646
OTHER INCOME (EXPENSE)
$110,212
$116,073
12,079
10,617
253
226
12,332
10,843
$33,163
$33,017
The accompanying notes are an integral part of these consolidated financial statements.
37
REVENUE
Net sales...
Membership fees
Total revenue
OPERATING EXPENSES
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(amounts in millions, except per share data)
52 Weeks Ended 52 Weeks Ended
August 28,
2016
August 30,
2015
52 Weeks Ended
August 31,
2014
$113,666
Interest expense.....
(133)
(124)
Shares used in calculation (000's)
$5.36
$5.41
$4.69
$5.33
$5.37
$4.65
Basic.
Diluted
438,585
439,455
438,693
441,263
442,716
442,485
CASH DIVIDENDS DECLARED PER COMMON
SHARE..
$1.70
$6.51
$1.33
The accompanying notes are an integral part of these consolidated financial statements.
38
August 28,
2016
Basic....
NET INCOME PER COMMON SHARE
ATTRIBUTABLE TO COSTCO:
$2,058
$2,377
(113)
Interest income and other, net
80
104
90
INCOME BEFORE INCOME TAXES.
3,604
3,197
Provision for income taxes.
1,243
6,518
1,195
Net income including noncontrolling interests.....
2,376
2,409
2,088
Net income attributable to noncontrolling
interests...
(26)
(32)
(30)
NET INCOME ATTRIBUTABLE TO COSTCO
$2,350
1,109
7,686
3,619
(1,099)
13,994
12,618
Equipment and fixtures
6,077
5,274
Construction in progress.....
701
811
26,167
23,664
Less accumulated depreciation and amortization.
(9,124)
(8,263)
Net property and equipment.
17,043
15,401
OTHER ASSETS.
902
837
TOTAL ASSETS.
$33,163
4,961
$33,017
5,395
228
CURRENT ASSETS
2015
(1,121)
Cash and cash equivalents.
Short-term investments..
Receivables, net.
Merchandise inventories.
Other current assets
Total current assets..
PROPERTY AND EQUIPMENT
Land...
Buildings and improvements.
$3,379
$4,801
1,350
1,618
1,252
1,224
8,969
8,908
268
16,779
LIABILITIES AND EQUITY
15,218
Accounts payable....
COMMITMENTS AND CONTINGENCIES
EQUITY
1,195
783
20,831
22,174
Preferred stock $.005 par value; 100,000,000 shares authorized; no
shares issued and outstanding.....
Common stock $.005 par value; 900,000,000 shares authorized;
437,524,000 and 437,952,000 shares issued and outstanding.
Accumulated other comprehensive loss
Total liabilities
Retained earnings.....
Noncontrolling interests
Total equity
TOTAL LIABILITIES AND EQUITY.
0
0
2
CURRENT LIABILITIES
2
5,490
5,218
Total Costco stockholders' equity.
OTHER LIABILITIES
Additional paid-in capital..
4,061
Current portion of long-term debt...
$9,011
$7,612
1,100
4,852
1,283
Accrued salaries and benefits.
2,629
Accrued member rewards..
869
813
2,468
Other current liabilities
Total current liabilities
LONG-TERM DEBT, excluding current portion...
1,362
1,269
16,539
Deferred membership fees
2,003
15,575
1,695
(494)
(494)
6,518
(1,121)
2
437,952
(2,865)
(2,865)
10,617
5,218
226
4
---
2,350
2,350
26
2,376
22
22
26
459
459
|
(452)
(2,865)
459
10,843
(42)
2,377
(122)
4,919
4
(76)
7,458
12,303
212
12,515
2,377
32
2,409
(1,045)
(1,045)
(3,456)
(18)
394
394
394
...
989
69
69
69
69
2,736 - (
(122)
(122)
(1,063)
(146)
$2,376
(146)
40
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income including noncontrolling interests
Adjustments to reconcile net income including noncontrolling interests
to net cash provided by operating activities:
Depreciation and amortization
Stock-based compensation
52 Weeks
Ended
52 Weeks
Ended
52 Weeks
Ended
40
August 28,
2016
August 31,
2014
$2,409
$2,088
1,255
1,127
1,029
459
394
327
Excess tax benefits on stock-based awards.
Other non-cash operating activities, net
2
August 30,
2015
(146)
The accompanying notes are an integral part of these consolidated financial statements.
BALANCE AT AUGUST 28,
3 -----
--
(41)
45
(436)
(477)
(477)
(746)
(3)
(749)
437,524
$2
2016
$5,490
$12,079
$253
$12,332
Release of vested RSUs,
including tax effects
2,749
Conversion of convertible
notes
Repurchases of common
stock
(3,184)
Cash dividends declared and
other..
$(1,099) $7,686
437,683
2,137
(584)
CONSOLIDATED STATEMENTS OF EQUITY
(amounts in millions)
Common Stock
Accumulated
Additional
Other
Shares
Paid-in
Comprehensive
(000's)
Amount
Capital
Income (Loss)
COSTCO WHOLESALE CORPORATION
Retained
Earnings
Equity
Noncontrolling
Interests
Total
Equity
BALANCE AT SEPTEMBER 1,
2013
436,839
$2
$4,670
$(122)
$6,283
$10,833
Total Costco
Stockholders'
$179
39
$2,104
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in millions)
NET INCOME INCLUDING NONCONTROLLING
INTERESTS
Foreign-currency translation adjustment and
other, net.
Comprehensive income
Less: Comprehensive income attributable to
noncontrolling interests
COMPREHENSIVE INCOME ATTRIBUTABLE TO
COSTCO
52 Weeks Ended
August 28,
2016
52 Weeks Ended
August 30,
2015
52 Weeks Ended
August 31,
2014
The accompanying notes are an integral part of these consolidated financial statements.
$2,376
$2,088
26
(1,063)
49
2,402
1,346
Deferred income taxes...
30
14
33
$2,372
$1,332
$2,409
(584)
$11,012
-
notes
18 -
1
1
1
Repurchases of common
stock
(2,915)
(35)
(299)
(334)
(334)
Stock-based compensation
--
Cash dividends declared....
Net income
Foreign-currency translation
adjustment and other, net..
Stock options exercised,
including tax effects
Release of vested RSUs,
including tax effects
Repurchases of common
stock
Cash dividends declared
BALANCE AT AUGUST 30,
2015
Net income
Foreign-currency translation
adjustment and other, net..
Stock-based compensation ...
Stock options exercised,
including tax effects
(584)
BALANCE AT AUGUST 31,
2014
Net income
(102)
(102)
-
-
-
2,058
2,058
30
2,088
Foreign-currency translation
adjustment and other, net..
46
46
3
49
(102)
Stock-based compensation ...
327
327
Stock options exercised,
including tax effects ....
971 -
58
--
58
58
Release of vested restricted
stock units (RSUs),
including tax effects
Conversion of convertible
2,770
327
Changes in operating assets and liabilities:
$4,801
(86)
Receivables, net..
2016
2015
.$
755 $ 729
270
273
99
103
128
119
.$ 1,252 $ 1,224
Vendor receivables include volume rebates or other purchase discounts. Balances are generally presented on
a gross basis, separate from any related payable due. In certain circumstances, these receivables may be
settled against the related payable to that vendor. Reinsurance receivables are held by the Company's wholly-
owned captive insurance subsidiary. The balance primarily represents amounts ceded through reinsurance
arrangements gross of the amounts assumed under reinsurance, which are presented within other current
liabilities in the consolidated balance sheets. Third-party pharmacy receivables generally relate to amounts
due from members' insurance companies. Other receivables primarily consist of amounts due from
governmental entities, mostly tax-related items.
Receivables are recorded net of an allowance for doubtful accounts. The allowance is based on historical
experience and application of the specific identification method. Write-offs of receivables were immaterial for
fiscal years 2016, 2015, and 2014.
Merchandise Inventories
Merchandise inventories consist of the following at the end of 2016 and 2015:
2016
2015
United States.
Foreign
Merchandise inventories
.$ 6,422 $ 6,427
2,547 2,481
.$ 8,969 $ 8,908
Merchandise inventories are valued at the lower of cost or market, as determined primarily by the retail
inventory method, and are stated using the last-in, first-out (LIFO) method for substantially all U.S.
merchandise inventories. Merchandise inventories for all foreign operations are primarily valued by the retail
inventory method and are stated using the first-in, first-out (FIFO) method. The Company believes the LIFO
method more fairly presents the results of operations by more closely matching current costs with current
revenues. The Company records an adjustment each quarter, if necessary, for the projected annual effect of
inflation or deflation, and these estimates are adjusted to actual results determined at year-end, after actual
inflation rates and inventory levels for the year have been determined.
Due to net deflationary trends, a benefit of $64 and $27 was recorded to merchandise costs in 2016 and
2015, respectively. Due to net inflationary trends in 2014, a charge of $28 was recorded to merchandise costs
to increase the cumulative LIFO valuation on merchandise inventories. At the end of 2016 and 2015, the
cumulative impact of the LIFO valuation on merchandise inventories was immaterial and $82, respectively.
The Company provides for estimated inventory losses between physical inventory counts as a percentage of
net sales, using estimates based on the Company's experience. The provision is adjusted periodically to
reflect actual physical inventory counts, which generally occur in the second and fourth fiscal quarters.
Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as the
Company progresses towards earning those rebates, provided that they are probable and reasonably
estimable.
44
Property and Equipment
Other receivables, net..
Third-party pharmacy receivables....
Reinsurance receivables.
Vendor receivables.
Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries
operate membership warehouses based on the concept that offering members low prices on a limited
selection of nationally branded and private-label products in a wide range of merchandise categories will
produce high sales volumes and rapid inventory turnover. At August 28, 2016, Costco operated 715
warehouses worldwide: 501 United States (U.S.) locations (in 44 U.S. states, Washington, D.C., and Puerto
Rico), 91 Canada locations, 36 Mexico locations, 28 United Kingdom (U.K.) locations, 25 Japan locations, 12
Korea locations, 12 Taiwan locations, eight Australia locations, and two Spain locations. The Company's
online business operates websites in all countries except Japan, Australia, and Spain.
Basis of Presentation
The consolidated financial statements include the accounts of Costco Wholesale Corporation, its wholly-
owned subsidiaries, and subsidiaries in which it has a controlling interest. The Company reports
noncontrolling interests in consolidated entities as a component of equity separate from the Company's equity.
All material inter-company transactions between and among the Company and its consolidated subsidiaries
have been eliminated in consolidation. The Company's net income excludes income attributable to
noncontrolling interests in its operations in Taiwan and Korea. Unless otherwise noted, references to net
income relate to net income attributable to Costco.
Fiscal Year End
The Company operates on a 52/53 week fiscal year basis with the fiscal year ending on the Sunday closest to
August 31. References to 2016, 2015, and 2014 relate to the 52-week fiscal years ended August 28, 2016,
August 30, 2015, and August 31, 2014, respectively.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S.
GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates and assumptions.
Reclassifications
Certain reclassifications have been made to prior fiscal year amounts or balances to conform to the
presentation in the current fiscal year. These reclassifications did not have a material impact on the
Company's previously reported consolidated financial statements.
Cash and Cash Equivalents
The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with a
maturity of three months or less at the date of purchase, and proceeds due from credit and debit card
transactions with settlement terms of up to one week. Credit and debit card receivables were $1,071 and
$1,243 at the end of 2016 and 2015, respectively.
42
Property and equipment are stated at cost. In general, new building additions are classified into components,
each with its own estimated useful life, generally five to fifty years for buildings and improvements and three to
twenty years for equipment and fixtures. Depreciation and amortization expense is computed using the
straight-line method over estimated useful lives or the lease term, if shorter. Leasehold improvements made
after the beginning of the initial lease term are depreciated over the shorter of the estimated useful life of the
asset or the remaining term of the initial lease plus any renewals that are reasonably assured at the date the
leasehold improvements are made.
Short-Term Investments
The Company periodically evaluates unrealized losses in its investment securities for other-than-temporary
impairment, using both qualitative and quantitative criteria. In the event a security is deemed to be other-than-
temporarily impaired, the Company recognizes the credit loss component in interest income and other, net in
the consolidated statements of income.
Fair Value of Financial Instruments
The Company accounts for certain assets and liabilities at fair value. The carrying value of the Company's
financial instruments, including cash and cash equivalents, receivables and accounts payable, approximate
fair value due to their short-term nature or variable interest rates. See Notes 2, 3, and 4 for the carrying value
and fair value of the Company's investments, derivative instruments, and fixed-rate debt, respectively.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Fair value is estimated by applying
a fair value hierarchy, which requires maximizing the use of observable inputs when measuring fair value. The
three levels of inputs are:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market
data.
Level 3: Significant unobservable inputs that are not corroborated by market data.
The Company's valuation techniques used to measure the fair value of money market mutual funds are based
on quoted market prices, such as quoted net asset values published by the fund as supported in an active
market. Valuation methodologies used to measure the fair value of all other non-derivative financial
instruments are based on independent external valuation information. The pricing process uses data from a
variety of independent external valuation information providers, including trades, bid price or spread, two-
sided markets, quotes, benchmark curves including but not limited to treasury benchmarks and Libor and
swap curves, discount rates, and market data feeds. All are observable in the market or can be derived
principally from or corroborated by observable market data. The Company reports transfers in and out of
Levels 1, 2, and 3, as applicable, using the fair value of the individual securities as of the beginning of the
reporting period in which the transfer(s) occurred.
Current financial liabilities have fair values that approximate their carrying values. Long-term financial
liabilities consist of long-term debt, which is recorded on the balance sheet at issuance price and adjusted for
any applicable unamortized discounts or premiums and debt issuance costs.
43
Receivables, Net
Receivables consist of the following at the end of 2016 and 2015:
In general, short-term investments have a maturity at the date of purchase of three months to five years.
Investments with maturities beyond five years may be classified, based on the Company's determination, as
short-term based on their highly liquid nature and because they represent the investment of cash that is
available for current operations. Short-term investments classified as available-for-sale are recorded at fair
value using the specific identification method with the unrealized gains and losses reflected in accumulated
other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-
sale securities, if any, are determined on a specific identification basis and are recorded in interest income
and other, net in the consolidated statements of income. Short-term investments classified as held-to-maturity
are financial instruments that the Company has the intent and ability to hold to maturity and are reported net
of any related amortization and are not remeasured to fair value on a recurring basis.
The Company capitalizes certain computer software and software development costs incurred in developing
or obtaining computer software for internal use. These costs are included in equipment and fixtures and
amortized on a straight-line basis over the estimated useful lives of the software, generally three to seven
years.
Repair and maintenance costs are expensed when incurred. Expenditures for remodels, refurbishments and
improvements that add to or change the way an asset functions or that extend the useful life are capitalized.
Assets that were removed during the remodel, refurbishment or improvement are retired. Assets classified as
held-for-sale at the end of 2016 and 2015 were immaterial.
The Company evaluates long-lived assets for impairment on an annual basis, when relocating or closing a
facility, or when events or changes in circumstances may indicate the carrying amount of the asset group,
generally an individual warehouse, may not be fully recoverable. For asset groups held and used, including
warehouses to be relocated, the carrying value of the asset group is considered recoverable when the
estimated future undiscounted cash flows generated from the use and eventual disposition of the asset group
exceed the respective carrying value. In the event that the carrying value is not considered recoverable, an
impairment loss would be recognized for the asset group to be held and used equal to the excess of the
carrying value above the estimated fair value of the asset group. For asset groups classified as held-for-sale
(disposal group), the carrying value is compared to the disposal group's fair value less costs to sell. The
Company estimates fair value by obtaining market appraisals from third party brokers or using other valuation
techniques. There were no impairment charges recognized in 2016, and charges were immaterial and
included in selling, general and administrative expenses in the consolidated statements of income in 2015 and
2014.
The unrealized gains or losses recognized in interest income and other, net in the accompanying consolidated
statements of income relating to the net changes in the fair value of unsettled forward foreign-exchange
contracts were immaterial in 2016 and 2014, respectively, and a net gain of $12 in 2015.
The Company is exposed to fluctuations in prices for the energy it consumes, particularly electricity and
natural gas, which it seeks to partially mitigate through the use of fixed-price contracts for certain of its
warehouses and other facilities, primarily in the U.S. and Canada. The Company also enters into variable-
priced contracts for some purchases of natural gas, in addition to fuel for its gas stations, on an index basis.
These contracts meet the characteristics of derivative instruments, but generally qualify for the “normal
purchases or normal sales" exception under authoritative guidance and require no mark-to-market
adjustment.
46
46
Foreign Currency
The functional currencies of the Company's international subsidiaries are the local currency of the country in
which the subsidiary is located. Assets and liabilities recorded in foreign currencies are translated at the
exchange rate on the balance sheet date. Translation adjustments are recorded in accumulated other
comprehensive loss. Revenues and expenses of the Company's consolidated foreign operations are
translated at average exchange rates prevailing during the year.
The Company recognizes foreign-currency transaction gains and losses related to revaluing or settling
monetary assets and liabilities denominated in currencies other than the functional currency in interest income
and other, net in the accompanying consolidated statements of income. Generally, these include the U.S.
dollar cash and cash equivalents and the U.S. dollar payables of consolidated subsidiaries revalued to their
functional currency. Also included are realized foreign-currency gains or losses from settlements of forward
foreign-exchange contracts. These items resulted in net gains of $38, $35, and $25 for 2016, 2015, and 2014,
respectively.
Revenue Recognition
The Company generally recognizes sales, which include shipping fees where applicable, net of returns, at the
time the member takes possession of merchandise or receives services. When the Company collects
payments from members prior to the transfer of ownership of merchandise or the performance of services, the
amounts received are generally recorded as deferred sales, included in other current liabilities in the
consolidated balance sheets, until the sale or service is completed. The Company reserves for estimated
sales returns based on historical trends in merchandise returns and reduces sales and merchandise costs
accordingly. The sales returns reserve is based on an estimate of the net realizable value of merchandise
inventories to be returned. Amounts collected from members for sales or value added taxes are recorded on a
net basis.
The Company evaluates whether it is appropriate to record the gross amount of merchandise sales and
related costs or the net amount earned. Generally, when Costco is the primary obligor, is subject to inventory
risk, has latitude in establishing prices and selecting suppliers, can influence product or service specifications,
or has several but not all of these indicators, revenue is recorded on a gross basis. If the Company is not the
primary obligor and does not possess other indicators of gross reporting as noted above, it records the net
amounts earned, which is reflected in net sales. The Company records related shipping fees on a gross basis.
The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the
one-year membership period. The Company's Executive members qualify for a 2% reward on qualified
purchases (up to a maximum reward of approximately $750 per year), which can be redeemed only at Costco
warehouses. The Company accounts for this reward as a reduction in sales. The sales reduction and
corresponding liability (classified as accrued member rewards in the consolidated balance sheets) are
computed after giving effect to the estimated impact of non-redemptions based on historical data. The net
reduction in sales was $1,172, $1,128, and $1,051 in 2016, 2015, and 2014, respectively.
Merchandise Costs
Merchandise costs consist of the purchase price of inventory sold, inbound and outbound shipping charges
and all costs related to the Company's depot operations, including freight from depots to selling warehouses,
and are reduced by vendor consideration. Merchandise costs also include salaries, benefits, depreciation, and
utilities in fresh foods and certain ancillary departments.
The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business. It
manages these fluctuations, in part, through the use of forward foreign-exchange contracts, seeking to
economically hedge the impact of fluctuations of foreign exchange on known future expenditures
denominated in a non-functional foreign-currency. The contracts relate primarily to U.S. dollar merchandise
inventory expenditures made by the Company's international subsidiaries, with functional currencies other
than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company
seeks to mitigate risk with the use of these contracts and does not intend to engage in speculative
transactions. These contracts do not contain any credit-risk-related contingent features. The aggregate
notional amounts of open, unsettled forward foreign-exchange contracts were $572 and $889 at the end of
2016 and 2015, respectively. The Company seeks to manage counterparty risk associated with these
contracts by limiting transactions to counterparties with which the Company has an established banking
relationship. There can be no assurance that this practice is effective. The contracts are limited to less than
one year in duration. See Note 3 for information on the fair value of unsettled forward foreign-exchange
contracts at the end of 2016 and 2015.
Vendor Consideration
47
consideration is generally recorded as a reduction of merchandise costs upon completion of contractual
milestones, terms of the related agreement, or by another systematic approach.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries, benefits and workers' compensation
costs for warehouse employees, other than fresh foods departments and certain ancillary businesses, as well
as all regional and home office employees, including buying personnel. Selling, general and administrative
expenses also include substantially all building and equipment depreciation, credit and debit card processing
fees, utilities, and stock-based compensation expense as well as other operating costs incurred to support
warehouse operations.
Retirement Plans
The Company's 401(k) Retirement Plan is available to all U.S. employees who have completed 90 days of
employment. The plan allows pre-tax deferrals, a portion of which the Company matches. In addition, the
Company provides each eligible participant an annual discretionary contribution. The Company also has a
defined contribution plan for Canadian employees and contributes a percentage of each employee's salary.
Certain subsidiaries in the Company's Other International operations have defined benefit and defined
contribution plans that are not material. Amounts expensed under all plans were $489, $454, and $436 for
2016, 2015, and 2014, respectively, and are included in selling, general and administrative expenses and
merchandise costs in the accompanying consolidated statements of income.
Stock-Based Compensation
Restricted stock units (RSUs) granted to employees generally vest over five years and allow for quarterly
vesting of the pro-rata number of stock-based awards that would vest on the next anniversary of the grant
date in the event of retirement or voluntary termination. The Company does not reduce stock-based
compensation for an estimate of forfeitures, which are inconsequential in light of historical experience and
considering the awards vest on a quarterly basis. Actual forfeitures are recognized as they occur.
Compensation expense for all stock-based awards granted is predominantly recognized using the straight-line
method over the requisite service period for the entire award. The terms of the Company's stock-based
awards for employees and non-employee directors provide for accelerated vesting of a portion of outstanding
shares based on reaching certain cumulative years of service with the Company. Compensation expense for
the accelerated shares is recognized upon achievement of the long service term. The cumulative amount of
compensation cost recognized at any point in time equals at least the portion of the grant-date fair value of
the award that is vested at that date. The fair value of RSUs is calculated as the market value of the common
stock on the measurement date less the present value of the expected dividends forgone during the vesting
period.
Stock-based compensation expense is predominantly included in selling, general and administrative
expenses in the consolidated statements of income. See Note 7 for additional information on the Company's
stock-based compensation plans.
Leases
The Company leases land and/or buildings at warehouses and certain other office and distribution facilities,
primarily under operating leases. Operating leases expire at various dates through 2064, with the exception of
one lease in the Company's U.K. subsidiary, which expires in 2151. These leases generally contain one or
more of the following options, which the Company can exercise at the end of the initial lease term: (a) renewal
of the lease for a defined number of years at the then-fair market rental rate or rate stipulated in the lease
agreement; (b) purchase of the property at the then-fair market value; or (c) right of first refusal in the event of
a third-party purchase offer.
48
The Company has agreements with vendors to receive funds for volume rebates and a variety of other
programs. Volume rebates or other purchase discounts are evidenced by signed agreements that are
reflected in the carrying value of the inventory when earned or as the Company progresses towards earning
the rebate or discount, and as a component of merchandise costs as the merchandise is sold. Other vendor
Description of Business
.$ 2,003 $ 1,695
314
Accounts Payable
The Company's banking system provides for the daily replenishment of major bank accounts as checks are
presented. Included in accounts payable at the end of 2016 and 2015 are $619 and $538, respectively,
representing the excess of outstanding checks over cash on deposit at the banks on which the checks were
drawn. The Company accelerated vendor payments of approximately $1,700 in the last week of fiscal 2016 in
advance of implementing its modernized accounting system at the beginning of fiscal 2017.
Insurance/Self-Insurance Liabilities
The Company uses a combination of insurance and self-insurance mechanisms, including for certain risks a
wholly-owned captive insurance subsidiary and participation in a reinsurance program, to provide for potential
liabilities for workers' compensation, general liability, property damage, directors' and officers' liability, vehicle
liability, and employee health care benefits. Liabilities associated with the risks that are retained by the
Company are not discounted and are estimated, in part, by considering historical claims experience,
demographic factors, severity factors, and other actuarial assumptions. The estimated accruals for these
liabilities could be significantly affected if future occurrences and claims differ from these assumptions and
historical trends. At the end of 2016 and 2015, these insurance liabilities were $1,021 and $993 in the
aggregate, respectively, and were included in accrued salaries and benefits and other current liabilities in the
consolidated balance sheets, classified based on their nature.
45
The Company's wholly-owned captive insurance subsidiary (the captive) receives direct premiums, which are
netted against the Company's premium costs in selling, general and administrative expenses, in the
consolidated statements of income. The captive participates in a reinsurance program that includes other
third-party participants. The reinsurance agreement is one year in duration, and new agreements are entered
into by each participant at their discretion at the commencement of the next calendar year. The participant
agreements and practices of the reinsurance program limit any participating members' individual risk. Income
statement adjustments related to the reinsurance program and related impacts to the consolidated balance
sheets are recognized as information becomes known. In the event the Company leaves the reinsurance
program, the Company is not relieved of its primary obligation to the policyholders for activity prior to the
termination of the annual agreement.
Other Current Liabilities
Other current liabilities consist of the following at the end of 2016 and 2015:
Accrued sales, income, and other taxes
Insurance-related liabilities...
Deferred sales.
Cash card liability..
185
Returns reserve
Other current liabilities.
Derivatives
2016
2015
401
396
365
299
254
201
137
124
Other..........
Note 1-Summary of Significant Accounting Policies
(amounts in millions, except share, per share, and warehouse count data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1,434
(2,393)
2,406
Other investing activities, net
27
(20)
Net cash used in investing activities
(2,345)
(2,480)
(1,993)
(3)
(2,093)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in bank checks outstanding
81
1,709
(2,649)
(45)
Repayments of short-term borrowings
(106)
(51)
(103)
Proceeds from short-term borrowings.
106
51
68
Proceeds from issuance of long-term debt
185
1,125
117
96
Repayments of long-term debt...
Additions to property and equipment ....
(2,503)
(84)
17
(5)
22
269
(101)
(63)
Merchandise inventories
(25)
(890)
(563)
Accounts payable..
Maturities and sales of short-term investments.....
(1,532)
529
Other operating assets and liabilities, net
547
557
699
Net cash provided by operating activities.
3,292
4,285
3,984
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments...
(1,432)
(1,501)
880
(74)
(1,288)
Minimum tax withholdings on stock-based awards..
1,094
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR
4,801
5,738
4,644
CASH AND CASH EQUIVALENTS END OF YEAR....
$3,379
$5,738
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (reduced by $19, $14, and $11, interest capitalized in 2016,
2015, and 2014, respectively)
$123
(937)
Income taxes, net.....
$117
$1,186
$109
$869
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Property acquired under build-to-suit and capital leases..
$15
$109
60
$0
The accompanying notes are an integral part of these consolidated financial statements.
41
COSTCO WHOLESALE CORPORATION
$953
(1)
(1,422)
(11)
(220)
(178)
0
(164)
Excess tax benefits on stock-based awards.
74
86
84
Repurchases of common stock.
(486)
(481)
(334)
Cash dividend payments.
Net change in cash and cash equivalents....
(746)
(584)
Other financing activities, net...
(19)
35
34
Net cash used in financing activities
(2,419)
(2,324)
(786)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS.
50
(418)
(2,865)
532 $ 490
315
45
99.72
(281)
8,326 $
(4,147)
3,521
Weighted-Average
Grant Date Fair
Value
9,233 $
(in 000's)
Number of
Units
Outstanding at the end of 2016
Forfeited.
Granted.
153.46
Outstanding at the end of 2015
7,878,000 time-based RSUs that vest upon continued employment over specified periods of time;
448,000 performance-based RSUs, of which 236,000 were granted to executive officers subject to the
certification of the attainment of specified performance targets for 2016. This certification occurred in
September 2016, at which time a portion vested as a result of the long service of all executive officers.
The remaining awards vest upon continued employment over specified periods of time.
•
RSUS granted to employees and to non-employee directors generally vest over five years and three years,
respectively. Additionally, the terms of the RSUs, including performance-based awards, provide for
accelerated vesting for employees and non-employee directors who have attained 25 or more years and five
or more years of service with the Company, respectively, and provide for vesting upon certain terminations of
employment or service. Recipients are not entitled to vote or receive dividends on non-vested and undelivered
shares. At the end of 2016, 15,068,000 shares were available to be granted as RSUs under the Seventh Plan.
The following awards were outstanding at the end of 2016:
Summary of Restricted Stock Unit Activity
terminations of employment or service. Employees who attain certain years of service with the Company
receive shares under accelerated vesting provisions on the annual vesting date rather than upon retirement.
The Seventh Restated 2002 Stock Incentive Plan (Seventh Plan), amended in the second quarter of fiscal
2015, is the Company's only stock-based compensation plan with shares available for grant at the end of
2016. Each share issued in respect of stock awards is counted as 1.75 shares toward the limit of shares
made available under the Seventh Plan. The Seventh Plan authorized the issuance of 23,500,000 shares
(13,429,000 RSUs) of common stock for future grants in addition to the shares authorized under the previous
plan. The Company issues new shares of common stock upon vesting of RSUs. Shares for vested RSUs are
generally delivered to participants annually, net of shares equal to the minimum statutory withholding taxes.
As required by the Company's Seventh Plan, in conjunction with the special cash dividend discussed in Note
6, adjustments were made to awards outstanding on the dividend record date to preserve their value following
the dividend, as follows: (i) the number of shares subject to outstanding RSUs was increased; and (ii) the
exercise prices of outstanding stock options were reduced and the number of shares subject to such options
was increased. Approximately 410,000 stock options were adjusted, and approximately 8,956,000 RSUs were
adjusted. These adjustments did not result in additional stock-based compensation expense, as the fair value
of the outstanding awards did not change. As further required by the Seventh Plan, the maximum number of
shares issuable under the Seventh Plan was proportionally adjusted, which resulted in an additional 750,000
RSU shares available to be granted.
55
55
The Company grants stock-based compensation to employees and non-employee directors. Beginning in
2009, RSU grants to all executive officers have been performance-based. Through a series of shareholder
approvals, there have been amended and restated plans and new provisions implemented by the Company.
RSUS held by employees and non-employee directors are subject to quarterly vesting upon certain
Note 7-Stock-Based Compensation Plans
These amounts may differ from the stock repurchase balances in the accompanying consolidated statements
of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year.
334
The following table summarizes RSU transactions during 2016:
114.45
102.43
120.56
2015
2016
Federal:
..$ 3,619 $ 3,604 $ 3,197
..$ 2,622 $ 2,574 $ 2,145
997 1,030 1,052
The provisions for income taxes for 2016, 2015, and 2014 are as follows:
Total.
Foreign.
Domestic (including Puerto Rico).
2014
2015
115.69
2016
2014
2015
2016
..$ 459 $ 394 $ 327
(150) (131) (109)
Income before income taxes comprised of the following:
Note 8 Income Taxes
Stock-based compensation expense, net of income taxes
Stock-based compensation expense before income taxes
Less recognized income tax benefit...
The following table summarizes stock-based compensation expense and the related tax benefits under the
Company's plans:
Summary of Stock-Based Compensation
56
The weighted-average grant date fair value of RSUs granted was $153.46, $125.68, and $113.64 in 2016,
2015, and 2014, respectively. The remaining unrecognized compensation cost related to non-vested RSUs at
the end of 2016 was $690 and the weighted-average period of time over which this cost will be recognized is
1.6 years. Included in the outstanding balance at the end of 2016 were approximately 2,602,000 RSUs vested
but not yet delivered.
..$ 309 $ 263 $ 218
2014
2,915
142.87
195
31
200 $
Leases (1)
Capital
Operating
Leases
Dividends
Note 6-Stockholders' Equity
(3) Included in other liabilities in the accompanying consolidated balance sheets.
(2) Included in other current liabilities in the accompanying consolidated balance sheets.
(1) Includes build-to-suit lease obligations.
31
Long-term capital lease obligations less current installments (3).
Net present value of minimum lease payments
Less amount representing interest.....
Total.
Thereafter
2021
2020.
2019
2018
2017.
At the end of 2016, future minimum payments, net of sub-lease income of $129 for all years combined, under
non-cancelable operating leases with terms of at least one year and capital leases were as follows:
54
Less current installments (2).
494
184
171
3,456
477
149.90 $
Total Cost
Average
Price per
Share
(000's)
3,184 $
Shares
Repurchased
2014
2016.
2015.
The Company's stock repurchase program is conducted under a $4,000 authorization by the Board of
Directors approved on April 17, 2015, which expires April 17, 2019. This authorization revoked previously
authorized but unused amounts, totaling $2,528. As of the end of 2016, the remaining amount available for
stock repurchases under the approved plan was $3,222. The following table summarizes the Company's
stock repurchase activity:
Stock Repurchase Programs
30
The Company's current quarterly dividend rate is $0.45 per share. In February 2015, the Company paid a
special cash dividend of $5.00 per share, totaling approximately $2,201.
(10)
374
(374)
748
3,120
$
593
2,204
32
166
31
364
Current
Deferred
State:
Accrued liabilities and reserves.
Deferred income/membership fees....
Equity compensation...
The components of the deferred tax assets (liabilities) are as follows:
The Company's provision for income taxes for 2015 was favorably impacted by a $57 tax benefit in
connection with the special cash dividend of $5.00 per share paid by the Company to employees, through
shares owned in the Company's 401(k) Retirement Plan. Dividends paid on these shares are deductible for
U.S. income tax purposes. There was no similar special cash dividend in 2016 and 2014.
57
34.7%
33.2% $ 1,109
34.3% $ 1,195
..$ 1,243
Total
Other (1)
0.6
1.2
39
(2.1)
(77)
(0.3)
(11)
(1.8)
(66)
(0.5)
(17)
(2.7)
20
(85)
Property and equipment.
Net deferred tax (liabilities)/assets...
59
58
The Company believes that its U.S. current and projected asset position is sufficient to meet its U.S. liquidity
requirements and has no current plans to repatriate for use in the U.S. the cash and cash equivalents and
short-term investments held by these non-U.S. subsidiaries whose earnings are considered indefinitely
reinvested.
The Company has not provided for U.S. deferred taxes on cumulative undistributed earnings of $3,280 and
$2,845 at the end of 2016 and 2015, respectively, of certain non-U.S. consolidated subsidiaries because the
subsidiaries have invested or will invest the undistributed earnings indefinitely, or the earnings, if repatriated
would not result in an adverse tax consequence. Because of the availability of U.S. foreign tax credits and
complexity of the computation, it is not practicable to determine the U.S. federal income tax liability that would
be associated with such earnings if such earnings were not deemed to be indefinitely reinvested.
During 2015, the Company repatriated a portion of the earnings in the Canadian operations that, in 2014, the
Company determined were no longer considered indefinitely reinvested. In the fourth quarter of 2015, the
Company changed its position regarding an additional portion of the undistributed earnings of the Canadian
operations, which are no longer considered indefinitely reinvested. These earnings were distributed in 2016.
Current exchange rates compared to historical rates when these earnings were generated resulted in an
immaterial U.S. benefit, which was recorded at the end of 2015. Subsequent to the end of fiscal 2016, the
Company determined that a portion of the undistributed earnings of its Canadian operations could be
repatriated without adverse tax consequences. Accordingly, the Company no longer considers that portion to
be indefinitely reinvested.
The Company has not provided for U.S. deferred taxes on cumulative undistributed earnings of certain non-
U.S. consolidated subsidiaries as such earnings are deemed by the Company to be indefinitely reinvested
because its subsidiaries have invested or will invest the undistributed earnings indefinitely, or the earnings if
repatriated would not result in an adverse tax consequence. Deferred taxes are recorded for earnings of
foreign operations when it is determined that such earnings are no longer indefinitely reinvested.
(1) Includes foreign tax credits of $78 and $33 for 2016 and 2015, respectively, which will expire beginning in 2025.
The deferred tax accounts at the end of 2016 and 2015 include non-current deferred income tax assets of
$202 and $219, respectively, included in other assets; and non-current deferred income tax liabilities of $297
and $51, respectively, included in other liabilities.
168
(95) $
.$
(200)
Merchandise inventories..
(256)
(779)
107
63
641
601
90
177
90
99 $
2015
2016
(560)
(3.5)
(0.6) (125)
(21)
129
(3)
21
107
131
108
591
754
701
(105)
(12)
132
233
468 $ 766 $
$
Total provision for income taxes
Total foreign...
Deferred
Current
Total state
Foreign:
Deferred
Current
Total federal.
696
104
398
399
Other...
Employee stock ownership plan (ESOP).
Foreign taxes, net..
2.1
66
2.3
35.0%
35.0% $ 1,119
35.0% $ 1,262
2.5
85
91
State taxes, net.
$ 1,267
Federal taxes at statutory rate.
2014
2015
2016
The reconciliation between the statutory tax rate and the effective rate for 2016, 2015, and 2014 is as follows:
Tax benefits associated with the exercise of employee stock programs were allocated to equity attributable to
Costco in the amount of $74, $86, and $84, in 2016, 2015, and 2014, respectively.
..$ 1,243 $ 1,195 $ 1,109
414
309
413
(90)
15
369
54
Gross assets recorded under capital and build-to-suit leases were $392 and $300 at the end of 2016 and
2015, respectively. These assets are recorded net of accumulated amortization of $63 and $42 at the end of
2016 and 2015, respectively.
Vested and delivered..
The aggregate rental expense for 2016, 2015, and 2014 was $250, $252, and $230, respectively. Sub-lease
income and contingent rent was not material in 2016, 2015, and 2014, respectively.
1,618
4 $
215
215
..$ 1,614 $
1,403
4
1,399
5
0
5
1,398
Gross unrealized gains and losses on available-for-sale securities were not material in 2016, 2015, and 2014.
At the end of 2016, the Company had no available-for-sale securities in a continuous unrealized-loss position,
and in 2015 and 2014, they were not material. There were no gross unrealized gains and losses on cash
equivalents at the end of 2016, 2015, or 2014.
4 $
Recorded
Basis
Unrealized
Gains, Net
Cost
Basis
Total short-term investments..
Certificates of deposit
Held-to-maturity:
Total available-for-sale....
Asset and mortgage-backed securities.
Government and agency securities.
Available-for-sale:
2015:
..$ 1,394 $
1,350
51
The proceeds from sales of available-for-sale securities were $291, $246, and $116 during 2016, 2015, and
2014, respectively. Gross realized gains or losses from sales of available-for-sale securities were not material
in 2016, 2015, and 2014.
1,035 $
1,029 $
..$
0
53
52
0
751
746
315
231 $
555
$
Held-To-Maturity
Fair Value
Cost Basis
Available-For-Sale
Note 3-Fair Value Measurement
Total.
years
Due after five
Due after one year through five years.
Due in one year or less.
The maturities of available-for-sale and held-to-maturity securities at the end of 2016, were as follows:
231
6 $
..$ 1,344 $
Total short-term investments..
In March 2016, the FASB issued new guidance on stock compensation, which is intended to simplify
accounting for share-based payment transactions. The guidance will change several aspects of the
accounting for share-based payment award transactions, including accounting for income taxes, forfeitures,
and minimum statutory tax withholding requirements. The new standard is effective for fiscal years and interim
periods within those years beginning after December 15, 2016, with early adoption permitted. The Company
plans to adopt this guidance at the beginning of its first quarter of fiscal year 2018.
In February 2016, the FASB issued new guidance on leases, which will require lessees to recognize assets
and liabilities on the balance sheet for the rights and obligations created by all leases with terms greater than
twelve months. The standard is effective for fiscal years and interim periods within those years beginning after
December 15, 2018, with early adoption permitted. The Company plans to adopt this guidance at the
beginning of its first quarter of fiscal year 2020.
Companies can transition to the standard either retrospectively or as a cumulative effect adjustment as of the
date of adoption. The new standard is effective for fiscal years and interim periods within those years
beginning after December 15, 2017. The Company plans to adopt this guidance at the beginning of its first
quarter of fiscal year 2019.
50
In May 2014, the FASB issued new guidance on the recognition of revenue from contracts with customers.
The guidance converges the requirements for reporting revenue and requires disclosures sufficient to
describe the nature, amount, timing, and uncertainty of revenue and cash flows arising from these contracts.
Recent Accounting Pronouncements Not Yet Adopted
In April 2014, the FASB issued guidance that changed the criteria for reporting discontinued operations, as
well as requiring new disclosures regarding discontinued operations and disposals that do not qualify for
discontinued operations reporting. This guidance became effective for fiscal years beginning after
December 15, 2014. The Company adopted this guidance at the beginning of fiscal year 2016. Adoption did
not have an impact on the Company's consolidated financial statements or disclosures.
In April 2015, the FASB issued guidance to simplify the presentation of debt issuance costs by recording
deferred debt issuance costs as a direct deduction from the carrying amount of the related debt liability. The
guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those
fiscal years, with early adoption permitted. The Company elected to early adopt the guidance at the beginning
of its first quarter of fiscal year 2016 on a retrospective basis. The Company reclassified deferred issuance
costs from other assets to the respective debt liability. Adoption of this guidance and prior fiscal year
reclassifications had an immaterial impact on previously reported consolidated financial statements and an
immaterial impact on the total assets by segment as disclosed in Note 11.
In November 2015, the Financial Accounting Standards Board (FASB) issued guidance on the presentation
of deferred tax assets and liabilities by jurisdiction, along with any related valuation allowance. The guidance
requires companies to classify all deferred tax assets and liabilities as non-current on the balance sheet on
either a prospective or retrospective basis. The guidance is effective for fiscal years and interim periods within
those years beginning after December 15, 2016, with early adoption permitted. The Company elected to early
adopt the guidance at the beginning of the second quarter of fiscal year 2016 on a retrospective basis and
reclassified deferred tax assets and liabilities from current to non-current. The reclassifications reduced other
current assets and other liabilities by $520 and $410, respectively, increased other assets by $109, and had
an immaterial impact on other current liabilities in the accompanying consolidated balance sheet for the fiscal
year ended August 30, 2015. Adoption of this guidance also had an immaterial impact on the total assets by
segment as disclosed in Note 11.
Recently Adopted Accounting Pronouncements
Repurchased shares of common stock are retired, in accordance with the Washington Business Corporation
Act. The par value of repurchased shares is deducted from common stock and the excess repurchase price
over par value is deducted by allocation to additional paid-in capital and retained earnings. The amount
allocated to additional paid-in capital is the current value of additional paid-in capital per share outstanding
and is applied to the number of shares repurchased. Any remaining amount is allocated to retained earnings.
See Note 6 for additional information.
The Company is evaluating the impact of these standards on its consolidated financial statements and
disclosures.
The computation of basic net income per share uses the weighted average number of shares that were
outstanding during the period. The computation of diluted net income per share uses the weighted average
number of shares in the basic net income per share calculation plus the number of common shares that would
be issued assuming vesting of all potentially dilutive common shares outstanding using the treasury stock
method for shares subject to RSUs and the "if converted" method for the convertible note securities.
Stock Repurchase Programs
indefinitely reinvested as of August 28, 2016. These earnings would be subject to U.S. income tax if we
changed our position and could result in a U.S. tax liability. Although the Company has historically asserted
that certain non-U.S. undistributed earnings will be permanently reinvested, it may repatriate such earnings to
the extent it can do so without an adverse tax consequence. See Note 8 for additional information.
49
49
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributed to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits and
loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences and carry-forwards are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. A valuation allowance is established when
necessary to reduce deferred tax assets to amounts that are more likely than not expected to be realized.
The determination of the Company's provision for income taxes requires significant judgment, the use of
estimates, and the interpretation and application of complex tax laws. Significant judgment is required in
assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain
tax positions. The benefits of uncertain tax positions are recorded in the Company's consolidated financial
statements only after determining a more-likely-than-not probability that the uncertain tax positions will
withstand challenge, if any, from tax authorities. When facts and circumstances change, the Company
reassesses these probabilities and records any changes in the consolidated financial statements as
appropriate. Additionally, certain of the Company's cumulative foreign undistributed earnings were considered
Income Taxes
Preopening expenses related to new warehouses, new regional offices and other startup operations are
expensed as incurred.
Preopening Expenses
The Company's asset retirement obligations (ARO) are primarily related to leasehold improvements that at
the end of a lease must be removed in order to comply with the lease agreement. These obligations are
recorded as a liability with an offsetting asset at the inception of the lease term based upon the estimated fair
value of the costs to remove the leasehold improvements. These liabilities are accreted over time to the
projected future value of the obligation using the Company's incremental borrowing rate. The ARO assets are
depreciated using the same depreciation method as the respective leasehold improvement assets and are
included with buildings and improvements. Estimated ARO liabilities associated with these leases amounted
to $64 and $54 at the end of 2016 and 2015, respectively, and are included in other liabilities in the
accompanying consolidated balance sheets.
The Company records an asset and related financing obligation for the estimated construction costs under
build-to-suit lease arrangements where it is considered the owner for accounting purposes, to the extent the
Company is involved in the construction of the building or structural improvements or has construction risk
prior to commencement of a lease. Upon occupancy, the Company assesses whether these arrangements
qualify for sales recognition under the sale-leaseback accounting guidance. If the Company continues to be
the deemed owner, it accounts for the arrangement as a financing lease.
The Company has capital leases for certain warehouse locations, expiring at various dates through 2054.
Capital lease assets are included in land and buildings and improvements in the accompanying consolidated
balance sheets. Amortization expense on capital lease assets is recorded as depreciation expense and is
predominately included in selling, general and administrative expenses. Capital lease liabilities are recorded
at the lesser of the estimated fair market value of the leased property or the net present value of the
aggregate future minimum lease payments and are included in other current liabilities and other liabilities in
the accompanying consolidated balance sheets. Interest on these obligations is included in interest expense
in the consolidated statements of income.
The Company accounts for its lease expense with free rent periods and step-rent provisions on a straight-line
basis over the original term of the lease and any extension options that the Company more likely than not
expects to exercise, from the date the Company has control of the property. Certain leases provide for
periodic rental increases based on price indices, or the greater of minimum guaranteed amounts or sales
volume.
Net Income per Common Share Attributable to Costco
Note 2-Investments
The Company's investments at the end of 2016 and 2015 were as follows:
2016:
315
315
9
9
306
306
1,035
6
1,029
1
0
1
Capital and Build-to-Suit Leases
6 $
..$ 1,028 $
Recorded
Basis
Unrealized
Gains, Net
Cost
Basis
Total held-to-maturity
Bankers' acceptances..
Certificates of deposit
Held-to-maturity:
Asset and mortgage-backed securities.
Total available-for-sale.
Government and agency securities
Available-for-sale:
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tables below present information at the end of 2016 and 2015, respectively, regarding the Company's
financial assets and financial liabilities that are measured at fair value on a recurring basis and indicate the
level within the fair value hierarchy reflecting the valuation techniques utilized to determine such fair value.
1,034
2015:
771
Other long-term debt.
484
496
512
497
2.25% Senior Notes due February 2022.
494
497
508
498
803
1.75% Senior Notes due February 2020.
1,195
1,219
1,196
1,097
1,098
1,103
1,099
1,099 1,171
1,100 1,129
1,200 $ 1,201
0 $ 0 $
1,186
550
555
Total long-term debt.
2016:
Operating Leases
Note 5-Leases
Total.
Thereafter
$ 5,171
978
100
1,698
100
..$ 1,100
1,195
2021
2020.
2019.
2018.
2017.
Maturities of long-term debt during the next five fiscal years and thereafter, excluding deferred issuance costs,
are as follows:
..$ 4,061 $ 4,144 $ 4,852 $ 4,904
Long-term debt, excluding current portion.........
1,283 1,284
1,100 1,130
6,188
6,135
5,274
5,161
0.65% Senior Notes due December 2015
5.5% Senior Notes due March 2017.
1.125% Senior Notes due December 2017.
1.7% Senior Notes due December 2019
Value
Less current portion.
Carrying
Value
1,398
0
306 $
0
.$
Level 2
Level 1
$ 222 $1,033
(13)
0
11
0
1
1,034
0
222 $
.$
Level 2
Level 1
(2)
Total.
Investment in government and agency securities
Investment in asset and mortgage-backed securities.
Forward foreign-exchange contracts, in asset position (2)
Forward foreign-exchange contracts, in (liability) position
Money market mutual funds (1)
Investment in government and agency securities
Investment in asset and mortgage-backed securities.
Forward foreign-exchange contracts, in asset position (2)
Forward foreign-exchange contracts, in (liability) position
Total...
Fair
Money market mutual funds (1)
5
16
0
(4)
Carrying
Value
0
2015
2016
The estimated fair value of the Company's debt was based primarily on reported market values, recently
completed market transactions, and estimates based upon interest rates, maturities, and credit. The carrying
value and estimated fair value at the end of 2016 and 2015 consisted of the following:
the Company's Japanese subsidiary issued approximately $103 of 0.63% Guaranteed Senior Notes through a
private placement. Interest is payable semi-annually, and principal is due in March 2026. Additionally in June
2016, the Company's Japanese subsidiary issued approximately $93 of zero percent Guaranteed Senior
Notes through a private placement. Interest is payable semi-annually, and principal is due in June 2021. Both
notes are included in other long-term debt in the table below.
53
Fair
Value
In February 2007, the Company issued $1,100 of 5.5% Senior Notes due March 15, 2017 (2007 Senior Note).
Interest is payable semi-annually. The Company, at its option, may redeem the 2007 Senior Note at any time,
in whole or in part, at a redemption price plus accrued interest. The redemption price is equal to the greater of
100% of the principal amount of the 2007 Senior Note to be redeemed or the sum of the present value of the
remaining scheduled payments of principal and interest to maturity. Additionally, the Company will be required
to make an offer to purchase the 2007 Senior Note at a price of 101% of the principal amount plus accrued
and unpaid interest to the date of repurchase, upon certain events as defined by the terms of the 2007 Senior
Note. The discount and issuance costs associated with the 2007 Senior Note are being amortized to interest
expense over the term of the note. This note is valued using Level 2 inputs.
On February 17, 2015, the Company issued $1,000 in aggregate principal amount of Senior Notes (February
2015 Notes), as follows: $500 of 1.75% Senior Notes due February 15, 2020; and $500 of 2.25% Senior
Notes due February 15, 2022. Interest is due semi-annually on February 15 and August 15; the first payment
was made on August 15, 2015. The Company, at its option, may redeem the February 2015 Notes at any
time, in whole or in part, at the redemption price plus accrued and unpaid interest to the date of redemption.
The redemption price is equal to the greater of 100% of the principal amount of the notes to be redeemed or
the sum of the present value of the remaining scheduled payments of principal and interest to maturity. The
Company will be required to offer to purchase the February 2015 Notes, at a price of 101% of the principal
amount plus accrued and unpaid interest to the date of repurchase, upon certain events as defined by the
terms of the February 2015 Notes. The discount and issuance costs associated with the February 2015 Notes
are being amortized to interest expense over the term of the notes, which are valued using Level 2 inputs.
In December 2012, the Company issued $3,500 in aggregate principal amount of Senior Notes (December
2012 Notes) as follows: $1,200 of 0.65% Senior Notes due December 7, 2015; $1,100 of 1.125% Senior
Notes due December 15, 2017; and $1,200 of 1.7% Senior Notes due December 15, 2019. Interest is payable
semi-annually. The Company, at its option, may redeem the December 2012 Notes at any time, in whole or in
part, at a redemption price plus accrued interest. The redemption price is equal to the greater of 100% of the
principal amount of the December 2012 Notes to be redeemed or the sum of the present value of the
remaining scheduled payments of principal and interest to maturity. Additionally, the Company will be required
to make an offer to purchase the December 2012 Notes at a price of 101% of the principal amount plus
accrued and unpaid interest to the date of repurchase, upon certain events as defined by the terms of the
December 2012 Notes. The discount and issuance costs associated with the December 2012 Notes are being
amortized to interest expense over the terms of the notes. In December 2015, the Company paid the
outstanding principal balance and interest on the 0.65% Senior Notes with existing sources of cash and cash
equivalents and short term investments. The remaining December 2012 Notes are valued using Level 2
inputs.
In 2016, the average and maximum short term borrowings in Japan were $99 and $110, respectively, and had
a weighted average interest rate of 0.52% during the year. All other short term borrowings during the year
were immaterial. In 2015, the average and maximum short term borrowings were immaterial.
Long-Term Debt
The Company enters into various short-term bank credit facilities, totaling $429 and $407 in 2016 and 2015,
respectively. At the end of 2016 and 2015, there were no outstanding borrowings under these credit facilities.
Short-Term Borrowings
Other long-term debt consisted primarily of promissory notes and term loans issued by the Company's
Japanese subsidiary. These notes and term loans are valued primarily using Level 3 inputs. In March 2016,
306 $ 1,415
Nonfinancial assets measured at fair value on a nonrecurring basis include items such as long-lived assets
that are measured at fair value resulting from an impairment, if deemed necessary. There were no fair value
adjustments to nonfinancial assets during 2016 and these adjustments were immaterial during 2015.
59
52
Financial assets measured at fair value on a nonrecurring basis include held-to-maturity investments that are
carried at amortized cost and are not remeasured to fair value on a recurring basis. There were no fair value
adjustments to these financial assets during 2016 and 2015. See Note 4 for discussion on the fair value of
long-term debt.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During and at the end of both 2016 and 2015, the Company did not hold any Level 3 financial assets and
liabilities that were measured at fair value on a recurring basis. There were no transfers in or out of Level 1 or
2 during 2016 and 2015.
.$
(1) Included in cash and cash equivalents in the accompanying consolidated balance sheets.
(2) The asset and the liability values are included in other current assets and other current liabilities, respectively, in the
accompanying consolidated balance sheets. See Note 1 for additional information on derivative instruments.
Note 4-Debt
$ 26,151
832
27,220
Total revenue.
28,170
2,646
618
$ 116,073
593
Membership fees.
$ 35,728
REVENUE
Net sales.
$ 26,627 $ 27,567
603
26,769
administrative
118,719
12,068
3,696
Preopening expenses..
Total
(52 Weeks)
2,731
2,835
2,806
Selling, general and
102,901
31,649
23,162
24,469
23,621
Merchandise costs
OPERATING EXPENSES
36,560
Fourth
Quarter
(16 Weeks)
3,036
Second
Quarter
(12 Weeks)
6,187
4,889
21,586
14,830
1,662
10,132
32,662
1,993
204
1,245
1,029
26
124
150
544
The following table summarizes the percentage of net sales by merchandise category:
Foods
Sundries.
First
Quarter
(12 Weeks)
52 Weeks Ended August 28, 2016
The two tables that follow reflect the unaudited quarterly results of operations for 2016 and 2015.
Note 12-Quarterly Financial Data (Unaudited)
16% 17%
12% 11% 11%
15%
14% 14% 13%
16% 16% 16%
21% 21% 21%
2016 2015 2014
22% 22% 22%
62
A copy of Costco's annual report to the Securities and Exchange Commission on Form 10-K and quarterly
reports on Form 10-Q will be provided to any shareholder upon written request directed to Investor
Relations, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027. Internet users
can access recent sales and earnings releases, the annual report and SEC filings, as well as our Costco
Online web site, at http://www.costco.com. E-mail users may direct their investor relations questions to
investor@costco.com. All of the Company's filings with the SEC may be obtained at the SEC's Public
Reference Room at Room 1580, 100 F Street NE, Washington, DC 20549. For information regarding the
operation of the SEC's Public Reference Room, please contact the SEC at 1-800-SEC-0330. Additionally,
the SEC maintains an internet site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC at www.sec.gov.
Softlines..
Other
Fresh Foods.
Hardlines.
Third
Quarter
(12 Weeks)
10
546
24
480
$
TO COSTCO..
NET INCOME ATTRIBUTABLE
(26)
(6)
$
(4)
(7)
noncontrolling interests.
Net income attributable to
2,376
785
549
(9)
$
545 $
779 $
$
755
1.24
$
SA | SA
1.09
$
Diluted
1.10
$
Basic............
COSTCO:
SHARE ATTRIBUTABLE TO
NET INCOME PER COMMON
2,350
555
18
487
Net income including
(133)
(39)
(30)
(31)
(33)
Interest expense.
Interest income and other, net..
OTHER INCOME (EXPENSE)
1,191
858
856
767
Operating income.
78
3,672
28
16
7
1,243
396
286
286
275
Provision for income taxes.
3,619
1,181
835
841
762
TAXES
INCOME BEFORE INCOME
80
29
noncontrolling interests.
3,220
NORTHERN DIVISION
Northwest Region
1045 Lake Drive
Issaquah, WA 98027
796
12
10
3,249
438,693
439,455
438,585
2,668
3,771
21
.$ 2,350 $ 2,377 $ 2,058
Note 10 Commitments and Contingencies
Weighted average number of common shares and dilutive potential
of common stock used in diluted net income per share.
Conversion of convertible notes
RSUs
Weighted average number of common shares used in basic net
income per common share
Net income available to common stockholders after assumed
conversions of dilutive securities
Legal Proceedings
441,263 442,716 442,485
The Company is involved in a number of claims, proceedings and litigation arising from its business and
property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual
for legal proceedings if and when those matters reach a stage where they present loss contingencies that are
both probable and reasonably estimable. There may be exposure to loss in excess of any amounts accrued.
The Company monitors those matters for developments that would affect the likelihood of a loss (taking into
account where applicable indemnification arrangements concerning suppliers and insurers) and the accrued
amount, if any, thereof, and adjusts the amount as appropriate. As of the date of this Report, the Company
has recorded an immaterial accrual with respect to two matters described below. If the loss contingency at
issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will
continue to monitor the matter for developments that will make the loss contingency both probable and
reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a
loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or
range of loss (including any loss in excess of the accrual) cannot in our view be reasonably estimated
because, among other things: (i) the remedies or penalties sought are indeterminate or unspecified; (ii) the
legal and/or factual theories are not well developed; and/or (iii) the matters involve complex or novel legal
theories or a large number of parties.
The Company is a defendant in the following matters, among others:
Depreciation and amortization..
Operating income
Total revenue.
2016
The Company and its subsidiaries are principally engaged in the operation of membership warehouses in
the U.S., Canada, Mexico, U.K., Japan, Australia, and Spain and through majority-owned subsidiaries in
Taiwan and Korea. The Company's reportable segments are largely based on management's organization of
the operating segments for operational decisions and assessments of financial performance, which
considers geographic locations. The material accounting policies of the segments are the same as
described in Note 1. All material inter-segment net sales and expenses have been eliminated in computing
total revenue and operating income. Certain operating expenses, predominantly stock-based compensation,
are incurred on behalf of the Company's Canadian and Other International operations, but are included in
the U.S. operations because those costs are not allocated internally and generally come under the
responsibility of the Company's U.S. management team.
Note 11-Segment Reporting
61
119
The Company does not believe that any pending claim, proceeding or litigation, either alone or in the
aggregate, will have a material adverse effect on the Company's financial position; however, it is possible that
an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be
material to the results of an individual fiscal quarter.
The Company has received from the Drug Enforcement Administration subpoenas and administrative
inspection warrants concerning the Company's fulfillment of prescriptions related to controlled substances and
related practices. Offices of the United States Attorney in various districts have communicated to the
Company their belief that the Company has committed civil regulatory violations concerning these subjects.
The Company is seeking to cooperate with these processes and is holding discussions concerning a potential
resolution.
The Company received notices from most states stating that they have appointed an agent to conduct an
examination of the books and records of the Company to determine whether it has complied with state
unclaimed property laws. In addition to seeking the turnover of unclaimed property subject to escheat laws,
the states may seek interest, penalties, costs of examinations, and other relief. Certain states have separately
also made requests for payment by the Company concerning a specific type of property, some of which have
been paid in immaterial amounts.
(N.D. Cal.); J.C. Wash, et al., v. Chevron USA, Inc., et al.; Case No. 4:07cv37 (E.D. Mo.); Jonathan Charles
Conlin, et al., v. Chevron USA, Inc., et al.; Case No. 07 0317 (M.D. Tenn.); William Barker, et al. v. Chevron
USA, Inc., et al.; Case No. 07-cv-00293 (D.N.M.); Melissa J. Couch, et al. v. BP Products North America, Inc.,
et al., Case No. 07cv291 (E.D. Tex.); S. Garrett Cook, Jr., et al., v. Hess Corporation, et al., Case No. 07cv750
(M.D. Ala.); Jeff Jenkins, et al. v. Amoco Oil Company, et al., Case No. 07-cv-00661 (D. Utah); and Mark
Wyatt, et al., v. B. P. America Corp., et al., Case No. 07-1754 (S.D. Cal.). On June 18, 2007, the Judicial
Panel on Multidistrict Litigation assigned the action, entitled In re Motor Fuel Temperature Sales Practices
Litigation, MDL Docket No 1840, to Judge Kathryn Vratil in the United States District Court for the District of
Kansas. On April 12, 2009, the Company agreed to settle the actions in which it is named as a defendant.
Under the settlement, which was subject to final approval by the court, the Company agreed, to the extent
allowed by law and subject to other terms and conditions in the agreement, to install over five years from the
effective date of the settlement temperature-correcting dispensers in the States of Alabama, Arizona,
California, Florida, Georgia, Kentucky, Nevada, New Mexico, North Carolina, South Carolina, Tennessee,
Texas, Utah, and Virginia. Other than payments to class representatives, the settlement does not provide for
cash payments to class members. On September 22, 2011, the court preliminarily approved a revised
settlement, which did not materially alter the terms. On April 24, 2012, the court granted final approval of the
revised settlement. A class member who objected has filed a notice of appeal from the order approving the
settlement. Plaintiffs have moved for an award of $10 in attorneys' fees, as well as an award of costs and
payments to class representatives. A report and recommendation has been issued in favor of a fee award of
$3.8, to which the Company is objecting. On August 24, 2016, the district court affirmed the report and
recommendation. On March 20, 2014, the Company filed a notice invoking a "most favored nation" provision
under the settlement, under which it seeks to adopt provisions in later settlements with certain other
defendants. The motion was denied on January 23, 2015. Final judgment was entered on September 22,
2015, and the Company has filed a notice of appeal.
60
60
Numerous putative class actions have been brought around the United States against motor fuel retailers,
including the Company, alleging that they have been overcharging consumers by selling gasoline or diesel
that is warmer than 60 degrees without adjusting the volume sold to compensate for heat-related expansion
or disclosing the effect of such expansion on the energy equivalent received by the consumer. The Company
is named in the following actions: Raphael Sagalyn, et al., v. Chevron USA, Inc., et al., Case No. 07-430 (D.
Md.); Phyllis Lerner, et al., v. Costco Wholesale Corporation, et al., Case No. 07-1216 (C.D. Cal.); Linda A.
Williams, et al., v. BP Corporation North America, Inc., et al., Case No. 07-179 (M.D. Ala.); James Graham, et
al. v. Chevron USA, Inc., et al., Civil Action No. 07-193 (E.D. Va.); Betty A. Delgado, et al., v. Allsups,
Convenience Stores, Inc., et al., Case No. 07-202 (D.N.M.); Gary Kohut, et al. v. Chevron USA, Inc., et al.,
Case No. 07-285 (D. Nev.); Mark Rushing, et al., v. Alon USA, Inc., et al., Case No. 06-7621 (N.D. Cal.);
James Vanderbilt, et al., v. BP Corporation North America, Inc., et al., Case No. 06-1052 (W.D. Mo.); Zachary
Wilson, et al., v. Ampride, Inc., et al., Case No. 06-2582 (D. Kan.); Diane Foster, et al., v. BP North America
Petroleum, Inc., et al., Case No. 07-02059 (W.D. Tenn.); Mara Redstone, et al., v. Chevron USA, Inc., et al.,
Case No. 07-20751 (S.D. Fla.); Fred Aguirre, et al. v. BP West Coast Products LLC, et al., Case No. 07-1534
2014
Additions to property and equipment..
2015
The following table shows the amounts used in computing net income per share and the effect on net income
and the weighted average number of shares of potentially dilutive common shares outstanding (shares in
000's):
2
75
158 $
2015
2016
Gross unrecognized tax benefit at end of year.
26
Lapse of statute of limitations
Gross decreases-tax positions in prior years
Gross increases-tax positions in prior years..
Gross increases-current year tax positions....
Gross unrecognized tax benefit at beginning of year.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2016 and 2015 is
as follows:
69 | 69
Settlements.........
1
63
(47)
Note 9-Net Income per Common and Common Equivalent Share
59
59
The Company files income tax returns in the United States, various state and local jurisdictions, in Canada
and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S.
federal, state or local examination for years before fiscal 2013. The Company is currently subject to
examination in Canada for fiscal years 2012 to present and in California for fiscal years 2007 to present. No
other examinations are believed to be material.
The Company is currently under audit by several taxing jurisdictions in the United States and in several
foreign countries. Some audits may conclude in the next 12 months and the unrecognized tax benefits we
have recorded in relation to the audits may differ from actual settlement amounts. It is not practical to estimate
the effect, if any, of any amount of such change during the next 12 months to previously recorded uncertain
tax positions in connection with the audits. The Company does not anticipate that there will be a material
increase or decrease in the total amount of unrecognized tax benefits in the next 12 months.
Accrued interest and penalties related to income tax matters are classified as a component of income tax
expense. Interest and penalties recognized by the Company were not material in 2016 and 2015. Accrued
interest and penalties were not material at the end of 2016 and 2015.
The gross unrecognized tax benefit includes tax positions for which the ultimate deductibility is highly certain
but there is uncertainty about the timing of such deductibility. At the end of 2016 and 2015, these amounts
were immaterial and $50, respectively. Because of the impact of deferred tax accounting, other than interest
and penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would
accelerate the payment of cash to the taxing authority to an earlier period. At the end of 2015, the Company
recorded an offsetting long-term asset of $48. There was no offsetting long-term asset at the end of 2016.
The total amount of such unrecognized tax benefits that, if recognized, would favorably affect the effective
income tax rate in future periods is $46 and $98 at the end of 2016 and 2015, respectively.
158
52 $
.$
(2)
(37)
(3)
(25)
(1)
2016
544
Net property and equipment..
2015
119
848
3,624
545
771
2,308
160
116,199
17,341 $
84,351 $
$
33,163
7,172
3,480
14,507 $
1,127
1,574
148
1,880
112,640
14,220 $
17,943 $
80,477 $
33,017
6,421
3,608
22,988
15,401
3,205
1,381
10,815
2,393
671
22,511
Total assets......
17,043
1,628
United States
Operations
Total assets.....
Net property and equipment..
Additions to property and equipment..
Depreciation and amortization.
Operating income
Canadian
Operations
Total revenue...
Total assets..
Net property and equipment.
Additions to property and equipment....
Depreciation and amortization..
Operating income
Total revenue.
2014
Other
International
Operations
Total
$
11,745
2,649
527
299
1,823
1,255
200
109
946
3,672
568
778
2,326
118,719
86,579 $ 17,028 $ 15,112 $
3,670
$ 1.24
62
Chief Compliance Officer
(1) Includes a $57 tax benefit recorded in the second quarter in connection with the special cash dividend paid to employees through
the Company's 401(k) Retirement Plan.
(2) Includes the special cash dividend of $5.00 per share paid in February 2015.
49
64
Jeffrey H. Brotman
Co-Founder, Chairman of the Board, Costco
Susan L. Decker(a)
Principal of Deck3 Ventures LLC;
Former President of Yahoo! Inc.
Daniel J. Evans (a)(c)
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Chairman, Daniel J. Evans Associates; Former U.S.
Senator and Governor of the State of Washington
6.51
Richard A. Galanti
Officer, Costco
Hamilton E. James
President and Chief Operating Officer,
The Blackstone Group
W. Craig Jelinek
President and Chief Executive Officer, Costco
Richard M. Libenson
A Founder, former Director and Executive Officer of
The Price Company
Jeffrey Abadir
John W. Meisenbach
President of MCM, A Meisenbach Company
Charles T. Munger (a)*(b)
Vice Chairman of the Board of Berkshire Hathaway Inc.;
Chairman of the Board of Daily Journal Corporation
Jeffrey S. Raikes
Executive Vice President and Chief Financial
(c)*
$
$
1.13 $
EA
1.36 $
1.17
$
1.75 $
5.41
Diluted
$
1.12 $
1.35 $
1.17
$
0.40
1.73 $
Shares used in calculation (000's)
Basic.
438,760
Diluted
442,210
440,384
442,896
440,070
443,132
438,835
442,404
439,455
442,716
CASH DIVIDENDS DECLARED
PER COMMON SHARE
0.355
5.355 (2) $
0.40
5.37
Founder and CEO of the Raikes Foundation; Former
CEO of the Bill and Melinda Gates Foundation
James D. Sinegal
Co-Founder, former President and CEO, Costco
John W. Stanton (b)*
Chairman of Trilogy International Partners, Inc.;
Chairman of Trilogy Equity Partners
Jaime Gonzalez
Senior Vice President, General Manager - Mexico
William Hanson
Senior Vice President, Merchandising - Foods & Sundries
Daniel M. Hines
Senior Vice President, Corporate Controller
W. Craig Jelinek
President and Chief Executive Officer
James Klauer
Senior Vice President, Merchandising - Non-Foods &
Ecommerce
Paul W. Latham
Senior Vice President, Membership, Marketing,
Franz E. Lazarus
Services & Publishing
Executive Vice President, Administration
Executive Vice President, Chief Financial Officer
Jeffrey R. Long
Jeffrey B. Lyons
Senior Vice President, Merchandising - Fresh Foods
John D. McKay
Executive Vice President, COO - Northern Division
David Messner
Senior Vice President, Real Estate Development
Russ D. Miller
Senior Vice President, General Manager - Western
Canada Region
Ali Moayeri
Senior Vice President, Construction
Paul G. Moulton
Executive Vice President, Chief Information Officer
James P. Murphy
Executive Vice President, COO - International Division
Mario Omoss
Senior Vice President, General Manager - Northwest Region
Stephen M. Pappas
Senior Vice President, General Manager - Europe
David S. Petterson
Senior Vice President, General Manager - Northeast Region
Senior Vice President, General Manager - Midwest Region
Richard A. Galanti
John B. Gaherty
Senior Vice President, General Manager - Los Angeles
Region
Maggie A. Wilderotter (c)
Former Executive Chairman of Frontier Communications
Board Committees
(a) Audit Committee
(b) Compensation Committee
(c) Nominating and Governance Committee
* 2016 Committee Chair
EXECUTIVE AND SENIOR OFFICERS
Senior Vice President, General Manager -
Bay Area Region
Andree T. Brien
Senior Vice President, National Merchandising -
Canadian Division
Jeffrey H. Brotman
Chairman of the Board
Donald E. Burdick
Senior Vice President, Ecommerce and Travel
Patrick J. Callans
Senior Vice President, Human Resources and
Risk Management
Richard Chang
Senior Vice President, General Manager - Asia
Richard C. Chavez
Senior Vice President, Costco Wholesale Industries &
Business Development
Victor A. Curtis
Senior Vice President, Pharmacy
Richard Delie
Senior Vice President, Merchandising - Non-Foods &
Ecommerce
Caton Frates
.$
Basic...........
COSTCO:
SHARE ATTRIBUTABLE TO
$ 25,517
$ 34,993
$ 113,666
Membership fees.
582
582
584
785
2,533
Total revenue.
26,866
27,454
26,101
$ 26,284 $ 26,872
35,778
OPERATING EXPENSES
Merchandise costs
23,385
23,897
22,687
31,096
101,065
Selling, general and
administrative
2,696
2,671
2,579
3,499
116,199
Net sales....
REVENUE
Total
(52 Weeks)
$ 1.78 $
5.36
$ 1.77 $
5.33
Shares used in calculation (000's)
Basic...
438,342
Diluted
441,386
439,648
441,559
438,815
441,066
437,809
440,868
438,585
441,263
CASH DIVIDENDS DECLARED
PER COMMON SHARE
$
0.40 $
0.40
$
0.45 $ 0.45 $
1.70
63
83
Note 12-Quarterly Financial Data (Unaudited) (Continued)
52 Weeks Ended August 30, 2015
First
Quarter
(12 Weeks)
Second
Quarter
(12 Weeks)
Third
Quarter
(12 Weeks)
Fourth
Quarter
(16 Weeks)
11,445
Senior Vice President, Accounting
Preopening expenses..
9
280
378
1,195
Net income including
noncontrolling interests.
505
607
519
778
2,409
Net income attributable to
noncontrolling interests.
(9)
(9)
263
(3)
(32)
NET INCOME ATTRIBUTABLE
TO COSTCO.
496
$
598
$
516
SA
$
767 $
2,377
NET INCOME PER COMMON
(11)
(1)
274
Provision for income taxes.
14
27
65
Operating income.
770
877
821
1,156
3,624
OTHER INCOME (EXPENSE)
Interest expense.
(26)
(27)
(31)
(40)
(124)
Interest income and other, net..
35
20
9
40
104
INCOME BEFORE INCOME
TAXES
779
870
799
1,156
3,604
15
SA SA
Joseph P. Portera
Pierre Riel
Construction
Todd Thull
Construction
Adrian Thummler
Operations Mexico
Diane Tucci
Country Manager - Spain
Azmina K. Virani
Sr. GMM-Non-Foods - Canadian Division
Sarah Wehling
GMM - Food & Sundries - Los Angeles
Region
Jack Weisbly
GMM Corporate Non-Foods
Shannon West
GMM Corporate Non-Foods
Craig Wilson
GMM-Optical, Optical Labs, Mini-labs
& Gasoline - Canadian Division
Keith H. Thompson
Food Safety & Quality Assurance
Charlie A. Winters
Operations Fresh Meat, Produce &
Service Deli
Earl Wiramanaden
GMM - Fresh Foods - Asia/Australia
66
ADDITIONAL INFORMATION
FSC® C132107
responsible sources
Paper from
MIX
www.fsc.org
FSC
WHOLESALE
COSTCO
-
67
Operations Midwest Region
Yves Thomas
Country Manager - Japan
Brian Thomas
Operations - Northeast Region
Giro Rizzuti
GMM - Non-Foods - Canadian Division
Aldyn J. Royes
Operations - Southeast Region
Chris Rylance
Information Systems
Drew Sakuma
Operations Bay Area Region
Debbie Sarter
Operations - Los Angeles Region
Adam Self
Operations Northeast Region
Janet Shanks
-
GMM-Fresh Foods - Canadian Division
GMM Corporate Non-Foods
Louie Silveira
Manager Taiwan
David L. Skinner
Operations - Eastern Canada Region
Monica Smith
Corporate Tax and Customs Compliance
James Stafford
GMM - Foods - Northeast Region
Richard Stephens
Operations Pharmacy
Kimberley L. Suchomel
GMM - International
Steve Supkoff
Operations Ecommerce
Gary Swindells
Country Manager - France
Mauricio Talayero
Chief Financial Officer - Mexico
Ken J. Theriault
Geoff Shavey
Stock Symbol: COST
The NASDAQ Global Select Market
Stock Exchange Listing
3-1-4 Ikegami-Shincho
Kawasaki-ku Kawasaki-shi
Kanagawa, 210-0832 Japan
Japan Region
INTERNATIONAL DIVISION
United Kingdom Region
213 Hartspring Lane
Watford, England
WD25 8JS
4500 Still Creek Drive, Unit A
Burnaby, BC V5C 0E5, Canada
Western Region
415 West Hunt Club Road
Ottawa, ON K2E 1C5, Canada
Eastern Region
CANADIAN DIVISION
3980 Venture Drive NW, #W100
Duluth, GA 30096
Southeast Region
45940 Horseshoe Drive, Suite 150
Sterling, VA 20166
EASTERN DIVISION
Northeast Region
Division and Region Offices
Korea Region
40, Iljik-ro
(425) 313-8100
Corporate Office
1701 Dallas Parkway, Suite 201
Plano, TX 75093
Texas Region
San Diego, CA 92117
4649 Morena Blvd.
San Diego Region
11000 Garden Grove Blvd., #201
Garden Grove, CA 92843
Los Angeles Region
SOUTHWEST DIVISION
1901 West 22nd Street, 2nd Floor
Oak Brook, IL 60523
Midwest Region
2820 Independence Drive
Livermore, CA 94551
Bay Area Region
999 Lake Drive
Issaquah, WA 98027
Gwangmyeong-si
Gyeonggi-do, 14347, Korea
Taiwan Region
Website: https://www.computershare.com/investor
Outside U.S.: (201) 680-6578
TDD for Hearing Impaired: (800) 490-1493
Telephone: (800) 249-8982
College Station, TX 77842-3170
P. O. Box 30170
Costco Shareholder Relations
Computershare
Transfer Agent
1918 Eighth Avenue, Suite 2900
Seattle, WA 98101
Independent Public Accountants
KPMG LLP
Bellevue, Washington 98004
11100 NE 6th Street
Thursday, January 26, 2017 at 4:00 PM
Meydenbauer Center
Annual Meeting
La Herradura 52760
Huixquilucan, Mexico
Col. San Fernando
Boulevard Magnocentro #4
Mexico Region
Polígono Empresarial Los Gavilanes
28906 Getafe, Madrid, Spain
Calle Agustín de Betancourt, 17
Spain Region
91190 Saint-Aubin, France
Parc des Algorithmes
Route de l'Orme des Merisiers
Immeuble le Thalés
France Region
17-21 Parramatta Rd.
Lidcombe, NSW, 2141, Australia
Australia Region
255 Min Shan Street
Neihu, Taipei 114, Taiwan
Operations - Southeast Region
Paul Pulver
GMM- Corporate Non-Foods
Steven D. Powers
Operations - Los Angeles Region
Michael Parrott
Shawn Parks
Operations - Northwest Region
Timothy Bowersock
Information Systems
Kimberly F. Brown
Operations - Texas Region
Deborah Calhoun
GMM Foods - San Diego Region
Michael G. Casebier
Operations Texas Region
Mike Cho
Country Manager - Korea
Jeffrey M. Cole
Gasoline, Car Wash & Mini-labs
Operations San Diego Region
Christopher Bolves
Julie L. Cruz
Wendy Davis
Operations Midwest Region
Russ Decaire
GMM - Foods & Sundries -
Northwest Region
Gino Dorico
Operations - Eastern Canada Region
Heather Downie
Operations - Western Canada Region
Debbie Ells
GMM - Softlines - Canadian Division
Liz Elsner
International Ecommerce
Frank Farcone
-
Operations Los Angeles Region
Timothy K. Farmer
Operations - Southeast Region
-
Financial Accounting Controller
Bryan Blank
Tiffany Barbre
Senior Vice President, General Manager - Eastern
Canada Region
Timothy L. Rose
Executive Vice President, Ancillary Businesses,
Manufacturing & Business Centers
Yoram B. Rubanenko
Senior Vice President, General Manager - Southeast Region
James W. Rutherford
Senior Vice President, Information Systems
John Sullivan
Senior Vice President, General Counsel &
John D. Thelan
Senior Vice President, Depots & Traffic
Ron M. Vachris
Executive Vice President, COO - Merchandising
Richard L. Webb
Senior Vice President, General Manager - Texas Region
Richard Wilcox
Senior Vice President, General Manager - San Diego Region
Dennis R. Zook
Executive Vice President, COO - Southwest
Division & Mexico
65
VICE PRESIDENTS
Claudine Adamo
GMM - Corporate Non-Foods
James J. Andruski
GMM - Foods & Sundries - Western
Canada Region
Marc-André Bally
GMM - Business Centers -
Canadian Division
GMM-Corporate Non-Foods
Christopher E. Fleming
Executive Vice President, COO - Eastern & Canadian
Divisions and Chief Diversity Officer
Operations - Western Canada Region
GMM-Hardlines - Canadian Division
Mitzi Hu
GMM - Imports
Ross A. Hunt
Human Resources, Finance & IS -
Canadian Division
Jeff Ishida
Real Estate - Eastern Division
Arthur D. Jackson, Jr.
Administration & Community Giving
Gary Kotzen
GMM Global Sourcing
William Koza
Operations - Midwest Region
Robert Leuck
Operations - Northeast Region
Steve Mantanona
GMM - Merchandising – Mexico
Mark Maushund
Internal Audit
Operations - Los Angeles Region
Susan McConnaha
Operations - Midwest Region
Tim Murphy
GMM-Foods - Bay Area Region
Robert Murvin
GMM
Foods - Texas Region
Robert E. Nelson
Treasury, Financial Planning &
Investor Relations
Pietro Nenci
GMM Foods & Sundries, Quality
Assurance, Food Safety & Business
Delivery Canadian Division
Patrick J. Noone
-
Country Manager - Australia
Frank Padilla
GMM-Corporate Produce &
Fresh Meat
Daniel Parent
Operations - Eastern Canada Region
Operations Bakery & Food Court
Daniel McMurray
Scott Howe
GMM-Ecommerce - Canadian Division
Graham E. Hillier
Anthony Fontana
Operations - Northeast Region
Thomas J. Fox
GMM-Bakery & Food Court
Jack S. Frank
Real Estate Development - West
Lorelle S. Gilpin
Marketing Canadian Division
―
Joseph Grachek III
Merchandise Accounting Controller
Darby Greek
Operations Bay Area Region
Nancy Griese
GMM - Corporate Foods
Martin Groleau
GMM- Non-Foods - Canadian Division
Peter Gruening
Costco Travel
Doris Harley
GMM - Foods - Southeast Region
Eric Harris
Warehouse Operations & Facilities
Jim Harrison
Transportation
David Harruff
Operations Northwest Region
Timothy Haser
Information Systems
James Hayes
Operations Northwest Region
-
Murray T. Fleming
1.24 $ 1.24
$
Costco Wholesale Corporation
(Exact name of registrant as specified in its charter)
Craig Jelinek
President and Chief Executive Officer
COSTCO 768 locations as of December 31, 2018
WHOLESALE
UNITED
STATES
Mexico
39
Canada
Commission file number 0-20355
100
50
49.4
51.6
21
# of
Whses
2018
Year
Opened
Executive
United States and
Paid Membership
Cray Jelek
Thank you for your continued trust in and support of Costco. May the year ahead bring you and your families
good health, happiness, peace, and prosperity.
$105
$103 120
$94 106 122
558 $131 140 149 158 166 173 173 172 177 190
762 $131 $139 $146 $155 $160 $164 $162 $159 $163 $176
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Fiscal Year
*First year sales annualized.
2009 and 2010 exclude the results of our joint venture partnership in Mexico
December 14, 2018
Dear Costco Shareholders:
When Costco was founded 35 years ago, we did not envision that we would become a $138 billion retailer,
employ over 245,000 people, operate over 750 warehouses or serve more than 94 million members
worldwide. Nor did we envision the breadth of products and services we now offer; or that what began as
a "cash-and-carry" operation would extend to delivering products to our members' doorsteps. What we did
know, and set out to do, was maintain a steadfast commitment to value and integrity. We honor this
commitment in all aspects of our business, from providing quality merchandise at terrific prices; to treating
members, employees, and vendors with courtesy and respect; and to working closely with suppliers to
promote fairness, dignity, and safety throughout our supply chains.
These commitments, and our unwavering “do the right thing” philosophy, led us to another strong year in
fiscal 2018. Net sales for the 52-week fiscal year totaled $138 billion, an increase of 9.7 percent, with a
comparable sales increase of 9 percent. Net income for the 52-week fiscal year was $3.134 billion, or $7.09
per share, an increase of 17 percent. Revenue from membership fees increased 10.1 percent to $3.142
billion.
Sincerely,
In addition to investing $3 billion in capital expenditures during fiscal 2018 to expand our business in many
ways, strong cash flows in fiscal 2018 allowed us to also declare dividends of $939 million and repurchase
shares of $322 million. As well, income tax savings from the recent U.S. tax law changes provided funding
to raise wages for most of our U.S. employees.
With respect to vertical integration, we continue to explore opportunities that will allow us to realize even
greater member satisfaction, whether driven by price, quality or a combination. We enjoy continued success
in our bakery commissary in Canada, various packaging operations, optical and pharmacy central-fill
locations, and U.S. meat plants. Our chicken complex in Nebraska, which is currently under construction,
should yield similar results.
In 2018, we reached a milestone with our 750th warehouse location. Fiscal 2018 expansion included the
opening of 21 new warehouses around the globe, with our 100th location in Canada; and we continue to
add gas stations and other ancillary services to locations in different countries. We are not only focused on
new markets, but how we strategically infill and relocate within markets where we currently operate. In
2019, we expect to open 23 new warehouses and relocate up to 4 warehouses to more ideal locations.
Especially anticipated is the planned opening in 2019 of our West Shanghai warehouse, our first in China.
Our capital plans also extend to making improvements in our logistics that will drive value for our members.
We are investing in new ecommerce fulfillment centers and improved transportation logistics.
Membership renewal rates in the U.S. and Canada were 90 percent, and renewal rates worldwide saw an
increase to 88 percent. We are seeing higher sign-up rates from younger generations and a more diverse
membership base. This shift can be partially attributed to our buyers' increased focus on products that have
an appeal that spans generations as well as sourcing products globally to expand cultural and ethnic
offerings.
Strong comparable sales and shopping frequency during fiscal 2018 reaffirm the demand and desire by
our members to shop in our warehouses. In 2018, we tested technology that will allow merchandise to be
moved faster through the registers and deployed self-checkout registers as well as self-ordering kiosks for
the Food Court. Research and development is underway toward a fob that will allow members to pay for
gas with a single swipe, eliminating the need to access their membership or credit cards.
We remain keenly aware that changing preferences of consumers, technological advancements and the
ever-changing retail climate will continue to alter the ways in which members shop. "Hot buys,” ecommerce
product showcases, online ordering capabilities and grocery delivery have all contributed to sales growth
of over 30% in ecommerce for the fiscal year. Along with everyday merchandise, impressive sales were
achieved in high-end items at outstanding values, such as Super Bowl tickets packages, diamonds, tablets
and laptops, designer handbags and accessories, and once-in-a-lifetime vacation packages. Our new "hotel
only" booking engine and expanded partnerships with new hotels provide greater value and convenience
for our members. Such activities have positively impacted our business, both online and in-warehouse,
and are helping our sales momentum, while also increasing our digital presence.
We remain committed to operating our business and sourcing our products using sustainable practices,
being mindful of our global impact on people, communities and the environment. We believe sustainability
is important to many of us who care deeply about how and where a product originates, the treatment of
workers and animals, and environmental impacts. We strive to be good stewards and follow our code of
conduct, requiring sustainable practices from suppliers, manufacturers, and farmers. This includes
eliminating harmful chemicals, emphasizing recycled and compostable packaging materials, saving energy
at our warehouses and depots, and donating more perishable items to food banks.
We continue to be proud of creating a climate of inclusion, diversity and a positive work environment for
employees globally. We recognize our consistently efficient and loyal employee base with competitive pay
and benefits, and opportunities for growth and advancement. These sentiments were recently acknowledged
in a survey by Indeed, identifying Costco as one of the top five Best Rated Workplaces in 2018 among
Fortune 500 companies. Our relationship with our employees is fundamental to driving our business not
only in the present, but over the long term.
We reached a key milestone as Costco co-founder Jim Sinegal stepped down in 2018, ending 35 years
with the Company. Jim's extraordinary vision, passion and work ethic have impacted so many. While Jim
still is frequently seen at the corporate headquarters and regularly visits warehouses, he is enjoying more
time with family and actively participating in philanthropic and other pursuits. We remain resolute in carrying
on the principal philosophy and values that Jim, along with Jeff Brotman, originally established for Costco
in 1983.
In closing, I express my gratitude to the 245,000 employees and more than 94 million members worldwide
who help make Costco the undeniable leader in membership warehouses, and one of the best retailers
worldwide.
Costco remains strong and competitive in today's dynamic retail climate. We continue to open warehouses
domestically and internationally, expand and improve our ecommerce business, and add products under
our Kirkland Signature TM brand. The Kirkland Signature TM brand has become globally recognized as a "gold
standard" of high quality and exceptional value. In 2018, Kirkland Signature sales exceeded $39 billion,
compared to $35 billion in the prior year. We have broadened our selection in apparel, organic and fresh
foods, household basics, sporting goods, and health and beauty products, including the introduction of a
new razor. We have also intensified our focus on in-country sourcing, driving costs down, enhancing member
value, and reducing the environmental impacts of transportation.
130 139 152
60
KEY FINANCIAL METRICS
DELAWARE -1
FLORIDA - 26
GEORGIA - 12
HAWAII - 7
IDAHO - 5
ILLINOIS - 19
INDIANA - 6
IOWA - 3
KANSAS - 3
ARIZONA - 18
CALIFORNIA - 128
COLORADO-14
CONNECTICUT -6
KENTUCKY-4
MARYLAND - 11
MASSACHUSETTS - 6
MICHIGAN - 15
MINNESOTA-10
MISSOURI - 6
MONTANA -5
NEBRASKA-3
NEVADA - 8
NEW HAMPSHIRE - 1
NEW JERSEY - 19
NEW MEXICO - 3
NORTH CAROLINA - 8
NORTH DAKOTA - 1
OHIO - 12
OKLAHOMA-1
OREGON - 13
PENNSYLVANIA - 11
SOUTH CAROLINA - 6
SOUTH DAKOTA - 1
TENNESSEE - 5
TEXAS - 31
LOUISIANA -3
Provided below is information related to our Membership and Sales per Warehouse which supplements
additional key metrics found on page 20.
ALASKA - 4
COSTCO.COM
Costco currently operates 768 warehouses, including 533 in the United States and Puerto Rico, 100 in
Canada, 39 in Mexico, 28 in the United Kingdom, 26 in Japan, 15 in Korea, 13 in Taiwan, 10 in Australia,
two in Spain, one in Iceland, and one in France. Costco also operates e-commerce sites in the U.S., Canada,
the United Kingdom, Mexico, Korea, and Taiwan.
Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983 in
Seattle, Washington. In October 1993, Costco merged with The Price Company, which had pioneered the
membership warehouse concept in 1976, to form Price/Costco, inc., a Delaware corporation. In January
1997, after the spin-off of most of its non-warehouse assets to Price Enterprises, Inc., the Company changed
its name to Costco Companies, Inc. On August 30, 1999, the Company reincorporated from Delaware to
Washington and changed its name to Costco Wholesale Corporation, which trades on the Nasdaq Global
Select Market under the symbol "COST."
THE COMPANY
Millions
WHOLESALE
COSTCO
A commitment to quality and value at 768 locations and on Costco.com
FISCAL YEAR ENDED SEPTEMBER 2, 2018
ALABAMA -4
2018
GOSTRO
COSTCO
WHOLESALE
COSTCO
COSTCO
WHOLESALE
COSTCO
Puerto Rico 533
Annual Report
115 124 128
130 136 139 139 148 163
135 144 148 151 155 168
137
116 124
We operate membership warehouses based on the concept that offering our members low prices on a limited
selection of nationally branded and private-label products in a wide range of categories will produce high
sales volumes and rapid inventory turnover. When combined with the operating efficiencies achieved by
volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service
warehouse facilities, these volumes and turnover enable us to operate profitably at significantly lower gross
margins (net sales less merchandise costs) than most other retailers. We generally sell inventory before we
are required to pay for it, even while taking advantage of early payment discounts.
General
We report on a 52/53-week fiscal year, consisting of thirteen four-week periods and ending on the Sunday
nearest the end of August. The first three quarters consist of three periods each, and the fourth quarter
consists of four periods (five weeks in the thirteenth period in a 53-week year). The material seasonal impact
in our operations is increased net sales and earnings during the winter holiday season. References to 2018
and 2016 relate to the 52-week fiscal years ended September 2, 2018, and August 28, 2016, respectively.
References to 2017 relate to the 53-week fiscal year ended September 3, 2017.
Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983, in
Seattle, Washington. We are principally engaged in the operation of membership warehouses in the United
States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan, Korea, Australia, Spain,
France, Iceland, and through a majority-owned subsidiary in Taiwan. Costco operated 762, 741, and 715
warehouses worldwide at September 2, 2018, September 3, 2017, and August 28, 2016, respectively. Our
common stock trades on the NASDAQ Global Select Market, under the symbol "COST."
Item 1-Business
PART I
Certain statements contained in this Report constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. They include statements that address activities, events, conditions
or developments that we expect or anticipate may occur in the future and may relate to such matters as
sales growth, changes in comparable sales, cannibalization of existing locations by new openings, price or
fee changes, earnings performance, earnings per share, stock-based compensation expense, warehouse
openings and closures, capital spending, the effect of adopting certain accounting standards, future financial
reporting, financing, margins, return on invested capital, strategic direction, expense controls, membership
renewal rates, shopping frequency, litigation, and the demand for our products and services. Forward-looking
statements may also be identified by the words "anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,”
"intend,” “may,” “might,” “likely,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target," "will," "would,"
or similar expressions and the negatives of those terms. Such forward-looking statements involve risks and
uncertainties that may cause actual events, results, or performance to differ materially from those indicated
by such statements, including, without limitation, the factors set forth in the section titled “Item 1A-Risk
Factors", and other factors noted in the section titled “Item 7-Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in the consolidated financial statements and related
notes in Item 8 of this Report. Forward-looking statements speak only as of the date they are made, and we
do not undertake to update these statements, except as required by law.
INFORMATION RELATING TO FORWARD LOOKING STATEMENTS
We buy most of our merchandise directly from manufacturers and route it to cross-docking consolidation
points (depots) or directly to our warehouses. Our depots receive large shipments from manufacturers and
quickly ship these goods to warehouses. This process creates freight volume and handling efficiencies,
lowering costs associated with traditional multiple-step distribution channels.
2
67
65
780
Signatures
50
2017
47.6
44.6
68
2016
Our average warehouse space is approximately 145,000 square feet, with newer units being slightly larger.
Floor plans are designed for economy and efficiency in the use of selling space, the handling of merchandise,
and the control of inventory. Because shoppers are attracted principally by the quality of merchandise and
low prices, our warehouses are not elaborate. By strictly controlling the entrances and exits and using a
membership format, we believe our inventory losses (shrinkage) are well below those of typical retail
operations.
4
Certain financial information for our segments and geographic areas is included in Note 11 to the consolidated
financial statements included in Item 8 of this Report.
Our e-commerce operations allow us to connect with our members online and provide additional products
and services, many not found in our warehouses. We operate e-commerce websites in the U.S., Canada,
Mexico, U.K., Korea, and Taiwan. Net sales for e-commerce represented approximately 4% of total net sales
in 2018. Additionally, we offer business delivery, travel and various other services online in certain countries.
We have direct buying relationships with many producers of national brand-name merchandise. We do not
obtain a significant portion of merchandise from any one supplier. We generally have not experienced difficulty
in obtaining sufficient quantities of merchandise and believe that if current sources of supply became
unavailable, we would be able to obtain alternative sources without substantial disruption of our business.
We also purchase and manufacture private-label merchandise, as long as quality and member demand are
comparable and the value to our members is significant.
Ancillary businesses within or next to our warehouses provide expanded products and services, encouraging
members to shop more frequently. These businesses include gas stations, pharmacies, optical dispensing
centers, food courts, and hearing-aid centers. The number of warehouses with gas stations vary significantly
by country, and we do not operate our gasoline business in Korea or France. We operated 567 gas stations
at the end of 2018.
Ancillary (including gasoline and pharmacy businesses)
•
Softlines (including apparel and small appliances)
•
3
Fresh Foods (including meat, produce, deli, and bakery)
Hardlines (including major appliances, electronics, health and beauty aids, hardware, and garden
and patio)
Food and Sundries (including dry foods, packaged foods, groceries, snack foods, candy, alcoholic
and nonalcoholic beverages, and cleaning supplies)
•
.
We offer merchandise in the following categories:
In keeping with our policy of member satisfaction, we generally accept returns of merchandise. On certain
electronic items, we typically have a 90-day return policy and provide, free of charge, technical support
services, as well as an extended warranty. Additional third-party warranty coverage is sold on certain
electronic items.
Our strategy is to provide our members with a broad range of high-quality merchandise at prices we believe
are consistently lower than elsewhere. We seek to limit items to fast-selling models, sizes, and colors. We
carry an average of approximately 3,700 active stock keeping units (SKUS) per warehouse in our core
warehouse business, significantly less than other broadline retailers. Many consumable products are offered
for sale in case, carton, or multiple-pack quantities only.
Our warehouses on average operate on a seven-day, 70-hour week. Gasoline operations generally have
extended hours. Because the hours of operation are shorter than other retailers, and due to other efficiencies
inherent in a warehouse-type operation, labor costs are lower relative to the volume of sales. Merchandise
is generally stored on racks above the sales floor and displayed on pallets containing large quantities,
reducing labor required. In general, with variations by country, our warehouses accept certain credit, including
the Costco co-branded card, and debit cards, cash, and checks.
•
42.0
19.3
40
Totals
0
2014 2015 2016 2017 2018
Fiscal Year
Average Sales Per Warehouse*
(Sales In Millions)
$116
$121
142
2009 & Before
$87
118
$83
85
94
112
$108 109 115 125
140
$99 109 113
97
10
13
21
18.5
17.4
2015
16.1
2014
2222 3
26
29
23
30
14.8
30
2013
26
2012
15
20
2011
2010
22353
UTAH - 11
VERMONT-1
NEW YORK-19
WASHINGTON - 32
WISCONSIN - 9
WASHINGTON, D.C. - 1
PUERTO RICO - 4
Controls and Procedures
Item 9A.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9.
33
Financial Statements and Supplementary Data.
31
Quantitative and Qualitative Disclosures About Market Risk
Item 9B.
Item 7A.
Item 8.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
20
17
72
Selected Financial Data ....
Item 6.
Item 7.
Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
PART II
Item 5.
21
17
Other Information
62
64
ठ ठ ठ
64
64
VIRGINIA-17
Item 14.
Item 13.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
233
Item 12.
Executive Compensation ...
Item 11.
64
Directors, Executive Officers and Corporate Governance
Item 10.
PART III
64
62
64
17
16
15
Accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
Large accelerated filer ☑
Non-accelerated filer ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer," "accelerated
filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☑ NO
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit such files). YES > NO ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES □ NO ☑
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES NO
The NASDAQ Global Select Market
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act.
Name of each exchange on
which registered
Title of each class
Registrant's telephone number, including area code: (425) 313-8100
Securities registered pursuant to Section 12(b) of the Act:
(Address of principal executive offices) (Zip Code)
999 Lake Drive, Issaquah, WA 98027
(I.R.S. Employer Identification No.)
91-1223280
incorporation or organization)
(State or other jurisdiction of
Common Stock, $.01 Par Value
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES □ NO ☑
The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 18, 2018 was
$83,850,253,577.
The number of shares outstanding of the registrant's common stock as of October 18, 2018 was 438,208,376.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on January 24, 2019,
are incorporated by reference into Part III of this Form 10-K.
8
3
Page
Mine Safety Disclosures.
Item 4.
Legal Proceedings
Item 3.
Properties.
Item 2.
Unresolved Staff Comments .
Item 1B.
Risk Factors
Item 1A.
Business
Item 1.
PARTI
TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 2, 2018
COSTCO WHOLESALE CORPORATION
PART IV
Item 15.
Certain Relationships and Related Transactions, and Director Independence..
Principal Accounting Fees and Services
Item 16.
United Kingdom
28
France
1
Spain
2
UNITED
KINGDOM
South Korea
1
15
Japan
26
Far East
Exhibits, Financial Statement Schedules
13
Australia
10
AUSTRALIA
Europe
COSTCO.CO.UK
Iceland
VERACRUZ-2
CANADA
COSTCO.CA
ALBERTA - 17
BRITISH COLUMBIA - 14
MANITOBA -3
NEW BRUNSWICK - 3
NEWFOUNDLAND AND
LABRADOR-1
NOVA SCOTIA - 2
ONTARIO - 36
QUÉBEC - 21
SASKATCHEWAN - 3
MEXICO
COSTCO.COM.MX
YUCATÁN -1
AGUASCALIENTES - 1
BAJA CALIFORNIA - 4
GUANAJUATO - 3
JALISCO - 3
MÉXICO - 5
MÉXICO, D.F. - 4
MICHOACÁN -1
MORELOS - 1
NUEVO LEÓN - 3
PUEBLA -1
QUERÉTARO -1
QUINTANA ROO - 1
SAN LUIS POTOSÍ - 1
SINALOA - 1
SONORA - 1
TABASCO-1
BAJA CALIFORNIA SUR-1
CHIHUAHUA - 2
COAHUILA - 1
ENGLAND - 24
Taiwan
WALES-1
SOUTH AUSTRALIA - 1
VICTORIA-4
COSTCO.CO.TW
CHIAYI CITY-1
HSINCHU CITY-1
KAOHSIUNG CITY - 2
NEW TAIPEI CITY - 3
TAICHUNG CITY -1
TAINAN CITY-1
TAIPEI CITY-2
TAOYUAN CITY - 2
SCOTLAND -3
ICELAND
FRANCE
COR000075C 0618
NEW SOUTH WALES - 3
QUEENSLAND -1
UNITED STATES
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 2, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Washington
Form 10-K Summary
SECURITIES AND EXCHANGE COMMISSION
AUSTRALIA CAPITAL
TERRITORY-1
SPAIN
GYEONGGI-DO-4
INCHEON - 1
SEJONG-1
SEOUL - 3
ULSAN – 1
JAPAN
AICHI -1
CHIBA - 2
FUKUOKA - 2
TAIWAN
GUNMA – 1
HIROSHIMA-1
HOKKAIDO -1
SOUTH
KOREA
HYOGO – 2
IBARAKI – 2
GIFU-1
KANAGAWA - 3
KYOTO-1
MIYAGI -1
OSAKA - 1
SAITAMA-2
SHIZUOKA-1
TOKYO-1
TOYAMA-1
YAMAGATA-1
COSTCO.CO.KR
BUSAN -1
CHUNGCHEONGNAM-DO-1
DAEGU - 2
DAEJEON-1
ISHIKAWA-1
Our suppliers (and those they depend upon for materials and services) are subject to risks, including labor
disputes, union organizing activities, financial liquidity, inclement weather, natural disasters, supply
constraints, and general economic and political conditions that could limit their ability to timely provide us
with acceptable merchandise. For these or other reasons, one or more of our suppliers might not adhere to
our quality control, legal, regulatory, labor, environmental or animal welfare standards. These deficiencies
may delay or preclude delivery of merchandise to us and might not be identified before we sell such
merchandise to our members. This failure could lead to recalls and litigation and otherwise damage our
reputation and our brands, increase our costs, and otherwise adversely impact our business.
Fluctuations in foreign exchange rates may adversely affect our results of operations.
During 2018, our international operations, including Canada, generated 28% and 38% of our net sales and
operating income, respectively. Our international operations have accounted for an increasing portion of our
warehouses, and we plan to continue international growth. To prepare our consolidated financial statements,
we translate the financial statements of our international operations from local currencies into U.S. dollars
using current exchange rates. Future fluctuations in exchange rates that are unfavorable to us may adversely
affect the financial performance of our Canadian and Other International operations and have a corresponding
adverse period-over-period effect on our results of operations. As we continue to expand internationally, our
exposure to fluctuations in foreign exchange rates may increase.
A portion of the products we purchase for sale in our warehouses around the world is paid for in a currency
other than the local currency of the country in which the goods are sold. Currency fluctuations may increase
our cost of goods and may not be passed on to members. Consequently, fluctuations in currency exchange
rates may adversely affect our results of operations.
13
Natural disasters or other catastrophes could negatively affect our business, financial condition,
and results of operations.
Natural disasters, such as hurricanes, typhoons or earthquakes, particularly in California or Washington
state, where our centralized operating systems and administrative personnel are located, could negatively
affect our operations and financial performance. Such events could result in physical damage to one or more
of our properties, the temporary closure of one or more warehouses, depots, manufacturing or home office
facilities, the temporary lack of an adequate work force in a market, the temporary or long-term disruption
in the supply of products from some local or overseas suppliers, the temporary disruption in the transport of
goods to or from overseas, delays in the delivery of goods to our warehouses or depots within the countries
in which we operate, and the temporary reduction in the availability of products in our warehouses. Public
health issues, whether occurring in the U.S. or abroad, could disrupt our operations, disrupt the operations
of suppliers or members, or have an adverse impact on consumer spending and confidence levels. These
events could also reduce demand for our products or make it difficult or impossible to procure products. We
may be required to suspend operations in some or all of our locations, which could have a material adverse
effect on our business, financial condition and results of operations.
Factors associated with climate change could adversely affect our business.
Our international operations subject us to risks associated with the legislative, judicial, accounting,
regulatory, political and economic factors specific to the countries or regions in which we operate,
which could adversely affect our business, financial condition and results of operations.
Failure to meet financial market expectations could adversely affect the market price and volatility
of our stock.
We believe that the price of our stock currently reflects high market expectations for our future operating
results. Any failure to meet or delay in meeting these expectations, including our warehouse and e-commerce
comparable sales growth rates, membership renewal rates, new member sign-ups, gross margin, earnings,
earnings per share, new warehouse openings, or dividend or stock repurchase policies could cause the
market price of our stock to decline.
Legal and Regulatory Risks
During 2018, we operated 235 warehouses outside of the U.S., and we plan to continue expanding our
international operations. Future operating results internationally could be negatively affected by a variety of
factors, many similar to those we face in the U.S., certain of which are beyond our control. These factors
include political and economic conditions, regulatory constraints, currency regulations, policy changes such
as the U.K.'s vote to withdraw from the European Union, commonly known as "Brexit", and other matters in
any of the countries or regions in which we operate, now or in the future. Other factors that may impact
international operations include foreign trade (including tariffs), monetary and fiscal policies and the laws
and regulations of the U.S. and foreign governments, agencies and similar organizations, and risks associated
with having major facilities in locations which have been historically less stable than the U.S. Risks inherent
in international operations also include, among others, the costs and difficulties of managing international
operations, adverse tax consequences, and difficulty in enforcing intellectual property rights.
14
We buy from numerous domestic and foreign manufacturers and importers. Our inability to acquire suitable
merchandise on acceptable terms or the loss of key vendors could negatively affect us. We may not be able
to develop relationships with new vendors, and products from alternative sources, if any, may be of a lesser
quality or more expensive than those from existing vendors. Because of our efforts to adhere to high quality
standards for which available supply may be limited, particularly for certain food items, the large volume we
demand may not be consistently available.
We use natural gas, diesel fuel, gasoline, and electricity in our distribution and warehouse operations. U.S.
and foreign government regulations limiting carbon dioxide and other greenhouse gas emissions may result
in increased compliance and merchandise costs, and legislation or regulation affecting energy inputs that
could materially affect our profitability. Climate change and extreme weather conditions, such as intense
hurricanes, thunderstorms, tornadoes, and snow or ice storms, as well as rising sea levels could affect our
ability to procure needed commodities at costs and in quantities we currently experience. We also sell a
substantial amount of gasoline, the demand for which could be impacted by concerns about climate change
and which could face increased regulation.
We depend heavily on our ability to purchase quality merchandise in sufficient quantities at competitive
prices. As the quantities we require continue to grow, we have no assurances of continued supply, appropriate
pricing or access to new products, and any vendor has the ability to change the terms upon which they sell
to us or discontinue selling to us. Member demands may lead to out-of-stock positions of our merchandise
leading to loss of sales and profits.
1994 66
policies including changes in tax rates, duties, tariffs, or other restrictions, sovereign debt crises, and other
economic factors could adversely affect demand for our products and services, require a change in product
mix, or impact the cost of or ability to purchase inventory. Prices of certain commodity products, including
gasoline and other food products, are historically volatile and are subject to fluctuations arising from changes
in domestic and international supply and demand, labor costs, competition, market speculation, government
regulations, taxes and periodic delays in delivery. Rapid and significant changes in commodity prices and
our ability and desire to pass them through to our members may affect our sales and profit margins. These
factors could also increase our merchandise costs and selling, general and administrative expenses, and
otherwise adversely affect our operations and financial results. General economic conditions can also be
affected by significant events like the outbreak of war or acts of terrorism.
Total employees
Approximately 15,900 employees are union employees. We consider our employee relations to be very
good.
Competition
Our industry is highly competitive, based on factors such as price, merchandise quality and selection, location,
convenience, distribution strategy, and customer service. We compete on a worldwide basis with global,
national, and regional wholesalers and retailers, including supermarkets, supercenters, internet retailers,
gasoline stations, hard discounters, department and specialty stores, and operators selling a single category
or narrow range of merchandise. Walmart, Target, Kroger, and Amazon.com are among our significant general
5
merchandise retail competitors. We also compete with warehouse club operations (primarily Walmart's Sam's
Club and BJ's Wholesale Club), and nearly every major U.S. and Mexico metropolitan area has multiple
club operations.
Intellectual Property
We believe that, to varying degrees, our trademarks, trade names, copyrights, proprietary processes, trade
secrets, patents, trade dress, domain names and similar intellectual property add significant value to our
business and are important to our success. We have invested significantly in the development and protection
of our well-recognized brands, including the Costco Wholesale® trademarks and our private-label brand,
Kirkland Signature®. We believe that Kirkland Signature products are high quality, offered to our members
at prices that are generally lower than national brands, and that they help lower costs, differentiate our
merchandise offerings, and generally earn higher margins. We expect to continue to increase the sales
penetration of our private label items.
We rely on trademark and copyright laws, trade-secret protection, and confidentiality, license and other
agreements with our suppliers, employees and others to protect our intellectual property. The availability
and duration of trademark registrations vary by country; however, trademarks are generally valid and may
be renewed indefinitely as long as they are in use and registrations are properly maintained.
Available Information
Our U.S. website is www.costco.com. We make available through the Investor Relations section of that site,
free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, Proxy Statements and Forms 3, 4 and 5, and any amendments to those reports, as soon as
reasonably practicable after filing such materials with or furnishing such documents to the Securities and
Exchange Commission (SEC). The information found on our website is not part of this or any other report
filed with or furnished to the SEC. The public may read and copy any materials we file with the SEC at the
SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a site that contains reports, proxy and information statements, and other information regarding
issuers, such as the Company, that file electronically with the SEC at www.sec.gov.
We have adopted a code of ethics for senior financial officers pursuant to Section 406 of the Sarbanes-Oxley
Act. Copies of the code are available free of charge by writing to Secretary, Costco Wholesale Corporation,
999 Lake Drive, Issaquah, WA 98027. If the Company makes any amendments to this code (other than
technical, administrative, or non-substantive amendments) or grants any waivers, including implicit waivers,
from this code to the CEO, chief financial officer or principal accounting officer and controller, we will disclose
(on our website or in a Form 8-K report filed with the SEC) the nature of the amendment or waiver, its effective
date, and to whom it applies.
CO
6
143,000 133,000 126,000
102,000 98,000 92,000
245,000 231,000 218,000
Executive Officers of the Registrant
Name
W. Craig Jelinek
Richard A. Galanti..
Jim C. Klauer.
Franz E. Lazarus.
Russ D. Miller
Position
President and Chief Executive Officer. Mr. Jelinek has
been President and Chief Executive Officer since
January 2012 and a director since February 2010. He
was President and Chief Operating Officer from
February 2010 to December 2011. Prior to that he was
Executive Vice President, Chief Operating Officer,
Merchandising since 2004.
Executive Vice President and Chief Financial Officer.
Mr. Galanti has been a director since January 1995.
Executive Vice President, Chief Operating Officer,
Northern Division. Mr. Klauer was Senior Vice President,
Non Foods and E-commerce merchandise, from 2013
to January 2018.
Executive Vice President, Administration. Mr. Lazarus
was Senior Vice President, Administration-Global
Operations, from 2006 to September 2012.
Executive Vice President, Chief Operating Officer,
Southern Division and Mexico. Mr. Miller was Senior Vice
President, Western Canada Region, from 2001 to
January 2018.
Paul G. Moulton
Executive
Officer
Since Age
1995 66
1993 62
2018
The executive officers of Costco, their position, and ages are listed below. All executive officers have over
25 years of service with the Company.
2016
2017
2018
Membership
Our members may utilize their memberships at our warehouses worldwide. Gold Star memberships are
available to individuals; Business memberships are limited to businesses, including individuals with a
business license, retail sales license or comparable evidence. Business members have the ability to add
additional cardholders (affiliates), to which the same annual fee applies. Affiliates are not available for Gold
Star members. Our annual fee for these memberships is $60 in our U.S. and Canadian operations and varies
in other countries. All paid memberships include a free household card.
Our member renewal rate was 90% in the U.S. and Canada and 88% on a worldwide basis at the end of
2018. The majority of members renew within six months following their renewal date. Therefore, our renewal
rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the
reporting date.
Vendors may be unable to timely supply us with quality merchandise at competitive prices or may
fail to adhere to our high standards, resulting in adverse effects on our business, merchandise
inventories, sales, and profit margins.
Gold Star
Business, including affiliates..
Total paid members
Household cards. .
Total cardholders
2018
2017
2016
40,700
38,600
36,800
10,900
10,800
Part-time employees
Full-time employees
Our employee count was as follows:
Paid cardholders (except Business affiliates) are eligible to upgrade to an Executive membership in the U.S.
and Canada for an additional annual fee of $60. Executive memberships are also available in Mexico and
the U.K., for which the additional annual fee varies. Executive members earn a 2% reward on qualified
purchases (up to a maximum reward of $1,000 per year in U.S. and Canada and varies in Mexico and the
U.K.), and can be redeemed only at Costco warehouses. This program also offers (except in Mexico), access
to additional savings and benefits on various business and consumer services, such as auto and home
insurance, the Costco auto purchase program, and check printing services. These services are generally
provided by third parties and vary by state and country. Executive members, who represented 37% of paid
members at the end of 2018, generally shop more frequently and spend more than other members.
Labor
86,700
90,300
56
94,300
40,900
42,700
47,600
49,400
51,600
10,800
39,100
2012
Our membership was made up of the following (in thousands):
2018
Given the very high volume of transactions we process each year it is important that we maintain uninterrupted
operation of our business-critical computer systems. Our systems, including our back-up systems, are subject
to damage or interruption from power outages, computer and telecommunications failures, computer viruses,
internal or external security breaches, catastrophic events such as fires, earthquakes, tornadoes and
hurricanes, and errors by our employees. If our systems are damaged or cease to function properly, we may
have to make significant investments to fix or replace them, and we may suffer interruptions in our operations
in the interim. Any material interruption in these systems could have a material adverse effect on our business
and results of operations.
We are currently making, and will continue to make, investments to improve or advance critical information
systems and processing capabilities. Failure to monitor and choose the right investments and implement
them at the right pace would be harmful. The risk of system disruption is increased when significant system
changes are undertaken, although we believe that our change management process will mitigate this risk.
Excessive technological change could impact the effectiveness of adoption, and could make it more difficult
9
for us to realize benefits. Targeting the wrong opportunities, failing to make the best investments, or making
an investment commitment significantly above or below our needs could result in the loss of our competitive
position and adversely impact our financial condition and results of operations. The potential problems and
interruptions associated with implementing technology initiatives could disrupt or reduce the efficiency of
our operations. These initiatives might not provide the anticipated benefits or may provide them on a delayed
schedule or at a higher cost.
We identified a material weakness in our internal control related to ineffective information technology
general controls which, if not remediated appropriately or timely, could result in loss of investor
confidence and adversely impact our stock price.
Internal controls related to the operation of technology systems are critical to maintaining adequate internal
control over financial reporting. As disclosed in Part II, Item 9A, during the fourth quarter of fiscal 2018,
management identified a material weakness in internal control related to ineffective information technology
general controls (ITGCs) in the areas of user access and program change-management over certain
information technology (IT) systems that support the Company's financial reporting processes. As a result,
management concluded that our internal control over financial reporting was not effective as of September
2, 2018. We are implementing remedial measures and, while there can be no assurance that our efforts will
be successful, we plan to remediate the material weakness prior to the end of fiscal 2019. These measures
will result in additional technology and other expenses. If we are unable to remediate the material weakness,
or are otherwise unable to maintain effective internal control over financial reporting or disclosure controls
and procedures, our ability to record, process and report financial information accurately, and to prepare
financial statements within required time periods, could be adversely affected, which could subject us to
litigation or investigations requiring management resources and payment of legal and other expenses,
negatively affect investor confidence in our financial statements and adversely impact our stock price.
If we do not maintain the privacy and security of personal and business information, we could damage
our reputation with members and employees, incur substantial additional costs, and become subject
to litigation.
We receive, retain, and transmit personal information about our members and employees and entrust that
information to third-party business associates, including cloud service-providers that perform activities for
us. Our warehouse and online businesses depend upon the secure transmission of encrypted confidential
information over public networks, including information permitting cashless payments. A compromise of our
security systems or defects within our hardware or software, or those of our business associates, that results
in our members' or employees' information being obtained by unauthorized persons, could adversely affect
our reputation with our members and others, as well as our operations, results of operations, financial
condition and liquidity, and could result in litigation, government actions, or the imposition of penalties. In
addition, a breach could require that we expend significant additional resources related to the security of
information systems and could disrupt our operations.
The use of data by our business and our business associates is regulated at the national and state or local
level in all of our operating countries. Privacy and information-security laws and regulations change, and
compliance with them may result in cost increases due to, among other things, systems changes and the
development of new processes. If we or those with whom we share information fail to comply with these
laws and regulations, our reputation could be damaged, possibly resulting in lost future business, and we
could be subjected to additional legal risk as a result of non-compliance, including fines of up to 4% of our
global revenue in the case of the General Data Protection Regulation (GDPR). We do not maintain cyber-
insurance for these risks.
We have security measures and controls to protect personal and business information and continue to make
investments to secure access to our information technology network. These measures may be undermined,
however, due to the actions of outside parties, employee error, internal or external malfeasance, or otherwise,
and, as a result an unauthorized party may obtain access to our data systems and misappropriate business
and personal information. Because the techniques used to obtain unauthorized access, disable or degrade
10
service, or sabotage systems change frequently and may not immediately produce signs of intrusion, we
may be unable to anticipate these techniques, timely discover or counter them, or implement adequate
preventative measures. Any such breach or unauthorized access could result in significant legal and financial
exposure, damage to our reputation, and potentially have an adverse effect on our business and results of
operations.
We are subject to payment-related risks.
We accept payments using a variety of methods, including cash and checks, a select variety of credit and
debit cards, and our proprietary cash card. As we offer new payment options to our members, we may be
subject to additional rules, regulations, compliance requirements, and higher fraud losses. For certain
payment methods, we pay interchange and other related card acceptance fees, along with additional
transaction processing fees. We rely on third parties to provide payment transaction processing services,
including the processing of credit and debit cards, and our proprietary cash card, and it could disrupt our
business if these companies become unwilling or unable to provide these services to us. We are also subject
to payment card association and network operating rules, including data security rules, certification
requirements and rules governing electronic funds transfers, which could change over time. For example,
we are subject to Payment Card Industry Data Security Standards ("PCI DSS"), which contain compliance
guidelines and standards with regard to our security surrounding the physical and electronic storage,
processing and transmission of individual cardholder data. In addition, if our internal systems are breached
or compromised, we may be liable for card re-issuance costs, subject to fines and higher transaction fees
and lose our ability to accept credit and/or debit card payments from our members, and our business and
operating results could be adversely affected.
We rely extensively on information technology to process transactions, compile results, and manage
our businesses. Failure or disruption of our primary and back-up systems could adversely affect
our businesses. A failure to adequately update our existing systems and implement new systems
could harm our businesses and adversely affect our results of operations.
We might sell products that cause illness or injury to our members, harm to our reputation, and
expose us to litigation.
If we do not successfully develop and maintain a relevant omnichannel experience for our members,
our results of operations could be adversely impacted.
Omnichannel retailing is rapidly evolving, and we must keep pace with changing member expectations and
new developments by our competitors. Our members are increasingly using mobile phones, tablets,
computers, and other devices to shop and to interact with us through social media. We are making technology
investments in our websites and mobile applications. If we are unable to make, improve, or develop relevant
member-facing technology in a timely manner, our ability to compete and our results of operations could be
adversely affected.
11
Inability to attract, train and retain highly qualified employees could adversely impact our business,
financial condition and results of operations.
Our success depends on the continued contributions of members of our senior management and other key
operations, merchandising and administrative personnel. Failure to identify and implement a succession
plan for key senior management could negatively impact the business.
We must attract, train and retain a large and growing number of qualified employees, while controlling related
labor costs and maintaining our core values. Our ability to control labor and benefit costs is subject to
numerous internal and external factors, including regulatory changes, prevailing wage rates, and healthcare
and other insurance costs. We compete with other retail and non-retail businesses for these employees and
invest significant resources in training and motivating them. There is no assurance that we will be able to
attract or retain highly qualified employees in the future, which could have a material adverse effect on our
business, financial condition and results of operations.
We may incur property, casualty or other losses not covered by our insurance.
The Company is predominantly self-insured for employee health care benefits, workers' compensation,
general liability, property damage, directors' and officers' liability, vehicle liability, and inventory loss. Insurance
coverage is maintained in certain instances to limit the exposure arising from catastrophic events. The types
and amounts of insurance may vary from time to time based on our decisions with respect to risk retention
and regulatory requirements. Significant claims or events, regulatory changes, a substantial rise in costs of
health care or costs to maintain our insurance, or the failure to maintain adequate insurance coverage could
have an adverse impact on our financial condition and results of operations.
We are primarily self-insured as it relates to property damage. Although we maintain specific coverages for
catastrophic losses, we still bear the risk of losses incurred as a result of any physical damage to, or the
destruction of, any warehouses, depots, manufacturing or home office facilities, loss or spoilage of inventory,
and business interruption caused by any such events to the extent they are below catastrophic levels of
coverage, as well as any losses to the extent they exceed our aggregate limits of applicable coverages.
Such losses could materially impact our cash flow and results of operations.
Market and Other External Risks
We face strong competition from other retailers and warehouse club operators, which could adversely
affect our business, financial condition and results of operations.
The retail business is highly competitive. We compete for members, employees, sites, products and services
and in other important respects with a wide range of local, regional and national wholesalers and retailers,
both in the United States and in foreign countries, including other warehouse-club operators, supermarkets,
supercenters, internet retailers, gasoline stations, hard discounters, department and specialty stores and
operators selling a single category or narrow range of merchandise. Such retailers and warehouse club
operators compete in a variety of ways, including merchandise pricing, selection and availability, services,
location, convenience, store hours, and the attractiveness and ease of use of websites and mobile
applications. The evolution of retailing in online and mobile channels has improved the ability of customers
to comparison shop with digital devices, which has enhanced competition. Some competitors may have
greater financial resources and technology capabilities, better access to merchandise, and greater market
penetration than we do. Our inability to respond effectively to competitive pressures, changes in the retail
markets and member expectations could result in lost market share and negatively affect our financial results.
General economic factors, domestically and internationally, may adversely affect our business,
financial condition, and results of operations.
12
71
If our merchandise, such as food and prepared food products for human consumption, drugs, children's
products, pet products and durable goods, do not meet or are perceived not to meet applicable safety
standards or our members' expectations regarding safety, we could experience lost sales, increased costs,
litigation or reputational harm. The sale of these items involves the risk of health-related illness or injury to
our members. Such illnesses or injuries could result from tampering by unauthorized third parties, product
contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents,
or residues introduced during the growing, manufacturing, storage, handling and transportation phases, or
faulty design. Our vendors are generally contractually required to comply with product safety laws, and we
are dependent on them to ensure that the products we buy comply with all safety standards. While we are
subject to governmental inspection and regulations and work to comply in all material respects with applicable
laws and regulations, we cannot be sure that consumption or use of our products will not cause illness or
injury in the future or that we will not be subject to claims, lawsuits, or government investigations relating to
such matters resulting in costly product recalls and other liabilities that could adversely affect our business
and results of operations. Even if a product liability claim is unsuccessful or is not fully pursued, negative
publicity could adversely affect our reputation with existing and potential members and our corporate and
brand image, and these effects could be long term.
We may not timely identify or effectively respond to consumer trends, which could negatively affect
our relationship with our members, the demand for our products and services, and our market share.
It is difficult to consistently and successfully predict the products and services that our members will desire.
Our success depends, in part, on our ability to identify and respond to trends in demographics and consumer
preferences. Failure to identify timely or effectively respond to changing consumer tastes, preferences
(including those relating to sustainability of product sources and animal welfare) and spending patterns could
negatively affect our relationship with our members, the demand for our products and services, and our
market share. If we are not successful at predicting our sales trends and adjusting our purchases accordingly,
we may have excess inventory, which could result in additional markdowns and reduce our operating
performance. This could have an adverse effect on net sales, gross margin and operating income.
Higher energy and gasoline costs, inflation, levels of unemployment, healthcare costs, consumer debt levels,
foreign-currency exchange rates, unsettled financial markets, weaknesses in housing and real estate
markets, reduced consumer confidence, changes and uncertainties related to government fiscal and tax
Disruptions in our merchandise distribution or processing, packaging, manufacturing, and other
facilities could adversely affect sales and member satisfaction.
Executive Vice President, Chief Information Officer.
Mr. Moulton was Executive Vice President, Real Estate
Development, from 2001 until March 2010.
61
2001
67
2011
65
James P. Murphy. . . . .
Joseph P. Portera..
Timothy L. Rose
We depend on the orderly operation of the merchandise receiving and distribution process, primarily through
our depots. We also rely upon processing, packaging, manufacturing and other facilities to support our
business, which includes the production of certain private-label items. Although we believe that our operations
are efficient, disruptions due to fires, tornadoes, hurricanes, earthquakes or other catastrophic events, labor
issues or other shipping problems may result in delays in the production and delivery of merchandise to our
warehouses, which could adversely affect sales and the satisfaction of our members.
Executive Vice President, Chief Operating Officer,
International. Mr. Murphy was Senior Vice President,
International, from 2004 to October 2010.
Executive Vice President, Chief Operating Officer,
Eastern and Canadian Divisions. Mr. Portera has held
these positions since 1994 and has been the Chief
Diversity Officer since 2010.
Executive Vice President, Ancillary Businesses,
Manufacturing, and Business Centers. Mr. Rose was
Senior Vice President, Merchandising, Food and
Sundries and Private Label, from 1995 to December
2012.
Executive Vice President, Chief Operating Officer,
Merchandising. Mr. Vachris was Senior Vice President,
Real Estate Development, from August 2015 to June
2016, and Senior Vice President, General Manager,
Northwest Region, from 2010 to July 2015.
7
Ron M. Vachris
2013 66
We sell many products under our Kirkland Signature brand. Maintaining consistent product quality,
competitive pricing, and availability of these products is essential to developing and maintaining member
loyalty. These products also generally carry higher margins than national brand products carried in our
warehouses and represent a growing portion of our overall sales. If the Kirkland Signature brand experiences
a loss of member acceptance or confidence, our sales and gross margin results could be adversely affected.
Our failure to maintain membership growth, loyalty and brand recognition could adversely affect our
results of operations.
8
We intend to continue to open warehouses in new markets. Associated risks include difficulties in attracting
members due to a lack of familiarity with us, attracting members of other wholesale club operators, our lack
of familiarity with local member preferences, and seasonal differences in the market. Entry into new markets
may bring us into competition with new competitors or with existing competitors with a large, established
market presence. We cannot ensure that new warehouses and new websites will be profitable and, as a
result, future profitability could be delayed or otherwise materially adversely affected.
We seek to expand in existing markets to attain a greater overall market share. A new warehouse may draw
members away from our existing warehouses and adversely affect their comparable sales performance,
member traffic, and profitability.
Our growth is dependent, in part, on our ability to acquire property and build or lease new warehouses and
depots. We compete with other retailers and businesses for suitable locations. Local land use and other
regulations restricting the construction and operation of our warehouses and depots, as well as local
community actions opposed to the location of our warehouses or depots at specific sites and the adoption
of local laws restricting our operations and environmental regulations, may impact our ability to find suitable
locations and increase the cost of sites and of constructing, leasing and operating warehouses and depots.
We also may have difficulty negotiating leases or purchase agreements on acceptable terms. In addition,
certain jurisdictions have enacted or proposed laws and regulations that would prevent or restrict the operation
or expansion plans of certain large retailers and warehouse clubs, including us. Failure to effectively manage
these and other similar factors may affect our ability to timely build or lease and operate new warehouses
and depots, which could have a material adverse effect on our future growth and profitability.
Membership loyalty and growth are essential to our business. The extent to which we achieve growth in our
membership base, increase the penetration of our Executive members, and sustain high renewal rates
materially influences our profitability. Damage to our brands or reputation may negatively impact comparable
sales, diminish member trust, and reduce member renewal rates and, accordingly, net sales and membership
fee revenue, negatively impacting our results of operations.
We are highly dependent on the financial performance of our U.S. and Canadian operations.
Our financial and operational performance is highly dependent on our U.S. and Canadian operations, which
comprised 87% and 83% of net sales and operating income in 2018, respectively. Within the U.S., we are
highly dependent on our California operations, which comprised 30% of U.S. net sales in 2018. Our California
market, in general, has a larger percentage of higher volume warehouses as compared to our other domestic
markets. Any substantial slowing or sustained decline in these operations could materially adversely affect
our business and financial results. Declines in financial performance of our U.S. operations, particularly in
California, and our Canadian operations could arise from, among other things: slow growth or declines in
comparable warehouse sales (comparable sales); negative trends in operating expenses, including
increased labor, healthcare and energy costs; failing to meet targets for warehouse openings; cannibalizing
existing locations with new warehouses; shifts in sales mix toward lower gross margin products; changes
or uncertainties in economic conditions in our markets, including higher levels of unemployment and
depressed home values; and failing to consistently provide high quality and innovative new products.
Business and Operating Risks
The risks described below could materially and adversely affect our business, financial condition and results
of operations. We could also be affected by additional risks that apply to all companies operating in the U.S.
and globally, as well as other risks that are not presently known to us or that we currently consider to be
immaterial. These Risk Factors should be carefully reviewed in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations in Item 7 and our consolidated financial
statements and related notes in Item 8 of this Report.
Item 1A-Risk Factors
53
2016
We may be unsuccessful implementing our growth strategy, including expanding our business in
existing markets and new markets, which could have an adverse impact on our business, financial
condition and results of operations.
3,220
$
3,624
4,480 $ 4,111 $ 3,672 $
$
10.40 %
9.89%
10.07 %
10.26%
10.02%
expenses as a percentage of net sales. .
Operating income..
Net income attributable to Costco
8.90
2,679
2,350
2,377
2,058
Net income per diluted common share
attributable to Costco
7.09
6.08
5.33
5.37
4.65
Cash dividends declared per common
share
2.14
1.70
3,134
Selling, general and administrative
$ 126,172
11.09 %
S&P 500
6.51
Peer Group
19
9/2/18
Item 6-Selected Financial Data
The following table sets forth information concerning our consolidated financial condition, operating results,
and key operating metrics. This information should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations, included in Item 7 of this Report, and our
consolidated financial statements and notes thereto, included in Item 8 of this Report.
SELECTED FINANCIAL DATA
(dollars in millions, except per share data)
As of and for the year ended
Sept. 2,
2018
(52 weeks)
Sept. 3,
2017
(53 weeks)
Aug. 28,
2016
(52 weeks)
Aug. 30,
2015
(52 weeks)
Aug. 31,
2014
(52 weeks)
$ 138,434
Membership fees
3,142
2,853
$116,073
2,646
$113,666
2,533
$110,212
2,428
Gross margin (1)
as a percentage of net
sales
11.04%
11.33%
11.35 %
10.66%
1.33
6%
United States
Total assets
40,830
$ 18,161
36,347
Long-term debt, excluding current portion . .
6,487
6,573
$ 17,043
33,163
4,061
$ 15,401
$ 14,830
33,017
4,852
32,662
5,084
Costco stockholders' equity.
12,799
10,778
12,079
10,617
12,303
WAREHOUSE INFORMATION
Warehouses in Operation.
Beginning of year
741
715
686
663
634
Opened.
25
S&P 500 Retail
$ 19,681
Changes in comparable sales (2)
Net property and equipment. .
7 %
Canada
Other International
Total Company
9%
4%
1 %
3%
5%
9%
5%
(3)%
(5)%
2%
11%
2%
(3)%
(3)%
3%
9%
4%
0 %
1 %
4%
Changes in Total Company comparable sales
excluding the impact of foreign currency
and gasoline prices
7%
4%
4 %
BALANCE SHEET DATA
9/3/17
100
8/30/15
Our philosophy is to provide our members with quality goods and services at competitive prices. We do not
focus in the short term on maximizing prices charged, but instead seek to maintain what we believe is a
perception among our members of our "pricing authority" on quality goods - consistently providing the most
competitive values. Our investments in merchandise pricing can, from time to time, include reducing prices
on merchandise to drive sales or meet competition and holding prices steady despite cost increases instead
of passing the increases on to our members, all negatively impacting near-term gross margin as a percentage
of net sales (gross margin percentage). We believe that our gasoline business draws members but it generally
has a significantly lower gross margin percentage relative to our non-gasoline business. A higher penetration
of gasoline sales will generally lower our gross margin percentage. Rapidly changing gasoline prices may
significantly impact our near-term net sales growth. Generally, rising gasoline prices benefit net sales growth
which, given the higher sales base, negatively impacts our gross margin percentage but decreases our
selling, general and administrative (SG&A) expenses as a percentage of net sales. A decline in gasoline
prices has the inverse effect.
We believe that the most important driver of our profitability is sales growth, particularly comparable
warehouse sales (comparable sales) growth. We define comparable sales as sales from warehouses open
for more than one year, including remodels, relocations and expansions, as well as online sales related to
e-commerce websites operating for more than one year. Comparable sales growth is achieved through
increasing shopping frequency from new and existing members and the amount they spend on each visit
(average ticket). Sales comparisons can also be particularly influenced by certain factors that are beyond
our control: fluctuations in currency exchange rates (with respect to the consolidation of the results of our
international operations); and changes in the cost of gasoline and associated competitive conditions. The
higher our comparable sales exclusive of these items, the more we can leverage certain of our selling,
general and administrative expenses, reducing them as a percentage of sales and enhancing profitability.
Generating comparable sales growth is foremost a question of making available to our members the right
merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long term.
Another substantial factor in sales growth is the health of the economies in which we do business, including
the effects of inflation or deflation, especially the United States. Sales growth and gross margins are also
impacted by our competition, which is vigorous and widespread, across a wide range of global, national and
regional wholesalers and retailers, including those with e-commerce operations. While we cannot control or
reliably predict general economic health or changes in competition, we believe that we have been successful
historically in adapting our business to these changes, such as through adjustments to our pricing and to
our merchandise mix, including increasing the penetration of our private label items, and through our online
offerings.
Item 7-Management's Discussion and Analysis of Financial Conditions and Results of Operations
(amounts in millions, except per share, share, membership fee, and warehouse count data)
Overview
20
20
(2) Includes net sales from warehouses and websites operating for more than one year. For fiscal 2017, the prior year includes the
comparable 53 weeks.
(1) Net sales less merchandise costs.
42,000
We also achieve sales growth by opening new warehouses. As our warehouse base grows, available and
desirable potential sites become more difficult to secure, and square footage growth becomes a comparatively
less substantial component of growth. The negative aspects of such growth, however, including lower initial
operating profitability relative to existing warehouses and cannibalization of sales at existing warehouses
when openings occur in existing markets, are continuing to decline in significance as they relate to the results
of our total operations. Our rate of square footage growth is generally higher in foreign markets, due to the
smaller base in those markets, and we expect that to continue. Our e-commerce business growth,
domestically and internationally, has also increased our sales.
44,600
49,400
51,600
Total paid members (000's)
MEMBERSHIP INFORMATION
663
686
715
741
47,600
762
Our membership format is an integral part of our business and has a significant effect on our profitability.
This format is designed to reinforce member loyalty and provide continuing fee revenue. The extent to which
we achieve growth in our membership base, increase the penetration of our Executive members, and sustain
high renewal rates, materially influences our profitability. Our paid membership growth rate may be adversely
impacted when warehouse openings occur in existing markets.
Our financial performance depends heavily on our ability to control costs. While we believe that we have
achieved successes in this area, some significant costs are partially outside our control, most particularly
health care and utility expenses. With respect to expenses relating to the compensation of our employees,
our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that achieving our
longer-term objectives of reducing employee turnover and enhancing employee satisfaction requires
maintaining compensation levels that are better than the industry average for much of our workforce. This
may cause us, for example, to absorb costs that other employers might seek to pass through to their
workforces. Because our business is operated on very low margins, modest changes in various items in the
income statement, particularly merchandise costs and selling, general and administrative expenses, can
have substantial impacts on net income.
22
22
In April 2018, the Board of Directors approved an increase in the quarterly cash dividend from $0.50
to $0.57 per share.
Net income increased 17% to $3,134, or $7.09 per diluted share compared to $2,679, or $6.08 per
diluted share in 2017; and
The effective tax rate in 2018 was 28.4% and was favorably impacted by the 2017 Tax Act and net tax
benefits of $57. The effective tax rate in 2017 was 32.8% and was favorably impacted by net tax benefits
of $104;
Selling, general & administrative (SG&A) expenses as a percentage of net sales decreased 24 basis
points, due to the impact of gasoline price inflation and leveraging increased sales;
Gross margin percentage decreased 29 basis points due to the impact of gasoline price inflation on
net sales and a shift in sales penetration to certain lower margin warehouse ancillary businesses from
our core merchandise categories;
Net sales increased 10% to 138,434 driven by a 9% increase in comparable sales and sales at new
warehouses opened in 2017 and 2018, partially offset by one additional week of sales in 2017;
Membership fee revenue increased 10% to $3,142, primarily due to the annual fee increase in the U.S.
and Canada in June 2017, and membership sign-ups at existing and new warehouses;
21
We opened 25 new warehouses, including 4 relocations, in 2018: 13 net new locations in the U.S.,
three in Canada, and five in our Other International segment, compared to 28 new warehouses, including
2 relocations in 2017;
•
•
•
•
•
Our fiscal year ends on the Sunday closest to August 31. Fiscal year 2018 and 2016 were 52-week fiscal
years ending on September 2, 2018 and August 28, 2016, respectively, and 2017 was a 53-week fiscal year
ending on September 3, 2017. Certain percentages presented are calculated using actual results prior to
rounding. Unless otherwise noted, references to net income relate to net income attributable to Costco.
Highlights for fiscal year 2018 included:
In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies
relative to the U.S. dollar, which are references to the differences between the foreign-exchange rates we
use to convert the financial results of our international operations from local currencies into U.S. dollars for
financial reporting purposes. This impact of foreign-exchange rate changes is calculated based on the
difference between the current period's currency exchange rates and that of the comparable prior period.
The impact of changes in gasoline prices on net sales is calculated based on the difference between the
current period's average price per gallon sold and that of the comparable prior period.
Our operating model is generally the same across our U.S., Canada, and Other International operating
segments (see Note 11 to the consolidated financial statements included in Item 8 of this Report). Certain
countries in the Other International segment have relatively higher rates of square footage growth, lower
wages and benefits costs as a percentage of country sales, and/or less or no direct membership warehouse
competition.
.
End of year..
(1)
(3)
Canada .
Mexico
United Kingdom
Japan
Korea (2)
Taiwan
Australia
Spain
United States and Puerto Rico
Iceland
Total
Lease Land
Own Land
and Building
and/or (1)
Building
Total
426
101
France
At September 2, 2018, we operated 762 membership warehouses:
Warehouse Properties
Item 2-Properties
(4)
(2)
(4)
Closed due to relocation
30
26
33
28
Changes in accounting standards and subjective assumptions, estimates and judgments by
management related to complex accounting matters could significantly affect our financial condition
and results of operations.
Accounting principles and related pronouncements, implementation guidelines, and interpretations we apply
to a wide range of matters that are relevant to our business, including self-insurance liabilities and income
taxes, are highly complex and involve subjective assumptions, estimates and judgments by our management.
Changes in rules or interpretation or changes in underlying assumptions, estimates or judgments by our
management could significantly change our reported or expected financial performance and have a material
impact on our consolidated financial statements.
We could be subject to additional income tax liabilities.
We compute our income tax provision based on enacted tax rates in the countries in which we operate. As
tax rates vary among countries, a change in earnings attributable to the various jurisdictions in which we
operate could result in an unfavorable change in our overall tax provision. Additionally, changes in the enacted
tax rates, adverse outcomes in tax audits, including transfer pricing disputes, or any change in the
pronouncements relating to accounting for income taxes could have a material adverse effect on our financial
condition and results of operations.
Significant changes in, or failure to comply with, federal, state, regional, local and international laws
and regulations relating to the use, storage, discharge and disposal of hazardous materials,
hazardous and non-hazardous wastes and other environmental matters could adversely impact our
business, financial condition and results of operations.
We are subject to a wide variety of federal, state, regional, local and international laws and regulations
relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous
wastes and other environmental matters. Failure to comply with these laws could result in harm to our
members, employees or others, significant costs to satisfy environmental compliance, remediation or
compensatory requirements, or the imposition of severe penalties or restrictions on operations by
governmental agencies or courts that could adversely affect our business, financial condition and results of
operations.
We are involved in a number of legal proceedings and audits and some of these outcomes could
adversely affect our business, financial condition and results of operations.
Our business requires compliance with many laws and regulations. Failure to achieve compliance could
subject us to lawsuits and other proceedings, and lead to damage awards, fines, penalties, and remediation
costs. We are, or may become involved, in a number of legal proceedings and audits including grand jury
investigations, government and agency investigations, and consumer, employment, tort, unclaimed property
laws, and other litigation. We cannot predict with certainty the outcomes of these proceedings and other
contingencies, including environmental remediation and other proceedings commenced by governmental
authorities. The outcome of some of these proceedings, audits, unclaimed property laws, and other
contingencies could require us to take, or refrain from taking, actions which could negatively affect our
operations or could require us to pay substantial amounts of money, adversely affecting our financial condition
and results of operations. Additionally, defending against these lawsuits and proceedings may involve
significant expense and diversion of management's attention and resources.
Item 1B-Unresolved Staff Comments
None.
15
Results of operations
527
Net Sales
2017
Net sales increased $10,099 or 9% during 2017, primarily due to a 4% increase in comparable sales, new
warehouses opened in 2016 and 2017, and the benefit of one additional week of sales in 2017. Changes in
gasoline prices positively impacted net sales by approximately $785, or 68 basis points, due to an 8%
increase in the average sales price per gallon. Changes in foreign currencies relative to the U.S. dollar
negatively impacted net sales by approximately $295, or 25 basis points, compared to 2016. The negative
impact was driven by Other International operations, partially offset by positive impacts attributable to our
Canadian operations.
Net Sales
2017 vs. 2016
23
Comparable sales increased 9% during 2018 and were positively impacted by increases in both shopping
frequency and the average ticket. The average ticket and comparable sales results were positively impacted
by an increase in gasoline prices and exchange rates in foreign currencies relative to the U.S. dollar. Changes
in comparable sales includes the negative impact of cannibalization (established warehouses losing sales
to our newly opened locations).
Comparable Sales
Changes in gasoline prices positively impacted net sales by approximately $2,267, or 180 basis points, due
to a 19% increase in the average sales price per gallon. Changes in foreign currencies relative to the U.S.
dollar positively impacted net sales by approximately $1,156, or 92 basis points, compared to 2017. The
positive impact was driven by both our Canadian and Other International operations.
Net sales increased $12,262 or 10% during 2018, primarily due to a 9% increase in comparable sales and
sales at new warehouses opened in 2017 and 2018, partially offset by the impact of one additional week of
sales in 2017.
Comparable Sales
Net Sales
4 %
4%
7%
Total Company
4 %
4%
7%
Other International
2018 vs. 2017
8 %
Comparable sales increased 4% during 2017 and were positively impacted by an increase in shopping
frequency and, to a lesser extent, an increased average ticket. The average ticket and comparable sales
results were positively impacted by an increase in gasoline prices, offset by decreases in foreign currencies
relative to the U.S. dollar. Changes in comparable sales includes the negative impact of cannibalization.
2018
24
24
The increase in membership fees was primarily due to membership sign-ups at existing and new warehouses,
an extra week of membership fee revenue, the annual fee increase, and an increased number of upgrades
to our higher-fee Executive Membership program. Fee increases had a positive impact on membership fee
revenues during 2017 of approximately $23.
2017 vs. 2016
As reported in fiscal 2017, we increased our annual membership fees in the U.S. and Canada and in certain
of our Other International operations. We account for membership fee revenue on a deferred basis,
recognized ratably over the one-year membership period. These fee increases had a positive impact of
approximately $178 in fiscal 2018 and will positively impact fiscal 2019, primarily the first two quarters, by
approximately $70.
The increase in membership fees was primarily due to the annual fee increase and membership sign-ups
at existing and new warehouses. These increases were partially offset by the impact of one additional week
of membership fees in 2017. At the end of 2018, our member renewal rates were 90% in the U.S. and Canada
and 88% worldwide.
2018 vs. 2017
2.28%
Membership Fees
4%
2,853 $
8%
2.26%
3,142 $
10%
2.27%
Membership fees as a percentage of net sales
Membership fees increase.
$
Membership fees.
2016
2017
2,646
4%
4%
Canada..
14%
(2)%
10%
10%
3%
8%
9%
$ 138,434 $ 126,172 $ 116,073
8%
Other International
U.S.
Changes in comparable sales:
Total Company ..
Other International
Canada.
Changes in net sales:
U.S.
Net Sales
2016
Canada...
4 %
10%
9%
3 %
4%
7%
U.S.
Increases in comparable sales excluding the impact
of changes in foreign currency and gasoline prices:
Total Company ...
0 %
4%
9%
(3)%
2%
11%
(3)%
5%
9%
1 %
4%
9%
2%
2018
86
14
100
7.500
172.00
150.11
0.450
163.98
142.24
0.450
Payment of future dividends is subject to declaration by the Board of Directors. Factors considered in
determining dividends include our profitability and expected capital needs. Subject to these qualifications,
we presently expect to continue to pay dividends on a quarterly basis.
164.55
17
The following table sets forth information on our common stock repurchase program activity for the fourth
quarter of fiscal 2018 (dollars in millions, except per share data):
Total Number
Period
May 14-June 10, 2018.
June 11-July 8, 2018
of Shares
Average
Price Paid
Purchased
Issuer Purchases of Equity Securities
per Share
(1)
0.500
First Quarter.
(1)
Includes a special cash dividend of $7.00 per share.
Price Range
High
Low
Cash
Dividends
Declared
$ 233.13 $ 195.48 $ 0.570
182.45
197.16
0.570
198.91
172.61
0.500
173.42
154.61
0.500
$ 182.20 $ 150.44 $
180.84
Total Number of
Shares
Purchased as
Part of Publicly
Announced
211.35
419,000
(1) The repurchase program is conducted under a $4,000 authorization approved by our Board of Directors in April 2015, which
expires in April 2019.
18
Performance Graph
The following graph compares the cumulative total shareholder return (stock price appreciation plus
dividends) on our common stock for the last five years with the cumulative total return of the S&P 500 Index,
the S&P 500 Retail Index, and a peer group previously selected by the Company.
The S&P 500 Retail Index is intended to replace the previously selected peer group to allow for a more broad
representation of industry performance. The transition to a larger retail index provides a better representation
of total retail market performance. For the year ended September 2, 2018, the cumulative total return of the
previous peer group is provided pursuant to SEC rules requiring presentation in the year of change, and
consists of: Amazon.com Inc.; The Home Depot Inc.; Lowe's Companies; Best Buy Co., Inc.; Staples Inc.;
Target Corporation; Kroger Company; and Walmart Stores, Inc. This group will not be presented in future
periods.
The information provided is from September 1, 2013, through September 2, 2018. The graph assumes the
investment of $100 in Costco common stock, the S&P 500 Index, the S&P 500 Retail Index, and the previously
selected peer group on September 1, 2013, and reinvestment of all dividends.
419,000 $
Dollars
300
200
100
0
9/1/13
Costco
Comparison of 5-Year Cumulative Total Returns
8/31/14
400
Total fourth quarter..
2,427
2,445
Program(1)
Maximum Dollar
Value of Shares
that May Yet be
Purchased
under the
Program
96,000 $
198.61
96,000 $
134,000
208.49
134,000
July 9-August 5, 2018..
111,000
216.06
111,000
August 6-September 2, 2018.
78,000
225.20
78,000
2,497
2,469
Second Quarter
Third Quarter
Fourth Quarter.
2017:
(1) 106 of the 157 leases are land-only leases, where Costco owns the building.
(2) In fiscal 2018, Costco purchased the remaining equity interest and three formerly leased locations from its former joint-venture
partner in Korea.
The following schedule shows warehouse openings, net of closings and relocations, and expected openings
through December 31, 2018:
United States
2014 and prior
2015.
2016.
2017
13
762
2018
2019 (expected through 12/31/2018).
6
Total...
533
Net sales
468
12
21
13
157
605
-
38
1
39
22
6
28
12
14
26
11
4
15
-
13
13
7
3
10
2
m
8/28/16
Canada
Total
136
769
At the end of fiscal 2018, our warehouses contained approximately 110.7 million square feet of operating
floor space: 77.5 million in the U.S.; 13.9 million in Canada; and 19.3 million in Other International. We
operate 24 depots, with approximately 11.0 million square feet, for the consolidation and distribution of most
merchandise shipments to the warehouses. Additionally, we operate various processing, packaging,
manufacturing and other facilities to support our business, which includes the production of certain private-
label items. Our executive offices are located in Issaquah, Washington, and we maintain 18 regional offices
in the U.S., Canada and Other International locations.
16
16
Item 3-Legal Proceedings
See discussion of Legal Proceedings in Note 10 to the consolidated financial statements included in Item 8
of this Report.
Item 4-Mine Safety Disclosures
769
Not applicable.
Item 5-Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Market Information and Dividend Policy
Our common stock is traded on the NASDAQ Global Select Market under the symbol "COST." On October 18,
2018, we had 8,829 stockholders of record. The following table shows the quarterly high and low closing
prices of our common stock as reported by NASDAQ for each quarter during the last two fiscal years and
the quarterly cash dividend declared per share.
2018:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter.
PART II
7
1
762
Total Warehouses
in Operation
88
107 663
663
1
10
23
686
2
6
29
715
6
7
26
741
3
5
21
Other
International
RESULTS OF OPERATIONS
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that our audits provide a reasonable basis for our opinion.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal
2018 vs. 2017
$ 121 $ 62 $ 80
_41 28 11
(5)
17
23
23
$ 75 $ 50 $ 41
Interest income and other, net.
Other, net...
Foreign-currency transaction gains (losses), net.
Interest income
2016
2017
2018
Interest Income and Other, Net
Interest expense primarily relates to Senior Notes issued by the Company. In May 2017, we issued $3,800
in aggregate principal amount of Senior Notes. In March and June 2017, we repaid $2,200 in total outstanding
principal of the 5.5% and 1.125% Senior Notes, respectively.
$ 159 $ 134 $ 133
Interest expense
2016
2017
2018
Interest Expense
Preopening expenses include costs for startup operations related to new warehouses and relocations,
developments in new international markets, new manufacturing and distribution facilities, and expansions
at existing warehouses. Preopening expenses vary due to the number of warehouse openings, the timing
of the opening relative to our year-end, whether the warehouse is owned or leased, and whether the opening
is in an existing, new, or international market. In 2017, we entered into two new international markets, Iceland
and France.
33
6
2
25
28
25
5
The increase in interest income in 2018 as compared to 2017 was primarily due to higher interest rates
earned on higher average cash and investment balances. Foreign-currency transaction gains (losses), net
include the revaluation or settlement of monetary assets and liabilities and mark-to-market adjustments for
forward foreign-exchange contracts by our Canadian and Other International operations. In 2018, the
increase was primarily due to a strengthening U.S. dollar relative to certain foreign currencies on forward
foreign-exchange contracts. See Derivatives and Foreign Currency sections in Item 8, Note 1 of this Report.
2017 vs. 2016
Foreign-currency transaction gains (losses), net include the revaluation or settlement of monetary assets
and liabilities and mark-to-market adjustments for forward foreign-exchange contracts by our Canadian
and Other International operations.
27
22
(2,419)
(3,218)
(1,281)
Net cash used in financing activities
(2,345)
3,292
6,726 $
(2,366)
5,774 $
(2,947)
$
Net cash provided by operating activities. .
Net cash used in investing activities
2016
2017
2018
The following table summarizes our significant sources and uses of cash and cash equivalents:
3
LIQUIDITY AND CAPITAL RESOURCES
Our effective tax rate for 2018 was favorably impacted by the 2017 Tax Act, which included a reduction in
the U.S. federal corporate rate from 35% to 21%. Due to the timing of our fiscal year relative to the effective
date of the rate change, our U.S. corporate rate for 2018 resulted in a blended rate of 25.6%. Other impacts
from the 2017 Tax Act consisted of tax expense of $142 for the estimated tax on deemed repatriation of
unremitted earnings and $43 for the reduction in foreign tax credits and other immaterial items, largely offset
by a tax benefit of $166 for the provisional remeasurement of certain deferred tax liabilities. In 2018, we also
recognized net tax benefits of $76, which was largely driven by the adoption of an accounting standard
related to stock-based compensation and other immaterial net benefits.
34.3%
32.8%
28.4%
1,243
1,325 $
1,263 $
$
2016
2017
2018
Effective tax rate
Provision for income taxes
Provision for Income Taxes
In 2017, our provision was favorably impacted by net tax benefits of $104, primarily due to a tax benefit
recorded in connection with the May 2017 special dividend paid to employees through our 401(k) retirement
plan of $82. This dividend was deductible for U.S. income tax purposes.
15
17
56
Total gross margin percentage decreased two basis points compared to 2016. Excluding the impact of
gasoline price inflation on net sales, gross margin as a percentage of adjusted net sales was 11.40%, an
increase of five basis points. This increase was primarily due to amounts earned under the co-branded credit
card arrangement in the U.S. of 15 basis points and a benefit of three basis points from non-recurring legal
settlements and other matters. The improvement in terms in our current co-brand agreement as compared
to the prior co-brand arrangement led to substantial year over year benefits in fiscal 2017. These increases
were partially offset by a six basis point decrease in our core merchandise categories, primarily due to food
and sundries as a result of a decrease in sales penetration. The gross margin percentage was also negatively
impacted by five basis points due to a LIFO benefit in 2016 and one basis point in warehouse ancillary and
other businesses. Changes in foreign currencies relative to the U.S. dollar had an immaterial impact on gross
margin in 2017.
The gross margin of our core merchandise categories, when expressed as a percentage of core merchandise
sales, increased eight basis points due to increases in these categories other than fresh foods.
2017 vs. 2016
Total gross margin percentage decreased 29 basis points compared to 2017. Excluding the impact of gasoline
price inflation on net sales, gross margin as a percentage of adjusted net sales was 11.22%, a decrease of
11 basis points. This decrease was primarily due to a shift in sales penetration to certain lower margin
warehouse ancillary and other businesses, which contributed to a 13 basis point decrease in our core
merchandise categories, except hardlines which was flat. Gross margin percentage was also negatively
impacted by 10 basis points due to a non-recurring legal settlement benefiting 2017 and costs related to our
centralized return centers in the U.S. These decreases were partially offset by a 13 basis point increase in
our warehouse ancillary and other businesses, predominantly our gasoline business. Changes in foreign
currencies relative to the U.S. dollar positively impacted gross margin by approximately $124 in 2018.
The segment gross margin percentage, when expressed as a percentage of the segment's own sales and
excluding the impact of changes in gasoline prices on net sales (segment gross margin percentage),
decreased in our U.S. operations, predominantly in our core merchandise categories, and as a result of the
non-recurring legal settlement in 2017, and the costs related to our centralized return centers mentioned
above. The segment gross margin percentage in our Canadian operations increased, due to warehouse
ancillary and other businesses, primarily our gasoline business. The segment gross margin percentage in
our Other International operations decreased, predominantly in food and sundries and softlines, partially
offset by an increase in our gasoline business.
The gross margin of our core merchandise categories (food and sundries, hardlines, softlines and fresh
foods), when expressed as a percentage of core merchandise sales (rather than total net sales), increased
one basis point primarily due to increases in food and sundries and hardlines partially offset by decreases
in fresh foods and softlines. This measure eliminates the impact of changes in sales penetration and gross
margins from our warehouse ancillary and other businesses.
Gross Margin
2018 vs. 2017
11.35%
11.33%
11.04 %
Gross margin percentage
13,172
$
14,290
Gross margin on a segment basis, when expressed as a percentage of the segment's own sales and excluding
the impact of changes in gasoline prices on net sales, increased in our U.S. operations, due to amounts
$
$
Gross margin
102,901
111,882
123,152
Less merchandise costs
116,073
126,172 $
138,434 $
$
Net sales
2016
2017
2018
15,282
34
45
earned under the co-branded credit card arrangement and non-recurring legal settlements and other matters
as discussed above. These increases were partially offset by a decrease in core merchandise categories,
predominantly food and sundries as a result of a decrease in sales penetration, and a LIFO benefit in 2016.
The segment gross margin percentage in our Canadian operations increased, primarily due to increases in
warehouse ancillary and other businesses, primarily our pharmacy business, partially offset by a decrease
in our core merchandise categories, largely fresh foods. The segment gross margin percentage increased
in our Other International operations due to increases across all core merchandise categories, except fresh
foods.
$ 68 $ 82 $ 78
Total warehouse openings, including relocations. .
Other International.
Canada
United States.
Warehouse openings, including relocations
Preopening expenses
2016
2017
2018
Preopening
26
26
SG&A expenses as a percentage of net sales decreased 14 basis points compared to 2016. Excluding the
impact of gasoline price inflation on net sales, SG&A expenses as a percentage of adjusted net sales was
10.33%, a decrease of seven basis points. Operating costs related to warehouses, ancillary, and other
businesses, were lower by nine basis points, primarily due to lower costs associated with the co-branded
credit card arrangement in the U.S. of 18 basis points. The improvement in terms in our current co-brand
agreement as compared to the prior co-brand arrangement led to substantial year over year benefits in fiscal
2017. This was partially offset by higher payroll and employee benefit expenses of 11 basis points, primarily
in our U.S. operations. Central operating costs were higher by one basis point, primarily due to increased
costs associated with our information systems modernization, including increased depreciation for projects
placed in service, incurred by our U.S. operations. Stock compensation expense was also higher by one
basis point.
25
Effective in June 2018, a portion of the savings generated from the Tax Cuts and Jobs Act (the "2017 Tax
Act") were used to increase wages for the majority of our U.S. hourly employees. The impact in fiscal 2018
was two basis points and the estimated annualized pre-tax cost of these increases is approximately $120.
2017 vs. 2016
2018 vs. 2017
SG&A expenses as a percentage of net sales.
10.40%
10.26%
12,068
$
12,950
$
13,876
10.02%
2016
2017
2018
SG&A expenses.
Selling, General and Administrative Expenses
SG&A expenses as a percentage of net sales decreased 24 basis points compared to 2017. Excluding the
impact of gasoline price inflation on net sales, SG&A expenses as a percentage of adjusted net sales was
10.19%, a decrease of seven basis points. Operating costs related to warehouses, ancillary, and other
businesses, which includes e-commerce and travel, were lower by six basis points, predominantly in our
U.S. and Other International operations, due to leveraging increased sales. Charges related to certain non-
recurring legal and other matters in 2017 positively impacted SG&A expense by two basis points. Stock
compensation expense was also lower by one basis point. Central operating costs were higher by two basis
points. Changes in foreign currencies relative to the U.S. dollar increased our SG&A expenses by
approximately $98 in 2018.
In fiscal 2018, we recorded a one-time charge of $142 for the estimated tax on deemed repatriation of
unremitted earnings under the 2017 Tax Act. The 2017 Tax Act provides for the payment of the federal tax
over an eight-year period. Because of the availability of foreign tax credits, the amount payable is $97, of
which $89 is classified as long-term and included in other liabilities on our consolidated balance sheet.
Cash Flows from Operating Activities
Our primary sources of liquidity are cash flows generated from warehouse operations, cash and cash
equivalents, and short-term investments. Cash and cash equivalents and short-term investments were
$7,259 and $5,779 at the end of 2018 and 2017, respectively. Of these balances, approximately $1,348 and
$1,255 represented unsettled credit and debit card receivables, respectively. These receivables generally
settle within four days. Cash and cash equivalents were negatively impacted by a change in exchange rates
of $37 in 2018 and positively impacted by $25 and $50 in 2017 and 2016, respectively.
Management believes that our cash position and operating cash flows will be sufficient to meet our liquidity
and capital requirements for the foreseeable future. While we believe that our U.S. current and projected
asset position is sufficient to meet our U.S. liquidity requirements, beginning in the second quarter of fiscal
2018, we no longer consider current fiscal year and future earnings of our non-U.S. consolidated subsidiaries
to be permanently reinvested. We recorded the estimated incremental foreign withholding (net of available
foreign tax credits) and state income taxes payable on current fiscal year earnings assuming a hypothetical
repatriation to the U.S. We continue to consider undistributed earnings of certain non-U.S. consolidated
subsidiaries prior to fiscal 2018 to be indefinitely reinvested and have not provided for withholding or state
taxes.
28
Our policy limits investments in the U.S. to direct U.S. government and government agency obligations,
repurchase agreements collateralized by U.S. government and government agency obligations, and U.S.
government and government agency money market funds. Our wholly-owned captive insurance subsidiary
invests in U.S. government and government agency obligations and U.S. government and government
agency money market funds. Our Canadian and Other International subsidiaries' investments are primarily
in money market funds, bankers' acceptances, and bank certificates of deposit, generally denominated in
local currencies.
31
Our exposure to market risk for changes in interest rates relates primarily to our investment holdings that
are diversified among various instruments considered to be cash equivalents, as defined in Note 1 to the
consolidated financial statements included in Item 8 of this Report, as well as short-term investments in
government and agency securities with effective maturities of generally three months to five years at the
date of purchase. The primary objective of our investment activities is to preserve principal and secondarily
to generate yields. The majority of our short-term investments are in fixed interest-rate securities. These
securities are subject to changes in fair value due to interest rate fluctuations.
Interest Rate Risk
Our exposure to financial market risk results from fluctuations in interest rates and foreign currency exchange
rates. We do not engage in speculative or leveraged transactions or hold or issue financial instruments for
trading purposes.
Item 7A-Quantitative and Qualitative Disclosures About Market Risk (amounts in millions)
See Note 1 to the consolidated financial statements included in Item 8 of this Report for a detailed description
of recent accounting pronouncements.
Recent Accounting Pronouncements
The determination of our provision for income taxes requires significant judgment, the use of estimates, and
the interpretation and application of complex tax laws. Significant judgment also is required in assessing the
timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions.
The benefits associated with uncertain tax positions are recorded only after determining a more-likely-than-
not probability that the positions will withstand challenge from tax authorities. When facts and circumstances
change, we reassess these positions and record any changes in the consolidated financial statements as
appropriate. In December 2017, the 2017 Tax Act was signed into law and our effective tax rate for fiscal
2018 reflects the provisional impact (see Note 8 to our Consolidated Financial Statements).
Income Taxes
The Company is predominantly self-insured for employee health-care benefits, workers' compensation,
general liability, property damage, directors' and officers' liability, vehicle liability, and inventory loss. Insurance
coverage is maintained in certain instances to limit the exposure arising from catastrophic events. We use
different mechanisms, including a wholly-owned captive insurance subsidiary and participate in a reinsurance
program. Liabilities associated with the risks that we retain are not discounted and are estimated by using
historical claims experience, demographic factors, severity factors and other actuarial assumptions. The
costs of claims are highly unpredictable and can fluctuate as a result of inflation rates, regulatory or legal
changes, and unforeseen developments in claims of an extended nature. While we believe our estimates
are reasonable and provide for a certain degree of coverage to account for these variables, actual claims
and costs could differ significantly from recorded liabilities. Historically, adjustments to our estimates have
not been material.
The preparation of our consolidated financial statements in accordance with U.S. generally accepted
accounting principles (U.S. GAAP) requires that we make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. We
base our estimates on historical experience and on assumptions that we believe to be reasonable, and we
continue to review and evaluate these estimates. For further information on significant accounting policies,
see discussion in Note 1 to the consolidated financial statements included in Item 8 of this Report.
Insurance/Self-Insurance Liabilities
Critical Accounting Estimates
50
30
In the opinion of management, we have no off-balance sheet arrangements that have had, or are reasonably
likely to have, a material current or future effect on our financial condition or financial statements other than
operating leases, included in the table above and discussed in Note 1 and Note 5 to the consolidated financial
statements included in Item 8 of this Report.
Off-Balance Sheet Arrangements
(6) Includes asset retirement obligations, deferred compensation obligations and current liabilities for unrecognized tax
contingencies. The total amount excludes $36 of non-current unrecognized tax contingencies and $30 of other obligations due
to uncertainty regarding the timing of future cash payments.
(5) Excludes certain services negotiated at the individual warehouse or regional level that are not significant and generally contain
clauses allowing for cancellation without significant penalty.
(3) Excludes common area maintenance, taxes, and insurance and have been reduced by $105 related to sub-lease income.
(4) Includes build-to-suit lease obligations and contractual interest payments.
(2) Includes contractual interest payments and excludes deferred issuance costs.
(1) Includes only open merchandise purchase orders.
5,502 $ 22,179
2,070 $
3,745 $
10,862 $
$
Total
Net cash provided by operating activities totaled $5,774 in 2018, compared to $6,726 in 2017. Our cash flow
provided by operations is primarily derived from net sales and membership fees. Cash flow used in operations
A 100 basis-point change in interest rates as of the end of 2018 would have had an immaterial incremental
change in fair market value. For those investments that are classified as available-for-sale, the unrealized
gains or losses related to fluctuations in market volatility and interest rates are reflected within stockholders'
equity in accumulated other comprehensive income in the consolidated balance sheets.
The nature and amount of our long-term debt may vary as a result of business requirements, market
conditions, and other factors. As of the end of 2018, long-term debt with fixed interest rates was $6,577.
Fluctuations in interest rates may affect the fair value of the fixed-rate debt. See Note 4 to the consolidated
financial statements included in Item 8 of this Report for more information on our long-term debt.
Foreign Currency-Exchange Risk
Our foreign subsidiaries conduct certain transactions in their non-functional currencies, which exposes us
to fluctuations in exchange rates. We manage these fluctuations, in part, through the use of forward foreign-
exchange contracts, seeking to economically hedge the impact of these fluctuations on known future
expenditures denominated in a non-functional foreign-currency. The contracts are intended primarily to
economically hedge exposure to U.S. dollar merchandise inventory expenditures made by our international
subsidiaries whose functional currency is other than the U.S. dollar. We seek to mitigate risk with the use of
these contracts and do not intend to engage in speculative transactions. For additional information related
to the Company's forward foreign-exchange contracts, see Notes 1 and 3 to the consolidated financial
statements included in Item 8 of this Report. A hypothetical 10% strengthening of the functional currency
compared to the non-functional currency exchange rates at September 2, 2018, would have decreased the
fair value of the contracts by $80 and resulted in an unrealized loss in the consolidated statements of income
for the same amount.
The Company's management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management's Annual Report on Internal Control Over Financial Reporting (Item 9A). Our
responsibility is to express an opinion on the Company's internal control over financial reporting based on
our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
Basis for Opinion
The material weakness was considered in determining the nature, timing, and extent of audit tests applied
in our audit of the fiscal year 2018 consolidated financial statements, and this report does not affect our
report on those consolidated financial statements.
There were ineffective information technology general controls (ITGCs) in the areas of user access and
program change-management over certain information technology (IT) systems that support the
Company's financial reporting processes. As a result, business process automated and manual controls
that were dependent on the affected ITGCs were ineffective because they could have been adversely
impacted. These control deficiencies were a result of: IT control processes lacked sufficient
documentation; insufficient knowledge and training of certain individuals with IT expertise; and risk-
assessment processes inadequate to identify and assess changes in IT environments and personnel
that could impact internal control over financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the company's annual
or interim financial statements will not be prevented or detected on a timely basis. The following material
weakness has been identified and included in management's assessment:
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets of the Company as of September 2, 2018 and
September 3, 2017, and the related consolidated statements of income, comprehensive income, equity, and
cash flows for the 52-week period ended September 2, 2018, the 53-week period ended September 3, 2017
and the 52-week period ended August 28, 2016, and the related notes (collectively, the consolidated financial
statements), and our report dated October 25, 2018 expressed an unqualified opinion on those consolidated
financial statements.
We have audited Costco Wholesale Corporation and subsidiaries' (the Company) internal control over
financial reporting as of September 2, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In
our opinion, because of the effect of the material weakness, described below, on the achievement of the
objectives of the control criteria, the Company has not maintained effective internal control over financial
reporting as of September 2, 2018, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Opinion on Internal Control Over Financial Reporting
Costco Wholesale Corporation:
To the Stockholders and Board of Directors
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
33
33
October 25, 2018
141
Seattle, Washington
/s/ KPMG LLP
These consolidated financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits. We
are a public accounting firm registered with the PCAOB and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
Basis for Opinion
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company's internal control over financial reporting as of September 2, 2018,
based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission, and our report dated October 25, 2018 expressed
an adverse opinion on the effectiveness of the Company's internal control over financial reporting.
We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation
and subsidiaries (the Company) as of September 2, 2018 and September 3, 2017, the related consolidated
statements of income, comprehensive income, equity, and cash flows for the 52-week period ended
September 2, 2018, the 53-week period ended September 3, 2017 and the 52-week period ended August 28,
2016, and the related notes (collectively, the consolidated financial statements). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company
as of September 2, 2018 and September 3, 2017, and the results of its operations and its cash flows for the
52-week period ended September 2, 2018, the 53-week period ended September 3, 2017 and the 52-week
period ended August 28, 2016, in conformity with U.S. generally accepted accounting principles.
Opinion on the Consolidated Financial Statements
Costco Wholesale Corporation:
To the Stockholders and Board of Directors
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Item 8-Financial Statements and Supplementary Data
32
32
We are exposed to fluctuations in prices for energy, particularly electricity and natural gas, which we seek
to partially mitigate through fixed-price contracts for certain of our warehouses and other facilities,
predominantly in the U.S. and Canada. We also enter into variable-priced contracts for some purchases of
electricity and natural gas, in addition to fuel for our gas stations, on an index basis. These contracts meet
the characteristics of derivative instruments, but generally qualify for the “normal purchases or normal sales"
exception under authoritative guidance and require no mark-to-market adjustment.
Commodity Price Risk
We have served as the Company's auditor since 2002.
36
234
19
9,029 $
$
(merchandise)(1)
Purchase obligations
Contractual obligations
Total
2024 and
thereafter
2022 to 2023
2020 to 2021
2019
Payments Due by Fiscal Year
At September 2, 2018, our commitments to make future payments under contractual obligations were as
follows:
Contractual Obligations
The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $220. The
outstanding standby letters of credit under these facilities at the end of 2018 totaled $149 and expire within
one year. The bank credit facilities and commercial paper programs have various expiration dates, all within
one year, and we generally intend to renew these facilities. The amount of borrowings available at any time
under our bank credit facilities is reduced by the amount of standby and commercial letters of credit then
outstanding.
38
We maintain bank credit facilities for working capital and general corporate purposes. At September 2, 2018,
we had borrowing capacity under these facilities of $857, including a $400 revolving line of credit renewed
by the U.S., which expires in June 2019. The Company currently has no plans to draw upon this facility. Our
international operations maintain $344 of the total borrowing capacity under bank credit facilities, of which
$163 is guaranteed by the Company. There were no outstanding short-term borrowings under the bank credit
facilities at the end of 2018 and 2017.
29
29
Cash dividends declared in 2018 totaled $2.14 per share, as compared to $8.90 per share in 2017, which
included a special cash dividend of $7.00 per share. In April 2018, our Board of Directors increased our
quarterly cash dividend from $0.50 to $0.57 per share. Subsequent to the end of 2018, our Board of Directors
declared a quarterly cash dividend in the amount of $0.57 per share, which is payable on November 23,
2018.
Dividends
During 2018 and 2017, we repurchased 1,756,000 and 2,998,000 shares of common stock, at average prices
of $183.13 and $157.87, totaling approximately $322 and $473, respectively. The remaining amount available
to be purchased under our approved plan was $2,427 at the end of 2018. These amounts may differ from
the stock repurchase balances in the accompanying consolidated statements of cash flows due to changes
in unsettled stock repurchases at the end of each fiscal year. Purchases are made from time-to-time, as
conditions warrant, in the open market or in block purchases and pursuant to plans under SEC Rule 10b5-1.
Repurchased shares are retired, in accordance with the Washington Business Corporation Act.
Stock Repurchase Programs
In May 2017, we issued $3,800 in aggregate principal amount of Senior Notes. The proceeds received were
net of a discount and used to pay the special dividend and a portion of the redemption of the 1.125% Senior
Notes.
Net cash used in financing activities totaled $1,281 in 2018, compared to $3,218 in 2017. The primary uses
of cash in 2018 were related to dividend payments and repurchases of common stock. Net cash used in
financing activities in 2017 primarily related to dividend payments, predominantly the special dividend paid
in May 2017, and the repayments of debt totaling $2,200 representing the aggregate principal balances of
the 5.5% and 1.125% Senior Notes.
Cash Flows from Financing Activities
We opened 21 net new warehouses and relocated 4 warehouses in 2018 and plan to open approximately
20 net new warehouses and relocate up to 4 warehouses in 2019. Our primary requirement for capital is
acquiring land, buildings, and equipment for new and remodeled warehouses. Capital is also required for
information systems, manufacturing and distribution facilities, initial warehouse operations and working
capital. In 2018, we spent $2,969 on capital expenditures, and it is our current intention to spend approximately
$2,800 to $3,100 during fiscal 2019. These expenditures are expected to be financed with cash from
operations, existing cash and cash equivalents, and short-term investments. There can be no assurance
that current expectations will be realized and plans are subject to change upon further review of our capital
expenditure needs.
Capital Expenditures
Net cash used in investing activities totaled $2,947 in 2018, compared to $2,366 in 2017, and primarily
related to capital expenditures. Net cash flows from investing activities also includes maturities and purchases
of short-term investments.
Cash Flows from Investing Activities
generally consists of payments to our merchandise vendors, warehouse operating costs including payroll
and employee benefits, utilities, and credit and debit card processing fees. Cash used in operations also
includes payments for income taxes. The decrease in net cash provided by operating activities for 2018
when compared to 2017 was primarily due to accelerated vendor payments of approximately $1,700 made
in the last week of fiscal 2016, which positively impacted cash flows in 2017.
Bank Credit Facilities and Commercial Paper Programs
232
Long-term debt (2)
227
Other (6)
867
3
67
186
611
and other)
(equipment services
Purchase obligations
824
647
72
722
IN
Operating leases (3)
71
Capital lease obligations (4)
2 $
3,029
407
$
$
9,031
34
2,496
2,215
1,537
358
3,207
Construction and land
obligations..
710
12
7,294
(1,756) -
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on
the financial statements.
control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
Definition and Limitations of Internal Control Over Financial Reporting
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
(26)
Seattle, Washington
October 25, 2018
CONSOLIDATED STATEMENTS OF EQUITY
COSTCO WHOLESALE CORPORATION
38
The accompanying notes are an integral part of these consolidated financial statements.
2,402
26
2,376
2,372
$
2,764
$
2,949
$
30
48
(amounts in millions)
38
Common Stock
Shares
Total Costco
Stockholders'
Equity
Retained
Earnings
notes....
Conversion of convertible
Release of vested restricted
stock units (RSUs),
including tax effects
Stock-based compensation .
Stock options exercised,
including tax effects
Foreign-currency translation
adjustment and other, net.
Net income
5,218 $
2 $
437,952 $
BALANCE AT AUGUST 30,
2015
(000's) Amount Capital Income (Loss)
Accumulated
Other
Comprehensive
Paid-in
Additional
2,812
98
2,987
1.70
8.90 $
2.14 $
CASH DIVIDENDS DECLARED PER COMMON
SHARE
438,585
441,263
440,937
438,437
438,515
441,834
Diluted
Basic
Shares used in calculation (000's)
5.33
6.08 $
$
7.09
The accompanying notes are an integral part of these consolidated financial statements.
37
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in millions)
(192)
$
2,714
$
3,179
August 28,
2016
September 3,
2017
Noncontrolling
September 2,
2018
53 Weeks Ended
52 Weeks Ended
COMPREHENSIVE INCOME ATTRIBUTABLE
TO COSTCO
Less: Comprehensive income attributable to
noncontrolling interests
Comprehensive income
Foreign-currency translation adjustment and
other, net.
NET INCOME INCLUDING NONCONTROLLING
INTERESTS
52 Weeks Ended
$
Total
Equity
518
98
13
85
55
85
|
2,673
Release of vested RSUs,
including tax effects
Stock-based compensation .
Foreign-currency translation
adjustment and other, net.
2,714
35
2,679
12,332
518
253
518
(165)
5
(165)
Release of vested RSUs,
including tax effects
Stock-based compensation
Foreign-currency translation
adjustment and other, net.
Net income
2017...
BALANCE AT SEPTEMBER 3,
and other.
Cash dividends declared
stock...
Repurchases of common
notes..
Conversion of convertible
(165)
--
12,079
(1,099) 7,686
--- - 2,679
5,490
2,749
- - 459 - - 459 - 459
4------
---- 2,350 2,350
26
4
22
22
21
2,376
26
$10,843
226
$
10,617
(1,121) $ 6,518 $
(146) - -
(146)
3 ------
|
2
437,524
(749)
(746)
--- - (746)
Net income
BALANCE AT AUGUST 28,
Interests
Cash dividends declared
and other..
(477)
(477)
(436)
(41)
(3,184)
Repurchases of common
stock..
(146)
2016
Diluted
5.36
6.11 $
4
4
438,189,000 and 437,204,000 shares issued and outstanding
Common stock $0.01 par value; 900,000,000 shares authorized;
0
0
Preferred stock $0.01 par value; 100,000,000 shares authorized; no
shares issued and outstanding
EQUITY
COMMITMENTS AND CONTINGENCIES
Total liabilities
OTHER LIABILITIES
25,268
27,727
1,200
1,314
Additional paid-in capital
6,573
6,107
Accumulated other comprehensive loss
11,079
13,103
TOTAL LIABILITIES AND EQUITY
Total equity
301
304
10,778
12,799
5,988
7,887
(1,014)
(1,199)
Noncontrolling interests. .
Total Costco stockholders' equity.
Retained earnings
5,800
6,487
17,495
19,926
36,347
$
40,830
$
TOTAL ASSETS
869
860
18,161
19,681
(10,180)
(11,033)
28,341
30,714
843
1,140
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable
$
2,725
3,014
1,498
1,624
LONG-TERM DEBT, excluding current portion
Total current liabilities
Other current liabilities
$
Deferred membership fees
1,057
Accrued member rewards
2,703
2,994
Accrued salaries and benefits
9,608
11,237 $
961
40,830
$
36,347
1,243
1,325
1,263
Provision for income taxes
3,619
4,039
4,442
INCOME BEFORE INCOME TAXES.
80
62
121
(133)
(134)
(159)
Interest income and other, net
Net income including noncontrolling interests. .
3,179
2,714
2,376
$
7.15
$
Basic
ATTRIBUTABLE TO COSTCO:
NET INCOME PER COMMON SHARE
2,350
Interest expense
2,679 $
$
NET INCOME ATTRIBUTABLE TO COSTCO
(26)
(35)
(45)
interests....
Net income attributable to noncontrolling
3,134 $
(2,998)
OTHER INCOME (EXPENSE)
4,111
141,576
3,142
138,434 $
August 28,
2016
September 3,
2017
52 Weeks Ended
52 Weeks Ended 53 Weeks Ended
September 2,
2018
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(amounts in millions, except per share data)
OPERATING EXPENSES
Total revenue.
Membership fees
Net sales.
REVENUE
36
The accompanying notes are an integral part of these consolidated financial statements.
126,172 $
116,073
2,853
2,646
4,480
Operating income
78
82
68
Preopening expenses.
12,068
3,672
12,950
Selling, general and administrative.
102,901
111,882
123,152
Merchandise costs
118,719
129,025
13,876
6,681
-
(41)
269
Changes in operating assets and liabilities:
Merchandise inventories..
(1,313)
(894)
(25)
Accounts payable.
1,561
2,258
(1,532)
Other operating assets and liabilities, net.
421
807
547
Net cash provided by operating activities
(29)
5,774
(49)
(14)
$
2,376
Adjustments to reconcile net income including noncontrolling interests
to net cash provided by operating activities:
Depreciation and amortization
Stock-based compensation
1,437
1,370
1,255
544
514
459
Other non-cash operating activities, net..
Deferred income taxes.
(6)
(57)
6,726
3,292
Other investing activities, net. .
Proceeds from issuance of long-term debt.
Repayments of long-term debt...
Tax withholdings on stock-based awards..
Repurchases of common stock
Cash dividend payments
Other financing activities, net.
7,274
Net cash used in financing activities
80
(236)
81
(106)
106
3,782
185
Proceeds from short-term borrowings
Repayments of short-term borrowings.
Change in bank checks outstanding
CASH FLOWS FROM FINANCING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments.
Maturities and sales of short-term investments
Additions to property and equipment.
Net cash used in investing activities
(1,060)
(1,279)
(1,432)
2,714
1,078
(2,969)
1,709
(2,649)
4
30
(2,947)
(2,366)
27
(2,345)
1,385
(2,502)
(86)
$
$
Net property and equipment.
OTHER ASSETS
$
6,055 $
4,546
1,204
1,233
1,669
1,432
11,040
9,834
321
272
20,289
17,317
Less accumulated depreciation and amortization
6,193
Construction in progress
Buildings and improvements
35
COSTCO WHOLESALE CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in millions, except par value and share data)
ASSETS
September 2, September 3,
2018
2017
CURRENT ASSETS
Cash and cash equivalents
Short-term investments
Receivables, net
Merchandise inventories
Other current assets
Total current assets
PROPERTY AND EQUIPMENT
Land
Equipment and fixtures
5,690
16,107
15,127
$
304
$13,103
The accompanying notes are an integral part of these consolidated financial statements.
39
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in millions)
52 Weeks
Ended
September 2,
2018
53 Weeks
Ended
52 Weeks
Ended
September 3,
2017
August 28,
2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income including noncontrolling interests
12,799
$
7,887
(1,199) $
(296)
(322)
(322)
Cash dividends declared
and other.
3
(939)
3,179
(936)
(971)
BALANCE AT SEPTEMBER 2,
2018...
438,189
$
4 $
6,107
$
(35)
(2,200)
(1,288)
(217)
1,703
Merchandise inventories
$ 11,040 $ 9,834
Merchandise inventories are stated at the lower of cost or market. U.S. merchandise inventories are valued
by the cost method of accounting, using the last-in, first-out (LIFO) basis. The Company believes the LIFO
method more fairly presents the results of operations by more closely matching current costs with current
revenues. The Company records an adjustment each quarter, if necessary, for the projected annual effect
of inflation or deflation, and these estimates are adjusted to actual results determined at year-end, after
actual inflation or deflation rates and inventory levels for the year have been determined. Canadian and
Other International merchandise inventories are predominantly valued using the cost and retail inventory
methods, respectively, using the first-in, first-out (FIFO) basis.
As of September 2, 2018 and September 3, 2017, U.S. merchandise inventories valued at LIFO approximated
FIFO after considering the lower of cost or market principle. Due to net deflation, a benefit of $64 was
recorded to merchandise costs in 2016.
The Company provides for estimated inventory losses between physical inventory counts as a percentage
of net sales, using estimates based on the Company's experience. The provision is adjusted periodically to
reflect physical inventory counts, which generally occur in the second and fourth fiscal quarters. Inventory
cost, where appropriate, is reduced by estimates of vendor rebates when earned or as the Company
progresses towards earning those rebates, provided that they are probable and reasonably estimable.
Property and Equipment
Property and equipment are stated at cost. In general, new building additions are classified into components,
each with an estimated useful life, generally five to fifty years for buildings and improvements and three to
twenty years for equipment and fixtures. Depreciation and amortization expense is computed using the
straight-line method over estimated useful lives or the lease term, if shorter. Leasehold improvements made
after the beginning of the initial lease term are depreciated over the shorter of the estimated useful life of
43
the asset or the remaining term of the initial lease plus any renewals that are reasonably assured at the date
the leasehold improvements are made.
The Company capitalizes certain computer software and software development costs incurred in developing
or obtaining computer software for internal use. These costs are included in equipment and fixtures and
amortized on a straight-line basis over the estimated useful lives of the software, generally three to seven
years.
Repair and maintenance costs are expensed when incurred. Expenditures for remodels, refurbishments and
improvements that add to or change the way an asset functions or that extend the useful life are capitalized.
Assets that were removed during the remodel, refurbishment or improvement are retired. Assets classified
as held-for-sale at the end of 2018 and 2017 were immaterial.
The Company evaluates long-lived assets for impairment on an annual basis, when relocating or closing a
facility, or when events or changes in circumstances may indicate the carrying amount of the asset group,
generally an individual warehouse, may not be fully recoverable. For asset groups held and used, including
warehouses to be relocated, the carrying value of the asset group is considered recoverable when the
estimated future undiscounted cash flows generated from the use and eventual disposition of the asset group
exceed the respective carrying value. In the event that the carrying value is not considered recoverable, an
impairment loss is recognized for the asset group to be held and used equal to the excess of the carrying
value above the estimated fair value of the asset group. For asset groups classified as held-for-sale (disposal
group), the carrying value is compared to the disposal group's fair value less costs to sell. The Company
estimates fair value by obtaining market appraisals from third party brokers or using other valuation
techniques. There were no impairment charges recognized in 2018, 2017 or 2016.
Insurance/Self-Insurance Liabilities
The Company is predominantly self-insured for employee health care benefits, workers' compensation,
general liability, property damage, directors' and officers' liability, vehicle liability, and inventory loss. Insurance
coverage is maintained in certain instances to limit the exposure arising from catastrophic events. It uses
different mechanisms including a wholly-owned captive insurance subsidiary (the captive) and participates
in a reinsurance program. Liabilities associated with the risks that are retained by the Company are not
discounted and are estimated, in part, by considering historical claims experience, demographic factors,
severity factors, and other actuarial assumptions. The estimated accruals for these liabilities could be
significantly affected if future occurrences and claims differ from these assumptions and historical trends.
At the end of 2018 and 2017, these insurance liabilities were $1,148 and $1,059 in the aggregate, respectively,
and were included in accrued salaries and benefits and other current liabilities in the consolidated balance
sheets, classified based on their nature.
1,040
The captive receives direct premiums, which are netted against the Company's premium costs in selling,
general and administrative expenses, in the consolidated statements of income. The captive participates in
a reinsurance program that includes other third-party participants. The reinsurance agreement is one year
in duration, and new agreements are entered into by each participant at their discretion at the commencement
of the next calendar year. The participant agreements and practices of the reinsurance program limit a
participating members' individual risk. Income statement adjustments related to the reinsurance program
and related impacts to the consolidated balance sheets are recognized as information becomes known. In
the event the Company leaves the reinsurance program, the Company retains its primary obligation to the
policyholders for prior activity.
1,189
1,770
2017
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Significant unobservable inputs that are not corroborated by market data.
The Company's valuation techniques used to measure the fair value of money market mutual funds are
based on quoted market prices, such as quoted net asset values published by the fund as supported in an
active market. Valuation methodologies used to measure the fair value of all other non-derivative financial
instruments are based on independent external valuation information. The pricing process uses data from
a variety of independent external valuation information providers, including trades, bid price or spread, two-
sided markets, quotes, benchmark curves including but not limited to treasury benchmarks and Libor and
swap curves, discount rates, and market data feeds. All are observable in the market or can be derived
principally from or corroborated by observable market data. The Company reports transfers in and out of
Levels 1, 2, and 3, as applicable, using the fair value of the individual securities as of the beginning of the
reporting period in which the transfer(s) occurred.
Current financial liabilities have fair values that approximate their carrying values. Long-term financial
liabilities include the Company's long-term debt, which are recorded on the balance sheet at issuance price
and adjusted for unamortized discounts or premiums and debt issuance costs, and are being amortized to
interest expense over the term of the loan. The estimated fair value of the Company's long-term debt is
based primarily on reported market values, recently completed market transactions, and estimates based
upon interest rates, maturities, and credit.
22
42
Receivables, Net
Receivables consist primarily of vendor, reinsurance, credit card incentive, third-party pharmacy and other
receivables. Vendor receivables include coupons, volume rebates or other purchase discounts. Balances
are generally presented on a gross basis, separate from any related payable due. In certain circumstances,
these receivables may be settled against the related payable to that vendor, in which case the receivables
are presented on a net basis. Reinsurance receivables are held by the Company's wholly-owned captive
insurance subsidiary and primarily represent amounts ceded through reinsurance arrangements gross of
the amounts assumed under reinsurance, which are presented within other current liabilities in the
consolidated balance sheets. Credit card incentive receivables primarily represent amounts earned under
the co-branded credit card arrangement in the U.S. Third-party pharmacy receivables generally relate to
amounts due from members' insurers. Other receivables primarily consist of amounts due from governmental
entities, mostly tax-related items.
Receivables are recorded net of an allowance for doubtful accounts. The allowance is based on historical
experience and application of the specific identification method. Write-offs of receivables were immaterial
for fiscal years 2018, 2017, and 2016.
Merchandise Inventories
Merchandise inventories consist of the following:
United States
Canada
Other International
2018
$ 8,081 $ 7,091
Derivatives
The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business.
It manages these fluctuations, in part, through the use of forward foreign-exchange contracts, seeking to
economically hedge the impact of fluctuations of foreign exchange on known future expenditures
denominated in a non-functional foreign-currency. The contracts relate primarily to U.S. dollar merchandise
inventory expenditures made by the Company's international subsidiaries with functional currencies other
44
10,778
5,988
(3,945)
(3,945)
(3,945)
- (473)
(473)
(432)
(1,014)
5,800
4
437,204
( (2)
2
-
301
11,079
-
3,134
stock....
Repurchases of common
(217)
(217)
(217)
2,741
547
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Fair value is estimated by applying
a fair value hierarchy, which requires maximizing the use of observable inputs when measuring fair value.
The three levels of inputs are:
(185)
547
(192)
(7)
(185)
3,179
45
3,134
547
The Company accounts for certain assets and liabilities at fair value. The carrying value of the Company's
financial instruments, including cash and cash equivalents, receivables and accounts payable, approximate
fair value due to their short-term nature or variable interest rates. See Notes 2, 3, and 4 for the carrying value
and fair value of the Company's investments, derivative instruments, and fixed-rate debt, respectively.
Fair Value of Financial Instruments
The Company periodically evaluates unrealized losses in its investment securities for other-than-temporary
impairment, using both qualitative and quantitative criteria. In the event a security is deemed to be other-
than-temporarily impaired, the Company recognizes the loss in interest income and other, net in the
consolidated statements of income.
1,167
(1,422)
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR
4,546
3,379
4,801
CASH AND CASH EQUIVALENTS END OF YEAR
$
6,055 $
4,546 $
3,379
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (reduced by $19, $16, and $19, interest capitalized in 2018,
2017, and 2016, respectively)..
$
1,509
50
25
(37)
(202)
(220)
(328)
(469)
(486)
(689)
(3,904)
143 $
(746)
11
55
(1,281)
(3,218)
(2,419)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS. . .
Net change in cash and cash equivalents
(41)
(4
131
$
Note 1-Summary of Significant Accounting Policies
Description of Business
Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries
operate membership warehouses based on the concept that offering members low prices on a limited
selection of nationally-branded and private-label products in a wide range of merchandise categories will
produce high sales volumes and rapid inventory turnover. At September 2, 2018, Costco operated 762
warehouses worldwide: 527 United States (U.S.) locations (in 44 U.S. states, Washington, D.C., and Puerto
Rico), 100 Canada locations, 39 Mexico locations, 28 United Kingdom (U.K.) locations, 26 Japan locations,
15 Korea locations, 13 Taiwan locations, 10 Australia locations, two Spain locations, one Iceland location,
and one France location. The Company operates e-commerce websites in the U.S., Canada, Mexico, U.K.,
Korea, and Taiwan.
Basis of Presentation
The consolidated financial statements include the accounts of Costco Wholesale Corporation, its wholly-
owned subsidiaries, and subsidiaries in which it has a controlling interest. The Company reports
noncontrolling interests in consolidated entities as a component of equity separate from the Company's
equity. All material inter-company transactions between and among the Company and its consolidated
subsidiaries have been eliminated in consolidation. The Company's net income excludes income attributable
to the noncontrolling interest in Taiwan. During the first quarter of 2018, Costco purchased its former joint-
venture partner's remaining equity interest in its Korean operations. Unless otherwise noted, references to
net income relate to net income attributable to Costco.
Fiscal Year End
The Company operates on a 52/53 week fiscal year basis with the fiscal year ending on the Sunday closest
to August 31. References to 2018 and 2016 relate to the 52-week fiscal years ended September 2, 2018,
and August 28, 2016, respectively. References to 2017 relate to the 53-week fiscal year ended September 3,
2017.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles
(U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates and assumptions.
Cash and Cash Equivalents
The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with a
maturity of three months or less at the date of purchase, and proceeds due from credit and debit card
transactions with settlement terms of up to four days. Credit and debit card receivables were $1,348 and
$1,255 at the end of 2018 and 2017, respectively.
The Company provides for the daily replenishment of major bank accounts as checks are presented. Included
in accounts payable at the end of 2018 and 2017 are $463 and $383, respectively, representing the excess
of outstanding checks over cash on deposit at the banks on which the checks were drawn.
41
Short-Term Investments
In general, short-term investments have a maturity at the date of purchase of three months to five years.
Investments with maturities beyond five years may be classified, based on the Company's determination,
as short-term based on their highly liquid nature and because they represent the investment of cash that is
available for current operations. Short-term investments classified as available-for-sale are recorded at fair
value using the specific identification method with the unrealized gains and losses reflected in accumulated
other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-
sale securities, if any, are determined on a specific identification basis and are recorded in interest income
and other, net in the consolidated statements of income. Short-term investments classified as held-to-maturity
are financial instruments that the Company has the intent and ability to hold to maturity and are reported net
of any related amortization and are not remeasured to fair value on a recurring basis.
(amounts in millions, except share, per share, and warehouse count data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COSTCO WHOLESALE CORPORATION
40
1,204 $
1,185
$
EA GA
$
123
953
Income taxes, net.
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
$
113
$ $
Cash dividend declared, but not yet paid. .
$
250
The accompanying notes are an integral part of these consolidated financial statements.
Property and equipment acquired, but not yet paid
/s/ KPMG LLP
Fair Value
305
(1) Includes build-to-suit lease obligations.
Total
Thereafter
2023
2022
2021
2020
2019
Less amount representing interest
At the end of 2018, future minimum payments, net of sub-lease income of $105 for all years combined, under
non-cancelable operating leases with terms of at least one year and capital leases were as follows:
Capital and Build-to-Suit Leases
The aggregate rental expense for 2018, 2017, and 2016 was $265, $258, and $250, respectively. Sub-lease
income and contingent rent were not material in 2018, 2017, or 2016.
Operating Leases
Note 5-Leases
Total
Thereafter
$ 6,614
Gross assets recorded under capital and build-to-suit leases were $427 and $404 at the end of 2018 and
2017, respectively. These assets are recorded net of accumulated amortization of $94 and $78 at the end
of 2018 and 2017, respectively.
Net present value of minimum lease payments.
Less current installments (2)
Long-term capital lease obligations less current installments (3)
36
175
36
183
36
193
35
214
34
227 $
$
Leases (1)
Capital
Operating
Leases
62
52
(2) Included in other current liabilities in the accompanying consolidated balance sheets.
(3) Included in other liabilities in the accompanying consolidated balance sheets.
2,343
90
2023
1,300
794
497
498
994
995
498
499
1,198
1,199 $
2017
2018
5557
51
(1) Included in other current liabilities in the consolidated balance sheets.
Long-term debt, excluding current portion.
Less current portion (1)
Total long-term debt.
793
2,215
992
987
2022
1,091
2021
1,700
2020
90
$
2019
Maturities of long-term debt during the next five fiscal years and thereafter are as follows:
6,487 $
86
90
6,659
6,577
702
613
986
991
647
$ 3,207
824
(1)
Stock-based compensation expense before income taxes
Less income tax benefit
The following table summarizes stock-based compensation expense and the related tax benefits under the
Company's plans:
Summary of Stock-Based Compensation
The weighted-average grant date fair value of RSUs granted was $156.19, $144.12, and $153.46 in 2018,
2017, and 2016, respectively. The remaining unrecognized compensation cost related to non-vested RSUs
at the end of 2018 was $693 and the weighted-average period of time over which this cost will be recognized
is 1.6 years. Included in the outstanding balance at the end of 2018 were approximately 2,658,000 RSUs
vested but not yet delivered.
140.85
7,578 $
138.57
(255)
129.49
(4,088)
156.19
3,722
128.15
8,199 $
Weighted-Average
Grant Date Fair
Value
Number of
Units
(in 000's)
Stock-based compensation expense, net of income taxes
Outstanding at the end of 2018
2018
2016
$ 4,442 $4,039 $3,619
997
$3,182 $2,988 $2,622
1,260 1,051
2016
2017
2018
...
54
Total
Domestic
Foreign.
Income before income taxes is comprised of the following:
(1) In 2018, the income tax benefit reflects the reduction in the U.S. federal statutory income tax rate from 35% to 21%.
Note 8—Income Taxes
$ 428 $ 347 $ 309
(150)
(116) (167)
$ 459
$ 544 $ 514
2017
Other long-term debt.
Forfeited
Granted
1,756 $
Total Cost
Average
Price per
Share
(000's)
Shares
Repurchased
2016.
2018
2017
The Company's stock repurchase program is conducted under a $4,000 authorization by the Board of
Directors, which expires April 17, 2019. As of the end of 2018, the remaining amount available for stock
repurchases under the approved plan was $2,427. The following table summarizes the Company's stock
repurchase activity:
Stock Repurchase Programs
The Company's current quarterly dividend rate is $0.57 per share. In May 2017, the Company paid a special
cash dividend of $7.00 per share. The aggregate payment was approximately $3,100. Subsequent to the
end of 2018, the Board of Directors declared a quarterly cash dividend in the amount of $0.57 per share,
which is payable on November 23, 2018.
Dividends
Note 6-Stockholders' Equity
390
$
(7)
397
(427)
183.13 $
Vested and delivered
322
157.87
Outstanding at the end of 2017
The following table summarizes RSU transactions during 2018:
7,246,000 time-based RSUs that vest upon continued employment over specified periods of time;
332,000 performance-based RSUs, of which 205,000 were granted to executive officers subject to
the certification of the attainment of specified performance targets for 2018. This certification occurred
in October 2018, at which time a portion vested as a result of the long service of all executive officers.
The remaining awards vest upon continued employment over specified periods of time.
•
•
The following awards were outstanding at the end of 2018:
53
53
RSUS granted to employees and to non-employee directors generally vest over five and three years,
respectively. Additionally, the terms of the RSUs, including performance-based awards, provide for
accelerated vesting for employees and non-employee directors who have attained 25 or more and five or
more years of service with the Company, respectively. Recipients are not entitled to vote or receive dividends
on non-vested and undelivered shares. At the end of 2018, 8,313,000 shares were available to be granted
as RSUs under the Seventh Plan.
Summary of Restricted Stock Unit Activity
The Company grants stock-based compensation primarily to employees and non-employee directors. RSU
grants to all executive officers are performance-based. Through a series of shareholder approvals, there
have been amended and restated plans and new provisions implemented by the Company. RSUs are subject
to quarterly vesting upon retirement or voluntary termination. Employees who attain certain years of service
with the Company receive shares under accelerated vesting provisions on the annual vesting date rather
than upon retirement. The Seventh Restated 2002 Stock Incentive Plan (Seventh Plan) is the Company's
only stock-based compensation plan with shares available for grant at the end of 2018. Each share issued
in respect of stock awards is counted as 1.75 shares toward the limit of shares made available under the
Seventh Plan. The Seventh Plan authorized the issuance of 23,500,000 shares (13,429,000 RSUs) of
common stock for future grants in addition to the shares authorized under the previous plan. The Company
issues new shares of common stock upon vesting of RSUs. Shares for vested RSUs are generally delivered
to participants annually, net of statutory withholding taxes.
Note 7-Stock-Based Compensation Plans
These amounts may differ from the stock repurchase balances in the accompanying consolidated statements
of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year.
477
149.90
3,184
473
2,998
3.00% Senior Notes due May 2027
6,573
1.70% Senior Notes due December 2019.
1.75% Senior Notes due February 2020
2.15% Senior Notes due May 2021.
2.25% Senior Notes due February 2022
2.30% Senior Notes due May 2022.
(14) $
$ 912 $
Recorded
Basis
Unrealized
Losses, Net
Cost
Basis
Total short-term investments.
Certificates of deposit
Held-to-maturity:
2.75% Senior Notes due May 2024
Available-for-sale:
2018:
The Company's investments were as follows:
Note 2-Investments
In February 2016, the FASB issued ASU 2016-02 which will require recognition on the balance sheet for the
rights and obligations created by leases with terms greater than twelve months. The new standard is effective
for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption
permitted. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal 2020 and
plans to utilize the transition option which does not require application of the guidance to comparative periods
in the year of adoption. While the Company continues to evaluate this standard and the effect on related
disclosures, the primary effect of adoption will be recording right-of-use assets and corresponding lease
obligations for current operating leases. The adoption is expected to have a material impact on the Company's
consolidated balance sheets, but not on the consolidated statements of income or cash flows. Additionally,
the Company is in the process of reviewing current accounting policies, changes to business processes,
systems and controls to support adoption of the new standard, which includes implementing a new lease
accounting system.
48
In May 2014, the FASB issued ASU 2014-09 providing for changes in the recognition of revenue from contracts
with customers. The guidance converges the requirements for reporting revenue and requires disclosures
sufficient to describe the nature, amount, timing, and uncertainty of revenue and cash flows arising from
these contracts. The new standard is effective for fiscal years and interim periods within those years beginning
after December 15, 2017. The Company plans to adopt this guidance at the beginning of its first quarter of
fiscal 2019, using the modified retrospective approach through a cumulative effect adjustment to retained
earnings. The Company has substantially completed its assessment of the new standard and it does not
believe the impacts to be material to the Company's consolidated financial statements. The Company
continues to evaluate the disclosure requirements related to the new standard.
Recent Accounting Pronouncements Not Yet Adopted
898
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) 2016-09 related to the accounting for share-based payment transactions. The guidance relates to
income taxes, forfeitures, and minimum statutory tax withholding requirements. The new standard was
effective for fiscal years and interim periods within those years beginning after December 15, 2016, with
early adoption permitted. The Company adopted this guidance at the beginning of its first quarter of fiscal
year 2018. As a result, the Company recognized a net tax benefit in fiscal 2018 of $33 as part of its income
tax provision in the accompanying consolidated statements of income, which includes the impact of the lower
tax rate from the 2017 Tax Act. Previously, tax benefits associated with the release of employee RSUs were
reflected in equity. These amounts are now reflected as cash flows from operations instead of cash flows
from financing activities in the consolidated statements of cash flows on a prospective basis. Adoption of
this guidance did not have a material impact on the consolidated balance sheets, consolidated statements
of cash flows, or related disclosures.
306
$ 1,218
(14) $
948
Total available-for-sale
1
0
1
Mortgage-backed securities
947
0 $
947 $
$
Government and agency securities.
Available-for-sale:
Recorded
Basis
Unrealized
Gains, Net
Cost
Basis
2017:
1,204
306
Recent Accounting Pronouncements Adopted
Repurchased shares of common stock are retired, in accordance with the Washington Business Corporation
Act. The par value of repurchased shares is deducted from common stock and the excess repurchase price
over par value is deducted by allocation to additional paid-in capital and retained earnings. The amount
allocated to additional paid-in capital is the current value of additional paid-in capital per share outstanding
and is applied to the number of shares repurchased. Any remaining amount is allocated to retained earnings.
See Note 6 for additional information.
Stock Repurchase Programs
Selling, General and Administrative Expenses
The Company has agreements to receive funds from vendors for coupons and a variety of other programs.
These programs are evidenced by signed agreements that are reflected in the carrying value of the inventory
when earned or as the Company progresses towards earning the rebate or discount, and as a component
of merchandise costs as the merchandise is sold. Other vendor consideration is generally recorded as a
reduction of merchandise costs upon completion of contractual milestones, terms of the related agreement,
or by another systematic approach.
Vendor Consideration
Merchandise costs consist of the purchase price or manufacturing costs of inventory sold, inbound and
outbound shipping charges and all costs related to the Company's depot operations, including freight from
depots to selling warehouses, and are reduced by vendor consideration. Merchandise costs also include
salaries, benefits, depreciation, and utilities in fresh foods and certain ancillary departments.
Merchandise Costs
(up to a maximum reward of approximately $1,000 per year), which can be redeemed only at Costco
warehouses. The Company accounts for this reward as a reduction in sales. The sales reduction and
corresponding liability (classified as accrued member rewards in the consolidated balance sheets) are
computed after giving effect to the estimated impact of non-redemptions, based on historical data. The net
reduction in sales was $1,394, $1,281, and $1,172 in 2018, 2017, and 2016, respectively.
45
The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the
one-year membership. The Company's Executive members qualify for a 2% reward on qualified purchases
Generally, when Costco is the primary obligor, is subject to inventory risk, has latitude in establishing prices
and selecting suppliers, can influence product or service specifications, or has several but not all of these
indicators, revenue is recorded on a gross basis. It otherwise records the net amounts earned, which is
reflected in net sales.
The Company generally recognizes sales, which include gross shipping fees where applicable, net of returns,
at the time the member takes possession of merchandise or receives services. When the Company collects
payments from members prior to the transfer of ownership of merchandise or the performance of services,
the amounts received are generally recorded as deferred sales, included in other current liabilities in the
consolidated balance sheets, until the sale or service is completed. The Company reserves for estimated
sales returns based on historical trends in merchandise returns and reduces sales and merchandise costs
accordingly. The sales returns reserve is based on an estimate of the net realizable value of merchandise
inventories expected to be returned. Amounts collected from members for sales or value added taxes are
recorded on a net basis.
Revenue Recognition
The Company recognizes foreign-currency transaction gains and losses related to revaluing or settling
monetary assets and liabilities denominated in currencies other than the functional currency in interest income
and other, net in the accompanying consolidated statements of income. Generally, these include the U.S.
dollar cash and cash equivalents and the U.S. dollar payables of consolidated subsidiaries revalued to their
functional currency. Also included are realized foreign-currency gains or losses from settlements of forward
foreign-exchange contracts. These items were immaterial for 2018 and 2017 and resulted in net gains of
$38 for 2016.
The functional currencies of the Company's international subsidiaries are the local currency of the country
in which the subsidiary is located. Assets and liabilities recorded in foreign currencies are translated at the
exchange rate on the balance sheet date. Translation adjustments are recorded in accumulated other
comprehensive loss. Revenues and expenses of the Company's consolidated foreign operations are
translated at average exchange rates prevailing during the year.
Foreign Currency
The Company is exposed to fluctuations in prices for energy, particularly electricity and natural gas, which
it seeks to partially mitigate through the use of fixed-price contracts for certain of its warehouses and other
facilities, primarily in the U.S. and Canada. The Company also enters into variable-priced contracts for some
purchases of natural gas, in addition to fuel for its gas stations, on an index basis. These contracts meet the
characteristics of derivative instruments, but generally qualify for the "normal purchases or normal sales"
exception under authoritative guidance and require no mark-to-market adjustment.
The unrealized gains or losses recognized in interest income and other, net in the accompanying consolidated
statements of income relating to the net changes in the fair value of unsettled forward foreign-exchange
contracts were immaterial in 2018, 2017, and 2016.
than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company
seeks to mitigate risk with the use of these contracts and does not intend to engage in speculative transactions.
Some of these contracts contain credit-risk-related contingent features that require settlement of outstanding
contracts upon certain triggering events. At the end of 2018 and 2017, the aggregate fair value amounts of
derivative instruments in a net liability position and the amount needed to settle the instruments immediately
if the credit-risk-related contingent features were triggered were immaterial. The aggregate notional amounts
of open, unsettled forward foreign-exchange contracts were $717 and $637 at the end of 2018 and 2017,
respectively. See Note 3 for information on the fair value of unsettled forward foreign-exchange contracts at
the end of 2018 and 2017.
Selling, general and administrative expenses consist primarily of salaries, benefits and workers'
compensation costs for warehouse employees (other than fresh foods departments and certain ancillary
businesses) as well as all regional and home office employees, including buying personnel. Selling, general
and administrative expenses also include substantially all building and equipment depreciation, stock
compensation expense, utilities, credit and debit card processing fees, as well as other operating costs
incurred to support warehouse operations.
Retirement Plans
The Company's 401(k) retirement plan is available to all U.S. employees who have completed 90 days of
employment. The plan allows participants to make wage deferral contributions, a portion of which the
Company matches. In addition, the Company provides each eligible participant an annual discretionary
contribution. The Company also has a defined contribution plan for Canadian employees and contributes a
percentage of each employee's wages. Certain subsidiaries in the Company's Other International operations
have defined benefit and defined contribution plans that are not material. Amounts expensed under all plans
were $578, $543, and $489 for 2018, 2017, and 2016, respectively, and are predominantly included in selling,
general and administrative expenses in the accompanying consolidated statements of income.
Stock-Based Compensation
The computation of basic net income per share uses the weighted average number of shares that were
outstanding during the period. The computation of diluted net income per share uses the weighted average
number of shares in the basic net income per share calculation plus the number of common shares that
would be issued assuming vesting of all potentially dilutive common shares outstanding using the treasury
stock method for shares subject to RSUs.
Net Income per Common Share Attributable to Costco
The timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax
positions requires significant judgment. The benefits of uncertain tax positions are recorded in the Company's
consolidated financial statements only after determining a more-likely-than-not probability that the uncertain
tax positions will withstand challenge from tax authorities. When facts and circumstances change, the
Company reassesses these probabilities and records any changes as appropriate.
statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits
and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences and carry-forwards are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Avaluation allowance is established when necessary
to reduce deferred tax assets to amounts that are more likely than not expected to be realized.
47
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributed to differences between the financial
Income Taxes
Preopening expenses include costs for startup operations related to new warehouses and relocations,
developments in new international markets, new manufacturing and distribution facilities, and expansions
at existing warehouses and are expensed as incurred.
0
Preopening Expenses
The Company records an asset and related financing obligation for the estimated construction costs under
build-to-suit lease arrangements where it is considered the owner for accounting purposes, to the extent the
Company is involved in the construction of the building or structural improvements or has construction risk
prior to commencement of a lease. Upon occupancy, the Company assesses whether these arrangements
qualify for sales recognition under the sale-leaseback accounting guidance. If the Company continues to be
the deemed owner, it accounts for the arrangement as a financing lease.
The Company has capital leases for certain warehouse locations, expiring at various dates through 2059.
Capital lease assets are included in land and buildings and improvements in the accompanying consolidated
balance sheets. Amortization expense on capital lease assets is recorded as depreciation expense and is
included in selling, general and administrative expenses. Capital lease liabilities are recorded at the lesser
of the estimated fair market value of the leased property or the net present value of the aggregate future
minimum lease payments and are included in other current liabilities and other liabilities in the accompanying
consolidated balance sheets. Interest on these obligations is included in interest expense in the consolidated
statements of income.
The Company accounts for its lease expense with free rent periods and step-rent provisions on a straight-
line basis over the original term of the lease and any extension options that the Company more likely than
not expects to exercise, from the date the Company has control of the property. Certain leases provide for
periodic rental increases based on price indices, or the greater of minimum guaranteed amounts or sales
volume.
The Company leases land and/or buildings at warehouses and certain other office and distribution facilities,
primarily under operating leases. Operating leases expire at various dates through 2064, with the exception
of one lease in the U.K., which expires in 2151. These leases generally contain one or more of the following
options, which the Company can exercise at the end of the initial lease term: (a) renewal of the lease for a
defined number of years at the then-fair market rental rate or rate stipulated in the lease agreement;
(b) purchase of the property at the then-fair market value; or (c) right of first refusal in the event of a third-
party purchase offer.
Leases
Stock-based compensation expense is predominantly included in selling, general and administrative
expenses in the consolidated statements of income. Certain stock-based compensation costs are capitalized
or included in the cost of merchandise. See Note 7 for additional information on the Company's stock-based
compensation plans.
46
Restricted stock units (RSUs) granted to employees generally vest over five years and allow for quarterly
vesting of the pro-rata number of stock-based awards that would vest on the next anniversary of the grant
date in the event of retirement or voluntary termination. Actual forfeitures are recognized as they occur.
Compensation expense for stock-based awards is predominantly recognized using the straight-line method
over the requisite service period for the entire award. Awards for employees and non-employee directors
provide for accelerated vesting of a portion of outstanding shares based on cumulative years of service with
the Company. Compensation expense for the accelerated shares is recognized upon achievement of the
long-service term. The cumulative amount of compensation cost recognized at any point in time equals at
least the portion of the grant-date fair value of the award that is vested at that date. The fair value of RSUs
is calculated as the market value of the common stock on the measurement date less the present value of
the expected dividends forgone during the vesting period.
The Company's asset retirement obligations (ARO) primarily relate to leasehold improvements that at the
end of a lease must be removed. These obligations are recorded as a liability with an offsetting asset at the
inception of the lease term based upon the estimated fair value of the costs to remove the leasehold
improvements. These liabilities are accreted over time to the projected future value of the obligation using
the Company's incremental borrowing rate. The ARO assets are depreciated using the same depreciation
method as the leasehold improvement assets and are included with buildings and improvements. Estimated
ARO liabilities associated with these leases were immaterial at the end of 2018 and 2017, respectively, and
are included in other liabilities in the accompanying consolidated balance sheets.
948
Government and agency securities. .
Certificates of deposit
$
7
Level 2
Level 1
917
9 $
$
(2)
0
16
903
0
$
9
Level 2
Level 1
Total
0
Forward foreign-exchange contracts, in (liability) position (3)
0
1
The Company at its option may redeem the Senior Notes at any time, in whole or in part, at a redemption
price plus accrued interest. The redemption price is equal to the greater of 100% of the principal amount or
the sum of the present value of the remaining scheduled payments of principal and interest to maturity.
Additionally, upon certain events, as defined by the terms of the Senior Notes, the holder has the right to
require the Company to purchase this security at a price of 101% of the principal amount plus accrued and
unpaid interest to the date of the event. Interest on all outstanding long-term debt is payable semi-annually.
The estimated fair value of Senior Notes is valued using Level 2 inputs. Other long-term debt consists of
Guaranteed Senior Notes issued by the Company's Japanese subsidiary and are valued using Level 3 inputs.
At the end of 2018 and 2017, the fair value of the Company's long-term debt, including the current portion,
was approximately $6,492 and $6,753, respectively. The carrying value of long-term debt consisted of the
following:
The Company's long-term debt consists primarily of Senior Notes, which have various principal balances,
interest rates, and maturity dates as described below. In May 2017, the Company issued $3,800 in aggregate
principal amount of Senior Notes, with maturity dates between May 2021 and May 2027. Additionally, in 2017
the Company repaid long-term debt totaling $2,200.
Long-Term Debt
The Company maintains various short-term bank credit facilities with a borrowing capacity of $857 and $833,
in 2018 and 2017, respectively. Borrowings on these short-term facilities were immaterial during 2018 and
2017, and there were no outstanding borrowings at the end of 2018 and 2017.
Short-Term Borrowings
Note 4-Debt
50
Assets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as
financial assets measured at amortized cost and long-lived nonfinancial assets. These assets are measured
at fair value if determined to be impaired. There were no fair value adjustments to these items during 2018
and 2017.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Held-to-maturity:
(3) The asset and the liability values are included in other current assets and other current liabilities, respectively, in the accompanying
consolidated balance sheets. See Note 1 for additional information on derivative instruments.
condensed consolidated balance sheets. At September 3, 2017, there were no securities included in cash and cash equivalents
and $947 included in short-term investments in the accompanying condensed consolidated balance sheets.
(1) Included in cash and cash equivalents in the accompanying consolidated balance sheets.
(2) At September 2, 2018, immaterial cash and cash equivalents and $898 short-term investments are included in the accompanying
7 $ 942
0
(8)
2
947
Forward foreign-exchange contracts, in asset position(³)
During and at the end of both 2018 and 2017, the Company did not hold any Level 3 financial assets or
liabilities that were measured at fair value on a recurring basis. There were no transfers in or out of Level 1
or 2 during 2018 and 2017.
Investment in government and agency securities (2)
Cost Basis
Available-For-Sale
Note 3-Fair Value Measurement
Total....
Due after five years
Due after one year through five years
Due in one year or less
The maturities of available-for-sale and held-to-maturity securities at the end of 2018 were as follows:
49
49
The proceeds from sales of available-for-sale securities were $39, $202, and $291 during 2018, 2017, and
2016, respectively. Gross realized gains or losses from sales of available-for-sale securities were not material
in 2018, 2017, and 2016.
Total short-term investments.
0 $ 1,233
$1,233 $
285
285
Investment in mortgage-backed securities
307 $
Held-To-Maturity
Gross unrealized gains and losses on available-for-sale securities were not material in 2018, 2017, and
2016. At the end of 2018 and 2017, the Company's available-for-sale securities that were in a continuous
unrealized-loss position were not material. The Company had no available-for-sale securities in a continuous
unrealized-loss position in 2016. Gross unrealized gains and losses on cash equivalents were not material
at the end of 2018, and there were no gross unrealized gains and losses on cash equivalents at the end of
2017 or 2016.
584
306
Total
Forward foreign-exchange contracts, in asset position (3)
Forward foreign-exchange contracts, in (liability) position (3
Investment in government and agency securities (2)
Money market mutual funds (1)
2017:
2018:
The tables below present information regarding the Company's financial assets and financial liabilities that
are measured at fair value on a recurring basis and indicate the level within the hierarchy reflecting the
valuation techniques utilized to determine such fair value.
Money market mutual funds (1)
306
912 $ 898 $
$
0
0
572
21
Assets and Liabilities Measured at Fair Value on a Recurring Basis
21
Equity compensation.
(2.1)
Total.
$ 1,263
28.4% $1,325
32.8% $1,243
55
During fiscal 2018, the Company recognized a net tax expense of $19 related to the 2017 Tax Act. This
expense included $142 for the estimated tax on deemed repatriation of foreign earnings, and $43 for the
reduction in foreign tax credits and other immaterial items, largely offset by a tax benefit of $166 for the
provisional remeasurement of certain deferred tax liabilities. These items were predominantly recorded in
the second quarter as provisional amounts and reflect the Company's current interpretations and estimates
that it believes are reasonable. As the Company continues to evaluate the 2017 Tax Act and available data,
it anticipates that adjustments may be made in future periods up to and including the second quarter of fiscal
2019 in accordance with Staff Accounting Bulletin 118.
In fiscal 2018, we also recognized net tax benefits of $76, which was largely driven by the adoption of an
accounting standard related to stock-based compensation and other immaterial net benefits. In fiscal 2017,
the Company's provision for income taxes was favorably impacted by a net tax benefit of $104, primarily
due to tax benefits recorded in connection with the May 2017 special cash dividends paid by the Company
to employees through the Company's 401(k) retirement plan of $82. Dividends on these shares are deductible
for U.S. income tax purposes. There was no similar special cash dividend in 2018 or 2016.
Deferred income/membership fees
The components of the deferred tax assets (liabilities) are as follows:
34.3%
(77)
(17)
(1.4)
(64)
Other
0.4
19
(0.5)
(2.6)
(104)
(0.3)
(14)
Employee stock ownership plan (ESOP).
2017 Tax Act.
Accrued liabilities and reserves.
(21)
(0.6)
(37) (0.9)
Property and equipment
The deferred tax accounts at the end of fiscal 2018 and 2017 include deferred income tax assets of $316
and $254, respectively, included in other assets; and deferred income tax liabilities of $317 and $312,
respectively, included in other liabilities.
Other (1) ...
(1.6)
6
3
6
2017
52 $ 52
2018
Gross unrecognized tax benefit at end of year
Lapse of statute of limitations
Gross decreases-tax positions in prior years
Settlements. . .
Gross increases-current year tax positions
Gross increases-tax positions in prior years.
Gross unrecognized tax benefit at beginning of year
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2018 and 2017
is as follows:
The Company no longer considers current fiscal 2018 and future earnings of our non-U.S. consolidated
subsidiaries to be permanently reinvested and has recorded the estimated incremental foreign withholding
(net of available foreign tax credits) on current fiscal year earnings and state income taxes payable assuming
a hypothetical repatriation to the U.S. The Company continues to consider undistributed earnings of certain
non-U.S. consolidated subsidiaries prior to fiscal 2018, which totaled $3,071, to be indefinitely reinvested
and has not provided for withholding or state taxes.
(1) $ (58)
Merchandise inventories
$
(40)
(252)
(175)
(747)
(478)
647
484
167
136
$ 72 $ 109
2017
2018
(1) Includes foreign tax credits of $36 for 2017. There were no foreign tax credits in 2018.
Net deferred tax (liabilities)/assets
18
(64)
200
32
212
21
8
22
108
161
190
701
809
601
233
7
(35)
636 $ 802 $ 468
$
2016
2017
2018
Foreign:
Total state
Deferred
Current
Total federal
State:
Deferred
Current
Federal:
The provisions for income taxes are as follows:
17
169
129
Current
Deferred
Foreign taxes, net.
2.5
91
2.9
116
3.4
154
State taxes, net.
35.0%
35.0% $1,267
25.6% $1,414
$ 1,136
Federal taxes at statutory rate
2016
0.7
2017
The reconciliation between the statutory tax rate and the effective rate is as follows:
In December 2017, the 2017 Tax Act was signed into law. Except for certain provisions, the 2017 Tax Act is
effective for tax years beginning on or after January 1, 2018. The Company is a fiscal-year taxpayer, so most
provisions will become effective for fiscal 2019, including limitations on the Company's ability to claim foreign
tax credits, repeal of the domestic manufacturing deduction, and limitations on certain business deductions.
Provisions with significant impacts that were effective starting in the second quarter of fiscal 2018 and
throughout the remainder of fiscal 2018 included: a decrease in the U.S. federal income tax rate,
remeasurement of certain net deferred tax liabilities, and a transition tax on deemed repatriation of certain
foreign earnings. The decrease in the U.S. federal statutory income tax rate to 21.0% resulted in a blended
rate for the Company of 25.6% for fiscal 2018.
$1,263 $1,325 $1,243
413
347
450
15
(42)
(37)
398
389
487
Total provision for income taxes
Total foreign
2018
(17)
0
(1)
7.15
$ 2.36 $
7.09
Shares used in calculation (000's)
Basic
Diluted
437,965
440,851
439,022
441,568
438,740
441,715
946
438,515
441,834
CASH DIVIDENDS DECLARED
PER COMMON SHARE
$
0.50 $ 0.50 $ 0.57 $ 0.57 $ 2.14
60
60
First
Quarter
(12 Weeks)
Second
Quarter
(12 Weeks)
Third
Quarter
(12 Weeks)
53 Weeks Ended September 3, 2017
Fourth
Quarter
(17 Weeks)
Total (53
Weeks)
REVENUE
2.38 $
Net sales
$
1.60 $
1.59 $ 1.70
(12)
(12)
(10)
(45)
NET INCOME ATTRIBUTABLE
TO COSTCO.
$
640
$
701 $
750
$
1,043 $
3,134
NET INCOME PER COMMON
SHARE ATTRIBUTABLE TO
COSTCO:
Basic
$
1.46
$
Diluted
$
1.45
$
1.71
(11)
$ 27,469
630
15
15
30
82
Operating income
849
844
968
1,450
4,111
OTHER INCOME (EXPENSE)
Interest expense
(29)
(31)
(21)
(53)
(134)
Interest income and other, net..
26
(4)
18
22
62
INCOME BEFORE INCOME
TAXES
22
Membership fees..
Preopening expenses
4,123
$ 29,130
636
$ 28,216
$ 41,357
$ 126,172
644
943
2,853
Total revenue.
28,099
29,766
28,860
42,300
129,025
OPERATING EXPENSES
Merchandise costs.
24,288
25,927
24,970
36,697
111,882
Selling, general and
administrative . . .
2,940
2,980
2,907
12,950
noncontrolling interests.
Net income attributable to
3,179
Note 12-Quarterly Financial Data (Unaudited)
The two tables that follow reflect the unaudited quarterly results of operations for 2018 and 2017.
52 Weeks Ended September 2, 2018
First
Quarter
(12 Weeks)
Second
Quarter
(12 Weeks)
Third
Quarter
(12 Weeks)
Fourth
Quarter
(16 Weeks)
Total
(52 Weeks)
REVENUE
Net sales
$ 31,117
$ 32,279
$ 31,624
$ 43,414
$ 138,434
Membership fees
692
716
Total revenue.
31,809
32,995
737
32,361
997
3,142
44,411
18% 17% 15%
141,576
11% 12% 12%
16% 16% 16%
1,255
Additions to property and equipment
1,823
299
527
2,649
Net property and equipment. .
11,745
1,628
3,670
17,043
Total assets
22,511
3,480
7,172
33,163
The following table summarizes the percentage of net sales by merchandise category:
Food and Sundries.
Hardlines
Fresh Foods
Softlines
Ancillary
59
2018 2017 2016
41% 41% 43%
14% 14% 14%
OPERATING EXPENSES
Merchandise costs
27,617
Interest income and other, net
22
7
41
51
121
INCOME BEFORE INCOME
TAXES..
936
986
1,071
1,449
4,442
Provision for income taxes
285
273
309
396
1,263
Net income including
noncontrolling interests.
651
713
762
1,053
(159)
(48)
(37)
(37)
28,733
28,131
38,671
123,152
Selling, general and
administrative
3,224
3,234
3,155
4,263
13,876
Preopening expenses.
846
17
8
31
68
Operating income..
951
1,016
1,067
1,446
4,480
OTHER INCOME (EXPENSE)
Interest expense.
(37)
12
809
965
1,419
Additions to property and equipment
1,370
202
124
1,044
Depreciation and amortization
4,111
626
841
2,644
Operating income
18,775 $ 16,361 $ 129,025
93,889 $
Total revenue
2017
40,830
8,320
4,303
28,207
Total assets
19,681
4,428
1,900
13,353
Net property and equipment. . .
1,714
2,969
277
2,502
The information required by this Item is incorporated herein by reference to the sections entitled “Independent
Public Accountants" in Costco's Proxy Statement.
64
.
Depreciation and amortization
3,672
568
778
2,326
Operating income
15,112 $ 118,719
17,028 $
86,579 $
$
Total revenue
2016
36,347
7,808
4,471
24,068
Total assets
18,161
4,002
1,820
12,339
Net property and equipment.
511
655
268
2,046
440,937
441,834
2,678
438,585
438,437
2,500
3,319
438,515
$ 3,134 $ 2,679 $ 2,350
2016
2017
2018
Legal Proceedings
Note 10-Commitments and Contingencies
Weighted average number of common shares and dilutive potential
of common stock used in diluted net income per share.
RSUS and other
Weighted average number of common shares used in basic net
income per common share..
Net income attributable to Costco
The following table shows the amounts used in computing net income per share and the weighted average
number of shares of potentially dilutive common shares outstanding (shares in 000's):
The Company files income tax returns in the United States, various state and local jurisdictions, in Canada,
and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S.
federal, state or local examination for years before fiscal 2014. The Company is currently subject to
examination in California for fiscal years 2007 to present. No other examinations are believed to be material.
Note 9-Net Income per Common and Common Equivalent Share
The Company is currently under audit by several jurisdictions in the United States and in several foreign
countries. Some audits may conclude in the next 12 months and the unrecognized tax benefits recorded in
relation to the audits may differ from actual settlement amounts. It is not practical to estimate the effect, if
any, of any amount of such change during the next 12 months to previously recorded uncertain tax positions
in connection with the audits. The Company does not anticipate that there will be a material increase or
decrease in the total amount of unrecognized tax benefits in the next 12 months.
56
Accrued interest and penalties related to income tax matters are classified as a component of income tax
expense. Interest and penalties recognized during 2018 and 2017 and accrued at the end of each respective
period were not material.
The gross unrecognized tax benefit includes tax positions for which the ultimate deductibility is highly certain
but there is uncertainty about the timing of such deductibility. At the end of 2018 and 2017, these amounts
were immaterial. Because of the impact of deferred tax accounting, other than interest and penalties, the
disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the
payment of cash to the taxing authority. The total amount of such unrecognized tax benefits that, if recognized,
would favorably affect the effective income tax rate in future periods is $32 and $29 at the end of 2018 and
2017, respectively.
(10)
36 $ 52
(11)
441,263
The Company is involved in a number of claims, proceedings and litigation arising from its business and
property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual
for legal proceedings if and when those matters reach a stage where they present loss contingencies that
are both probable and reasonably estimable. There may be exposure to loss in excess of any amounts
accrued. The Company monitors those matters for developments that would affect the likelihood of a loss
(taking into account where applicable indemnification arrangements concerning suppliers and insurers) and
the accrued amount, if any, thereof, and adjusts the amount as appropriate. As of the date of this Report,
the Company has recorded an immaterial accrual with respect to one matter described below, in addition to
other immaterial accruals for matters not described below. If the loss contingency at issue is not both probable
and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter
for developments that will make the loss contingency both probable and reasonably estimable. In each case,
there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable
accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any
loss in excess of the accrual) cannot, in the Company's view, be reasonably estimated because, among
other things: (i) the remedies or penalties sought are indeterminate or unspecified; (ii) the legal and/or factual
theories are not well developed; and/or (iii) the matters involve complex or novel legal theories or a large
number of parties.
The Company is a defendant in a class action alleging violation of California Wage Order 7-2001 for failing
to provide seating to member service assistants who act as greeters and exit attendants in the Company's
California warehouses. Canela v. Costco Wholesale Corp., et al. (Case No. 5:13-cv-03598, N.D. Cal. filed
July 1, 2013). The complaint seeks relief under the California Labor Code, including civil penalties and
attorneys' fees. The Company filed an answer denying the material allegations of the complaint. The plaintiff
has since indicated that exit attendants are no longer a subject of the litigation. The action in the district court
57
1,437
224
135
1,078
4,480
754
939
2,787
$ 102,286 $ 20,689 $ 18,601 $ 141,576
Additions to property and equipment
Depreciation and amortization
Operating income
The information required by this Item is incorporated herein by reference to the sections entitled "Proposal
1: Election of Directors," "Directors," "Committees of the Board," "Shareholder Communications to the Board,"
"Meeting Attendance," "Report of the Compensation Committee of the Board of Directors,” “Certain
Relationships and Transactions" and "Report of the Audit Committee” in Costco's Proxy Statement.
Item 14-Principal Accounting Fees and Services
Total revenue
Total
Other
International
Operations
Canadian
Operations
United States
Operations
The Company and its subsidiaries are principally engaged in the operation of membership warehouses in
the U.S., Canada, Mexico, U.K., Japan, Korea, Australia, Spain, Iceland, and France and through a majority-
owned subsidiary in Taiwan. Reportable segments are largely based on management's organization of the
operating segments for operational decisions and assessments of financial performance, which considers
geographic locations. The material accounting policies of the segments are as described in Note 1. Inter-
segment net sales and expenses have been eliminated in computing total revenue and operating income.
Certain operating expenses, predominantly stock-based compensation, incurred on behalf of the Company's
Canadian and Other International operations, are included in the U.S. operations because those costs
generally come under the responsibility of U.S. management.
Note 11-Segment Reporting
The Company does not believe that any pending claim, proceeding or litigation, either alone or in the
aggregate, will have a material adverse effect on the Company's financial position, results of operations or
cash flows; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely,
could result in a charge that might be material to the results of an individual fiscal quarter.
In November 2016 and September 2017, the Company received notices of violation from the Connecticut
Department of Energy and Environmental Protection regarding hazardous waste practices at its Connecticut
warehouses, primarily concerning unsalable pharmaceuticals. The Company is seeking to cooperate
concerning the resolution of these notices.
In December 2017, the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases
filed against various defendants by counties, cities, hospitals, Native American tribes and third-party payors
concerning the impacts of opioid abuse. In re National Prescription Opiate Litigation (MDL No. 2804) (N.D.
Ohio). Included are federal court cases that name the Company, including actions filed by a number of
counties and cities in Michigan, New Jersey and Ohio, and a third-party payor in Ohio. Similar cases that
name the Company have been filed in state courts in New Jersey and Oklahoma. The Company is defending
these matters.
has been stayed pending review by the Ninth Circuit of the order certifying a class. On September 6, 2018,
counsel claiming to represent an employee notified the California Labor and Workforce Development agency
of an intention to bring similar claims concerning Costco employees engaged at member services counters.
On November 23, 2016, the Company's Canadian subsidiary received from the Ontario Ministry of Health
and Long Term Care a request for an inspection and information concerning compliance with the anti-rebate
provisions in the Ontario Drug Benefit Act and the Drug Interchangeability and Dispensing Fee Act. The
Company is seeking to cooperate with the request. The Ministry has indicated it has reason to believe the
Company received payments in violation of these laws and is seeking disgorgement of these sums.
50
58
2018
109
Item 13-Certain Relationships and Related Transactions, and Director Independence
Item 12-Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
700
$
919 $
2,679
NET INCOME PER COMMON
SHARE ATTRIBUTABLE TO
COSTCO:
Basic .
$
1.24
$
1.17
$
1.59
$
2.10 $
6.11
Diluted
$
1.24
$
1.17
$
1.59
$
$
2.08 $
515
545
4,039
(1)
Provision for income taxes
291
288
259
487
1,325
Net income including
noncontrolling interests
555
521
706
932
2,714
Net income attributable to
noncontrolling interests
(10)
(6)
(6)
(13)
(35)
NET INCOME ATTRIBUTABLE
TO COSTCO
$
$
6.08
Shares used in calculation
(000's)
62
62
to the financial statements, and there were no changes to previously released financial results. Based on
this material weakness, the Company's management concluded that at September 2, 2018, the Company's
internal control over financial reporting was not effective.
The Company's independent registered public accounting firm, KPMG LLP has issued an adverse audit
report on the effectiveness of the Company's internal control over financial reporting as of September 2,
2018, which appears in Item 8 of this Form 10-K.
Following identification of the material weakness and prior to filing this Annual Report on Form 10-K, we
completed substantive procedures for the year ended September 2, 2018. Based on these procedures,
management believes that our consolidated financial statements included in this Form 10-K have been
prepared in accordance with U.S. GAAP. Our CEO and CFO have certified that, based on their knowledge,
the financial statements, and other financial information included in this Form 10-K, fairly present in all
material respects the financial condition, results of operations and cash flows of the Company as of, and for,
the periods presented in this Form 10-K. KPMG LLP has issued an unqualified opinion on our financial
statements, which is included in Item 8 of this Form 10-K.
Remediation
Management has been implementing and continues to implement measures designed to ensure that control
deficiencies contributing to the material weakness are remediated, such that these controls are designed,
implemented, and operating effectively. The remediation actions include: (i) creating and filling an IT
Compliance Oversight function; (ii) developing a training program addressing ITGCs and policies, including
educating control owners concerning the principles and requirements of each control, with a focus on those
related to user access and change-management over IT systems impacting financial reporting; (iii) developing
and maintaining documentation underlying ITGCs to promote knowledge transfer upon personnel and
function changes; (iv) developing enhanced risk assessment procedures and controls related to changes in
IT systems; (v) implementing an IT management review and testing plan to monitor ITGCs with a specific
focus on systems supporting our financial reporting processes; and (vi) enhanced quarterly reporting on the
remediation measures to the Audit Committee of the Board of Directors.
We believe that these actions will remediate the material weakness. The weakness will not be considered
remediated, however, until the applicable controls operate for a sufficient period of time and management
has concluded, through testing, that these controls are operating effectively. We expect that the remediation
of this material weakness will be completed prior to the end of fiscal 2019.
Changes in Internal Control Over Financial Reporting
Except for the material weakness identified during the quarter, as of September 2, 2018, there have been
no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f)
of the Exchange Act) that occurred during the fourth quarter of fiscal 2018 that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over financial reporting.
/s/ W. CRAIG JELINEK
W. Craig Jelinek
President, Chief Executive Officer and Director
/s/ RICHARD A. GALANTI
Richard A. Galanti
Executive Vice President, Chief Financial Officer
and Director
80
63
Item 9B-Other Information
None.
PART III
Item 10-Directors, Executive Officers and Corporate Governance
Information relating to the availability of our code of ethics for senior financial officers and a list of our executive
officers appear in Part I, Item 1 of this Report. The information required by this Item concerning our directors
and nominees for director is incorporated herein by reference to the sections entitled "Proposal 1: Election
of Directors," "Directors,” “Committees of the Board" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in Costco's Proxy Statement for its 2019 annual meeting of stockholders, which will be filed
with the SEC within 120 days of the end of our fiscal year ("Proxy Statement”).
Item 11-Executive Compensation
The information required by this Item is incorporated herein by reference to the sections entitled
"Compensation of Directors,” “Executive Compensation," and "Compensation Discussion and Analysis" in
Costco's Proxy Statement.
We identified a material weakness in internal control related to ineffective information technology general
controls (ITGCs) in the areas of user access and program change-management over certain information
technology (IT) systems that support the Company's financial reporting processes. Our business process
controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective
because they could have been adversely impacted. We believe that these control deficiencies were a result
of: IT control processes lacking sufficient documentation such that the successful operation of ITGCs was
overly dependent upon knowledge and actions of certain individuals with IT expertise, which led to failures
resulting from changes in IT personnel; insufficient training of IT personnel on the importance of ITGCs; and
risk-assessment processes inadequate to identify and assess changes in IT environments that could impact
internal control over financial reporting. The material weakness did not result in any identified misstatements
Under the supervision of and with the participation of our management, we assessed the effectiveness of
our internal control over financial reporting as of September 2, 2018, using the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-
Integrated Framework (2013). Amaterial weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility that a material misstatement of
our annual or interim financial statements will not be prevented or detected on a timely basis.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and
procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect our transactions and the dispositions of our assets; (2) provide reasonable assurance that our
transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles and that our receipts and expenditures are being made only in
accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect
on our financial statements.
Basic
438,007
439,127
Diluted.
440,525
440,657
438,817
441,056
437,987
441,036
438,437
440,937
CASH DIVIDENDS DECLARED
PER COMMON SHARE..
0.45
The information required by this Item is incorporated herein by reference to the section entitled "Principal
Shareholders" and "Equity Compensation Plan Information" in Costco's Proxy Statement.
(2)
0.45
$ 7.50
$ 0.50 $
8.90
(1) Includes an $82 tax benefit recorded in the third quarter in connection with the special cash dividend paid to employees through
the Company's 401(k) Retirement Plan.
(2) Includes the special cash dividend of $7.00 per share paid in May 2017.
61
Item 9-Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A-Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed in the
reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in the rules and forms of the Securities and Exchange Commission and to
ensure that information required to be disclosed is accumulated and communicated to management, including
our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief
Executive Officer (CEO) and the Chief Financial Officer (CFO), with assistance from other members of
management, have reviewed the effectiveness of our disclosure controls and procedures as of September
2, 2018 and, based on their evaluation, have concluded that the disclosure controls and procedures were
not effective as of such date due to a material weakness in internal control over financial reporting, described
below.
Management's Annual Report on Internal Control Over Financial Reporting
$
438,379
442,427
President and Chief Executive Officer
Senior Vice President, General Counsel & Corporate Secretary
Joseph P. Portera
Executive Vice President, COO - Eastern & Canadian Divisions and
Chief Diversity Officer
Pierre Riel
Senior Vice President, General Manager - Eastern Canada Region
Timothy L. Rose
Executive Vice President, Ancillary Businesses, Manufacturing &
Business Centers
Yoram B. Rubanenko
Senior Vice President, General Manager - Southeast Region
James W. Rutherford
Senior Vice President, Information Systems
David Skinner
Senior Vice President, General Manager - Western Canadian Region
John Sullivan
John D. Thelan
Senior Vice President, Depots & Traffic
Ron M. Vachris
Executive Vice President, COO - Merchandising
W. Richard Wilcox
Senior Vice President, General Manager - San Diego Region
VICE PRESIDENTS
Michael Anderson
Information Systems
James J. Andruski
Foods & Sundries - Western Canada Region
Kathleen Ardourel
Global Ecommerce
Marc-André Bally
Business Centre and Bakery Commissary
Senior Vice President, Ecommerce
- Canadian Division
Mike Parrott
Senior Vice President, General Manager - Northwest Region
Stephen M. Pappas
Senior Vice President, General Manager
- Mexico
Darby Greek
Senior Vice President, General Manager - Texas Region
William Hanson
Senior Vice President, Merchandising - Foods & Sundries
Daniel M. Hines
Senior Vice President, Corporate Controller
W. Craig Jelinek
James Klauer
Executive Vice President, COO - Northern Division
Paul Latham
Senior Vice President, Membership, Marketing, Services &
Franz E. Lazarus
Executive Vice President, Administration
Jeffrey R. Long
Senior Vice President, General Manager - Northeast Region
Jeffrey B. Lyons
Senior Vice President, Merchandising - Fresh Foods
David Messner
Senior Vice President, Real Estate Development
Russ Miller
Executive Vice President, COO - Southwest Division & Mexico
Ali Moayeri
Senior Vice President, Construction
Paul G. Moulton
Executive Vice President, Chief Information Officer
James P. Murphy
Executive Vice President, COO - International Division
Robert E. Nelson
Senior Vice President, Treasury, Financial Planning &
Investor Relations
Mario Omoss
Senior Vice President, General Manager - Europe
Jaime Gonzalez
Tiffany Barbre
Patty Bauer
- Southeast Region
Gino Dorico
Operations - Eastern Canada Region
Heather Downie
Operations - Western Canada Region
Jeff Elliott
Treasury
Debbie Ells
GMM-Softlines
- Canadian Division
Liz Elsner
Ecommerce
Frank Farcone
Operations - Los Angeles Region
Timothy K. Farmer
GMM-Corporate Non-Foods
Christopher E. Fleming
Operations
- Western Canada Region
Anthony Fontana
Operations - Northeast Region
Thomas J. Fox
GMM-Bakery & Food Court
Jack S. Frank
Real Estate Development - West
Joseph Grachek III
Operations
Financial Accounting Controller
Guy Delmonte
Russ Decaire
Information Systems
Bryan Blank
Operations
- San Diego Region
Christopher Bolves
Operations Northwest Region
Timothy Bowersock
Information Systems
Kimberly F. Brown
Operations - Texas Region
Deborah Calhoun
GMM - Foods - San Diego Region
Paul Cano
Operations - Bay Area Region
Michael G. Casebier
Operations - Texas Region
Mike Cho
Country Manager - Korea
Jeffrey M. Cole
Gasoline, Car Wash & Mini-labs
Julie L. Cruz
Operations - Southeast Region
Ron Damiani
Marketing Canadian Division
Wendy Davis
Operations - Midwest Region
GMM - Foods & Sundries - Northwest Region
Executive Vice President, Chief Financial Officer
Richard A. Galanti
- Midwest Region
Officer and Director
(Principal Financial Officer)
/s/ SUSAN L. DECKER
Susan L. Decker
Director
By
By
By
By
/s/ JOHN W. MEISENBACH
By
John W. Meisenbach
Director
By
/s/ JEFFREY S. RAIKES
By
Jeffrey S. Raikes
Director
By
/s/ MARY (MAGGIE) A. WILDEROTTER
Mary (Maggie) A. Wilderotter
Director
68
88
/s/ HAMILTON E. JAMES
Hamilton E. James
Chairman of the Board
/s/ DANIEL M. HINES
Daniel M. Hines
Senior Vice President and Corporate
Controller
Executive Vice President, Chief Financial
(Principal Accounting Officer)
Richard A. Galanti
Director
X
Presentation Linkbase Document
Incorporated by Reference
Period Ending
Filing Date
* Management contract, compensatory plan or arrangement.
** Portions of this exhibit have been omitted under a confidential treatment order issued by the Securities and Exchange
Commission.
(c)
Financial Statement Schedules―None.
Item 16-Form 10-K Summary
None.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
October 25, 2018
COSTCO WHOLESALE CORPORATION
(Registrant)
By
/s/ RICHARD A. GALANTI
Richard A. Galanti
Executive Vice President, Chief Financial Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
October 25, 2018
By
By
By
/s/ W. CRAIG JELINEK
W. Craig Jelinek
President, Chief Executive Officer and
/s/ RICHARD A. GALANTI
/s/ KENNETH D. DENMAN
Kenneth D. Denman
Director
/s/ CHARLES T. MUNGER
Charles T. Munger
Director
Maggie A. Wilderotter(b)(c)
CEO and Chairman of Grand Reserve Inn;
Former Executive Chairman of Frontier Communications
Board Committees
(a) Audit Committee
(b) Compensation Committee
(c) Nominating and Governance Committee
*2018 Committee Chair
EXECUTIVE AND SENIOR OFFICERS
Jeffrey Abadir
Senior Vice President, General Manager - Bay Area
Claudine Adamo
Senior Vice President, Merchandising - Non-Foods & Ecommerce
Andree T. Brien
Senior Vice President, National Merchandising - Canada Division
Donald E. Burdick
Senior Vice President, Ecommerce and Travel
Patrick J. Callans
Senior Vice President, Human Resources and Risk Management
Richard Chang
Senior Vice President, General Manager - Asia
Richard C. Chavez
Senior Vice President, Costco Wholesale Industries & Business
Development
Victor A. Curtis
Senior Vice President, Pharmacy
Richard Delie
Senior Vice President, Merchandising - Non-Foods & Ecommerce
Caton Frates
Senior Vice President, General Manager - Los Angeles Region
John B. Gaherty
Senior Vice President, General Manager
Trilogy International Partners, Inc. and Trilogy Equity Partners
Chairman of First Avenue Entertainment LLLP,
John W. Stanton(b)*
Former CEO of the Bill and Melinda Gates Foundation
/s/ JOHN W. STANTON
John W. Stanton
Director
Susan L. Decker(a)
CEO and co-founder of Raftr;
Former President of Yahoo! Inc.
Kenneth D. Denman(a)(c)
Venture Partner at Sway Ventures;
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Former President and Chief Executive Officer of Emotient, Inc.
Richard A. Galanti
Executive Vice President and
Internal Audit
Chief Financial Officer, Costco
Chairman of the Board, Costco;
Executive Vice Chair, The Blackstone Group
W. Craig Jelinek
President and Chief Executive Officer, Costco
John W. Meisenbach
Former President of MCM, A Meisenbach Company
Richard M. Libenson
Director Emeritus
Charles T. Munger(a)*(b)
Vice Chairman of the Board of Berkshire Hathaway Inc.;
Chairman of the Board of Daily Journal Corporation
Jeffrey S. Raikes(c)*
Founder and CEO of the Raikes Foundation;
Hamilton E. James
Nancy Griese
GMM-Corporate Foods
Martin Groleau
Karim Zeffouini
Warehouse Operations & Facilities
Operations
- Northeast Region
ADDITIONAL INFORMATION
A copy of Costco's annual report to the Securities and Exchange Commission on Form 10-K and quarterly reports on
Form 10-Q will be provided to any shareholder upon written request directed to Investor Relations, Costco Wholesale
Corporation, 999 Lake Drive, Issaquah, Washington 98027. Internet users can access recent sales and earnings
releases, the annual report and SEC filings, as well as our Costco Online web site, at http://www.costco.com. E-mail
users can direct their investor relations questions to investor@costco.com. All of the Company's filings with the SEC
may be obtained at the SEC's Public Reference Room at Room 1580, 100 F Street NE, Washington, DC 20549. For
information regarding the operation of the SEC's Public Reference Room, please contact the SEC at 1-800-SEC-0330.
Additionally, the SEC maintains an internet site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC at www.sec.gov.
Corporate, Division and Region Offices
U.S. Corporate Office
999 Lake Drive
Issaquah, WA 98027
(425) 313-8100
Canada Corporate Office
415 West Hunt Club Road
Ottawa, ON K2E 1C5
(613) 221-2000
NORTHERN DIVISION
Northwest Region
1045 Lake Drive
Issaquah, WA 98027
Bay Area Region
2820 Independence Drive
Livermore, CA 94551
Midwest Region
1901 West 22nd Street, 2nd Floor
Oak Brook, IL 60523
SOUTHWEST DIVISION
Los Angeles Region
11000 Garden Grove Blvd., #201
Garden Grove, CA 92843
San Diego Region
4649 Morena Blvd.
San Diego, CA 92117
Texas Region
1701 Dallas Parkway, Suite 201
Plano, TX 75093
Annual Meeting
GMM - Fresh Foods - Asia/Australia
Thursday, January 24, 2019 at 4:00 PM
Earl Wiramanaden
Charlie A. Winters
Corporate Marketing &
Publishing
Tony Tran
GMM - Fresh Foods - Canadian Division
Diane Tucci
Country Manager - Spain
Howard Tulk
Operations -
Japan
Azmina K. Virani
Sr. GMM - Non-Foods & Ecommerce
- Canadian Division
Sarah Wehling
GMM - Food & Sundries - Los Angeles Region
Jack Weisbly
GMM-Corporate Non-Foods
Jill Whittaker
Operations San Diego Region
-
Janet Wiebke
GMM-Corporate Non-Foods
Terry Williams
Information Systems
Craig Wilson
Food Safety & Quality Assurance
Operations Fresh Meat, Produce & Service Deli
Meydenbauer Center
11100 NE 6th Street
Bellevue, Washington 98004
Col. San Fernando
La Herradura 52765
Huixquilucan, Mexico
Transfer Agent
Computershare
Costco Shareholder Relations
Correspondence should be mailed to:
P.O. Box 505000
Louisville, KY 40233
Overnight correspondence should be sent to:
462 South 4th Street, Suite 1600
Louisville, KY 40202
Telephone: (800) 249-8982
TDD for Hearing Impaired: (800) 490-1493
Outside U.S.: (201) 680-6578
Website: https://www.computershare.com/investor
Состоя
COSTCO
WHOLESALE
COSTCO
COSTCO
GOSTOO
WHOLESALE
www.fsc.org
FSC
MIX
Paper from
responsible sources
FSC® C132107
COSTCO
Boulevard Magnocentro #4
Mexico Region
Lidcombe, NSW, 2141, Australia
17-21 Parramatta Rd.
Independent Public Accountants
KPMG LLP
1918 Eighth Avenue, Suite 2900
Seattle, WA 98101
Stock Exchange Listing
The Nasdaq Global Select Market
Stock Symbol: COST
EASTERN DIVISION
Northeast Region
45940 Horseshoe Drive, Suite 150
Sterling, VA 20166
Southeast Region
3980 Venture Drive NW, #W100
Duluth, GA 30096
CANADIAN DIVISION
Eastern Region
31 Auriga Drive
Ottawa, ON K2E 1C4, Canada
Western Region
Sandy Torrey
4500 Still Creek Drive, Unit A
Burnaby, BC V5C 0E5, Canada
France Region
1 avenue de Bréhat
91140 Villebon sur Yvette, France
Spain Region
Calle Agustín de Betancourt, 17
Polígono Empresarial Los Gavilanes
28906 Getafe, Madrid, Spain
Japan Region
3-1-4 Ikegami-Shincho
Kawasaki-ku Kawasaki-shi
Kanagawa, 210-0832, Japan
Korea Region
40, Iljik-ro
Gwangmyeong-si
Gyeonggi-do, 14347, Korea
Taiwan Region
255 Min Shan Street
Neihu, Taipei 114, Taiwan
Australia Region
INTERNATIONAL DIVISION
United Kingdom Region
213 Hartspring Lane
Watford, England WD25 8JS
101.PRE XBRL Taxonomy Extension
Operations - Mexico
Construction
Yoon Kim
GMM-Corporate Non-Foods
William Koza
Operations - Midwest Region
Robert Leiss
Operations - Australia
Robert Leuck
Operations - Northeast Region
Judith Logan
GMM - Non-Foods
Steve Mantanona
GMM - Merchandising - Mexico
Mark Maushund
Operations - Los Angeles Region
Susan McConnaha
Operations Bakery & Food Court
Daniel McMurray
Operations
- Midwest Region
Tim Murphy
GMM - Foods - Bay Area Region
Robert Murvin
GMM - Foods - Texas Region
Jim Nelson
GMM Corporate Non-Foods
Pietro Nenci
GMM-Corporate Foods, Foods & Sundries,
Quality Assurance, Food Safety - Canadian Division
Patrick J. Noone
Country Manager - Australia
GMM - Food & Sundries - Midwest Region
Frank Padilla
Jim Kenyon
Kathy Kearney
GMM - Non-Foods - Canadian Division
Peter Gruening
Costco Travel
Doris Harley
GMM - Foods - Southeast Region
Eric Harris
Jim Harrison
Transportation
David Harruff
Operations - Northwest Region
Timothy Haser
Information Systems
Graham E. Hillier
GMM - Non-Foods
- Canadian Division
Scott Howe
Payroll & Benefit Accounting
Mitzi Hu
GMM - Imports
Ross A. Hunt
Finance, Information Systems & Administration
- Canadian Division
Jeff Ishida
Real Estate - Eastern Division
Teresa Jones
Depot Operations
Merchandise Accounting Controller
GMM-Corporate Produce & Fresh Meat
Thomas Padilla
Operations - Northwest Region
- Corporate Non-Foods
Louie Silveira
General Manager - Taiwan
Monica Smith
Corporate Tax and Customs Compliance
Dick Snyder
Operations - Midwest Region
James Stafford
GMM - Foods - Northeast Region
Joseph Stanovcak
Operations - San Diego Region
Richard Stephens
Operations - Pharmacy
Kimberley L. Suchomel
GMM - International
Steve Supkoff
Operations Ecommerce
Gary Swindells
Country Manager - France
Mauricio Talayero
Chief Financial Officer - Mexico
Ken J. Theriault
Country Manager - Japan
Brian Thomas
Operations - Midwest Region
Yves Thomas
GMM-Optical, Optical Labs, Mini-labs, Pharmacy
& Gasoline - Canadian Division
H. Keith Thompson
Construction
Todd Thull
GMM
Geoff Shavey
Legal - Canada
Stuart Shamis
Daniel Parent
Operations
- Eastern Canada Region
Robert Parker
Operations Business Centers
Shawn Parks
Operations - Los Angeles Region
Larry Pifer
Operations - Eastern Canada Region
Steven D. Powers
Operations - Southeast Region
Paul Pulver
Operations - Northeast Region
Giro Rizzuti
Adrian Thummler
GMM - Non-Foods - Canadian Division
Operations - Southeast Region
Chris Rylance
Information Systems
Drew Sakuma
Operations - Bay Area Region
Art Salas
U.S. Optical
Debbie Sarter
Operations - Los Angeles Region
Scott Schruber
Operations
- United Kingdom
Adam Self
Operations - Northeast Region
Aldyn J. Royes
X
XBRL Taxonomy Extension Label
Linkbase Document
101.LAB
1/31/2012
3/17/2010
2/14/2010
10-Q
8-K
Sixth Restated 2002 Stock
10.2.2*
Incentive Plan
Fifth Restated 2002 Stock
10.2.1*
Health Plan
10/19/2012
9/2/2012
10-K
Costco Wholesale Executive
10.1*
5/16/2017
8-K
Form of 3.000% Senior Notes due
May 18, 2027
Incentive Plan
4.4
10.2.3*
DEF 14A
10-Q
Filing Date
Period Ending
Form
Herewith
Filed
Incorporated by Reference
Seventh Restated 2002 Stock
Incentive Plan Restricted Stock
Unit Award Agreement-Non-U.S.
Employee
Exhibit Description
10.2.5*
Exhibit
Number
99
65
12/17/2015
11/22/2015
10-Q
Seventh Restated 2002 Stock
Incentive Plan Restricted Stock
Unit Award Agreement-U.S.
Employee
10.2.4*
12/19/2014
Seventh Restated 2002 Stock
Incentive Plan
5/16/2017
8-K
Form of 2.750% Senior Notes due
May 18, 2024
Incorporated by Reference
Articles of Incorporation as
Exhibit Description
3.1
Exhibit
Number
Exhibits: The required exhibits are filed as part of this Annual Report on Form 10-K or are
incorporated herein by reference.
All schedules have been omitted because the required information is not present or is not
present in amounts sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial statements, including the notes
thereto.
Financial Statement Schedules:
II.
See the listing of Financial Statements included as a part of this Form 10-K in Item 8 of Part
Financial Statements:
2.
1.
Documents filed as part of this report are as follows:
(b)
(a)
Item 15-Exhibits, Financial Statement Schedules
PART IV
WHOLESALE
Filed
Herewith
Form
Period Ending
Filing Date
4.3
5/16/2017
8-K
Form of 2.300% Senior Notes due
May 18, 2022
4.2
May 18, 2021
5/16/2017
8-K
Form of 2.150% Senior Notes due
11/22/2015
4.1
11/2/2017
8-K
Bylaws as amended of Costco
3.2
Corporation
amended of Costco Wholesale
3/11/2015
2/15/2015
10-Q
Wholesale Corporation
12/17/2015
COR000075B_0618
Seventh Restated 2002 Stock
Incentive Plan Restricted Stock
Unit Award Agreement-Non-
Executive Director
X
Subsidiaries of the Company
21.1
10/31/2017
8-K
Fiscal 2018 Executive Bonus Plan
10.7*
Agreement
Co-Branded Credit Card
3/15/2018
2/18/2018
10-Q
Fourth Amendment to Citi, N.A.
10.6.5**
Branded Credit Card Agreement
10/12/2016
8/28/2016
10-K
Third Amendment to Citi, N.A. Co-
23.1
10.6.4**
Consent of Independent
Registered Public Accounting Firm
101.DEF XBRL Taxonomy Extension
Definition Linkbase Document
10.2.6*
XBRL Taxonomy Extension
Calculation Linkbase Document
X
101.CAL
X
101.SCH XBRL Taxonomy Extension
Schema Document
X
Form
Filed
Herewith
Exhibit Description
XBRL Instance Document
Exhibit
Number
66
99
X
Section 1350 Certifications
32.1
Rule 13a 14(a) Certifications
31.1
X
Agreement
101.INS
3/9/2016
January 1, 2017, between W.
Employment Agreement, effective
Term of the Executive
11/26/2017 12/21/2017
10-Q
Letter Dated December 18, 2017,
Regarding an Extension of the
10.3.2*
2017, between W. Craig Jelinek
and Costco Wholesale
Corporation
Agreement, effective January 1,
11/20/2016 12/16/2016
10-Q
Executive Employment
11/22/2015 12/17/2015
10-Q
Seventh Restated 2002 Stock
Incentive Plan Letter Agreement
for 2016 Performance-Based
Restricted Stock Units-Executive
10.2.7*
Co-Branded Credit Card
10-Q
11/22/2015 12/17/2015
Craig Jelinek and Costco
Wholesale Corporation
10.3.1*
Form of Indemnification
Second Amendment to Citi, N.A.
10.4*
2/14/2016
10.6.3**
11/22/2015 12/17/2015
First Amendment to Citi, N.A. Co-
Branded Credit Card Agreement
10.6.2**
Card Agreement
9/1/2013 10/16/2013
8/31/2015
5/10/2015
10-Q
10-Q/A
14A
12/13/1999
Agreement
10.5*
Deferred Compensation Plan
10-Q
10-K
Citibank, N.A. Co-Branded Credit
10.6.1**
Spain
4
FRANCE
ÎLE-DE-FRANCE - 2
ICELAND
CHINA
JIANGSU - 1
MADRID - 2
UNITED
KINGDOM
SPAIN
ANDALUCÍA - 1
BISCAY-1
13
KAUPTÚN -1
China
2
YUCATÁN - 1
COSTCO.CO.UK
Korea
16
Japan
30
Australia
Taiwan
Iceland
2
1
United
29 Kingdom
France
14
ENGLAND -25
SCOTLAND - 3
BUSAN - 1
SHANGHAI -1
CHUNGCHEONGNAM-DO-1
DAEGU - 2
DAEJEON-1
GYEONGGI-DO-5
INCHEON - 1
SEJONG-1
SEOUL - 3
ULSAN – 1
COSTCO.CO.KR
TAIWAN
CHIAYI CITY-1
HSINCHU CITY-1
KAOHSIUNG CITY - 2
NEW TAIPEI CITY - 3
TAICHUNG CITY - 2
TAINAN CITY-1
TAIPEI CITY-2
VERACRUZ-2
COSTCO.COM.TW
WALES-1
KOREA
TOYAMA-1
JAPAN
COSTCO.CO.JP
ISHIKAWA-1
KANAGAWA - 3
KUMAMOTO-1
KYOTO-1
AICHI - 2
YAMAGATA-1
CHIBA - 3
MIYAGI -1
GIFU-1
GUNMA – 1
HIROSHIMA-1
HOKKAIDO-2
HYOGO - 2
IBARAKI – 2
OSAKA - 1
SAITAMA - 2
SHIZUOKA-1
TOKYO-1
FUKUOKA -2
TABASCO - 1
Cray Jelek
MORELOS - 1
NUEVO LEÓN - 3
PUEBLA - 1
QUERÉTARO-1
QUINTANA ROO - 1
SAN LUIS POTOSÍ - 1
SINALOA - 1
We operate eight e-commerce websites worldwide, where comparable sales grew by 44% over the previous year. We continue
to focus on complementing our core warehouse business with online offerings. Our acquisition of what we now call Costco
Logistics has helped improve our delivery times and often lower delivery prices of big and bulky items. As a result, categories
such as appliances, exercise equipment, furniture, mattresses and patio products contributed to sales growth this year, despite
supply challenges. Other important advancements were achieved in our online business including reduced costs associated
with picking items, the addition of frozen grocery 2-day deliveries, and technology enhancements including a streamlined
COVID-19 vaccine scheduler.
TM
The Kirkland Signature ™ brand, which is synonymous with higher quality and exceptional value, saw strong global growth with
sales exceeding $59 billion, compared to $52 billion in the prior year. We focused on driving down costs, improving quality,
expanding in-country sourcing options, reducing the environmental impact of transportation, and introducing new and exciting
products.
We continued to recognize and reward the exceptional performance of hourly employees in operations, extending the $2 per
hour premium pay through February 2021. Such action marked an entire year of providing premium pay for those employees
who demonstrated outstanding service during an extraordinarily difficult and uncertain time. In March 2021, we permanently
increased wages by $1 for hourly warehouse employees.
Costco is committed to efforts around social and environmental issues. Regarding diversity and inclusion, we have increased
our efforts to expand the recruitment candidate pool and developed a library of resources and training for all levels of
employees in order to foster an environment that supports and encourages open dialogue and communication. Regarding the
environment, Costco's continuing work on initiatives aligned with the Global Climate Action Plan, the Global Forest
Conservation Commitment and UN Sustainable Development Goals, which can be found on our website. We recognize that
continuing to address Costco's social and environmental impact is both a business imperative and the right thing to do, and we
remain committed to these efforts.
As 2021 comes to a close, I extend my thanks and appreciation to our more than 300,000 Costco employees across the globe
who consistently impress me with their work ethic, dedication to member service, and their loyalty to our business. Finally, I
thank Costco members around the world for their continued support and trust in our business. Together, we've made it through
an unimaginable time in our lives, and we're moving forward toward a brighter future.
In a move much anticipated by members, warehouses began a phased return to full sampling using increased safety
protocols. Costco food courts were able to resume seating at most locations, with more physical separation and reduced
seating capacity.
From the Costco family to yours, I wish you a healthy and happy New Year.
TAOYUAN CITY -2
Craig Jelinek
President and Chief Executive Officer
COSTCO 828 locations as of December 31, 2021
WHOLESALE
UNITED
STATES
Sincerely,
COSTCO.COM
In fiscal 2021, we opened warehouses and business centers domestically and internationally, including 12 net new in the U.S.,
four net new in Canada, three in Japan, and one in Taiwan. The pandemic created challenges in opening buildings, and we
expect the pace to increase in fiscal 2022. In fact as of today we have already opened 13 net new buildings in the new fiscal
year.
Despite ongoing pandemic challenges, we had another strong year in fiscal 2021. Net sales for the 52-week fiscal year totaled
$192 billion, an increase of 18%, with a comparable sales increase of 16%. Net income for the 52-week fiscal year was $5
billion, or $11.27 per diluted share, an increase of 25%. Revenue from membership fees increased 9% to $3.9 billion. In
December 2020, we paid a special cash dividend of $10 per share or $4.4 billion. The special dividend was the fourth in eight
years, which was in addition to a 13% increase in the regular dividend approved in April 2021.
Bey
COSTCO
NICOLE
COSTCO
Coarce
SHANNON
COSTCO 2021
WHOLESALE
Fiscal 2021 presented global challenges in the supply of key commodities, transportation capacity, and labor shortages.
Inflationary factors, such as higher labor and freight costs, greater transportation and container demand, and scarcity of certain
products put pressure on pricing. We worked with our suppliers to explore methods to control costs and avoid or minimize
price increases when possible.
ANNUAL REPORT
WAL
Costco
Costco
December 9, 2021
Dear Costco Shareholders:
In another year of uncertainty, Costco was steadfast in providing goods and services, remaining nimble, and adapting our
business as needed to best serve our members and protect our employees.
FISCAL YEAR ENDED AUGUST 29, 2021
SONORA - 1
MICHIGAN - 16
MINNESOTA - 13
MISSISSIPPI - 1
40
UTAH - 12
VERMONT -1
VIRGINIA - 17
WASHINGTON - 32
WISCONSIN - 9
WASHINGTON, D.C. -1
TEXAS-35
PUERTO RICO - 4
COSTCO.CA
ALBERTA -19
BRITISH COLUMBIA - 14
MANITOBA - 3
NEW BRUNSWICK - 3
NEWFOUNDLAND AND
LABRADOR-1
NOVA SCOTIA -2
ONTARIO - 38
QUÉBEC - 22
SASKATCHEWAN - 3
MEXICO
COSTCO.COM.MX
AGUASCALIENTES - 1
BAJA CALIFORNIA - 4
BAJA CALIFORNIA SUR-1
CHIHUAHUA -2
CIUDAD DE MÉXICO - 5
COAHUILA -1
GUANAJUATO - 3
JALISCO - 3
MÉXICO - 5
MICHOACÁN -1
CANADA
Mexico
PENNSYLVANIA - 11
SOUTH CAROLINA - 6
SOUTH DAKOTA - 1
TENNESSEE - 6
OKLAHOMA - 3
Canada
105
United States and
Puerto Rico 572
ALABAMA - 4
ALASKA - 4
ARIZONA-18
ARKANSAS-1
CALIFORNIA - 131
COLORADO-14
CONNECTICUT - 8
OREGON - 13
DELAWARE-1
FLORIDA-29
GEORGIA - 15
MASSACHUSETTS - 6
MISSOURI - 7
MONTANA -5
NEBRASKA-3
NEVADA - 8
NEW HAMPSHIRE - 1
NEW JERSEY - 21
NEW MEXICO - 3
NEW YORK-19
NORTH CAROLINA - 10
NORTH DAKOTA - 2
OHIO - 12
HAWAII - 7
IDAHO - 7
ILLINOIS-23
INDIANA - 8
IOWA - 3
KANSAS - 3
KENTUCKY-4
LOUISIANA -3
MARYLAND - 11
AUSTRALIA
TABLE OF CONTENTS
AUSTRALIAN CAPITAL
TERRITORY-1
Item 15.
PART IV
64
64
64
ठ ठ ठ
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 13.
Item 14.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 12.
64
Executive Compensation
Item 11.
64
Directors, Executive Officers and Corporate Governance
PART III
64
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
30
Item 8.
Financial Statements and Supplementary Data
31
Exhibits, Financial Statement Schedules
Item 9.
63
Item 9A.
Controls and Procedures
63
Item 9B.
Other Information
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 16.
Form 10-K Summary
Signatures
Our strategy is to provide our members with a broad range of high-quality merchandise at prices we
believe are consistently lower than elsewhere. We seek to limit most items to fast-selling models, sizes,
and colors. We carry less than 4,000 active stock keeping units (SKUs) per warehouse in our core
warehouse business, significantly less than other broadline retailers. We average anywhere from 9,000 to
11,000 SKUs online, some of which are also available in our warehouses. Many consumable products are
offered for sale in case, carton, or multiple-pack quantities only.
In keeping with our policy of member satisfaction, we generally accept returns of merchandise. On certain
electronic items, we typically have a 90-day return policy and provide, free of charge, technical support
services, as well as an extended warranty. Additional third-party warranty coverage is sold on certain
electronic items.
We offer merchandise and services in the following categories:
Core Merchandise Categories (or core business):
•
•
Our warehouses on average operate on a seven-day, 70-hour week. Gasoline operations generally have
extended hours. Because the hours of operation are shorter than other retailers, and due to other
efficiencies inherent in a warehouse-type operation, labor costs are lower relative to the volume of sales.
Merchandise is generally stored on racks above the sales floor and displayed on pallets containing large
quantities, reducing labor required. In general, with variations by country, our warehouses accept certain
credit cards, including Costco co-branded cards, debit cards, cash and checks, co-brand cardholder
rebates, Executive member 2% reward certificates and our proprietary stored-value card (shop card).
•
Non-Foods (previously Hardlines and Softlines; including major appliances, electronics, health
and beauty aids, hardware, garden and patio, sporting goods, tires, toys and seasonal, office
supplies, automotive care, postage, tickets, apparel, small appliances, furniture, domestics,
housewares, special order kiosk, and jewelry)
Fresh Foods (including meat, produce, service deli, and bakery)
Warehouse Ancillary (includes gasoline, pharmacy, optical, food court, hearing aids, and tire installation)
and Other Businesses (includes e-commerce, business centers, travel, and other)
Warehouse ancillary businesses operate primarily within or next to our warehouses, encouraging
members to shop more frequently. The number of warehouses with gas stations varies significantly by
country, and we have no gasoline business in Korea or China. We operated 636 gas stations at the end of
2021. Net sales for our gasoline business represented approximately 9% of total net sales in 2021.
Our other businesses sell products and services that complement our warehouse operations (core and
warehouse ancillary businesses). Our e-commerce operations give members convenience and a broader
selection of goods and services. Net sales for e-commerce represented approximately 7% of total net
sales in 2021. This figure does not consider other services we offer online in certain countries such as
business delivery, travel, same-day grocery, and various other services. Our business centers carry items
tailored specifically for food services, convenience stores and offices, and offer walk-in shopping and
deliveries. Business centers are included in our total warehouse count. Costco Travel offers vacation
4
Foods and Sundries (including sundries, dry grocery, candy, cooler, freezer, deli, liquor, and
tobacco)
21
Our average warehouse space is approximately 146,000 square feet, with newer units being slightly
larger. Floor plans are designed for economy and efficiency in the use of selling space, the handling of
merchandise, and the control of inventory. Because shoppers are attracted principally by the quality of
merchandise and low prices, our warehouses are not elaborate. By strictly controlling the entrances and
exits and using a membership format, we believe our inventory losses (shrinkage) are well below those of
typical retail operations.
3
2
64
67
68
2680
INFORMATION RELATING TO FORWARD LOOKING STATEMENTS
commerce operations we ship merchandise through our depots, our logistics operations for big and bulky
items, as well as through drop-ship and other delivery arrangements with our suppliers.
Certain statements contained in this Report constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. They include statements that address activities,
events, conditions or developments that we expect or anticipate may occur in the future and may relate to
such matters as sales growth, changes in comparable sales, cannibalization of existing locations by new
openings, price or fee changes, earnings performance, earnings per share, stock-based compensation
expense, warehouse openings and closures, capital spending, the effect of adopting certain accounting
standards, future financial reporting, financing, margins, return on invested capital, strategic direction,
expense controls, membership renewal rates, shopping frequency, litigation, and the demand for our
products and services. Forward-looking statements may also be identified by the words "anticipate,”
"believe," "continue,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “might,” “plan,” “potential,"
"predict," "project,” “seek,” “should,” “target,” “will,” “would," or similar expressions and the negatives of
those terms. Such forward-looking statements involve risks and uncertainties that may cause actual
events, results, or performance to differ materially from those indicated by such statements, including,
without limitation, the factors set forth in the section titled "Item 1A-Risk Factors", and other factors noted
in the section titled “Item 7-Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in the consolidated financial statements and related notes in Item 8 of this Report.
Forward-looking statements speak only as of the date they are made, and we do not undertake to update
these statements, except as required by law.
Item 1-Business
Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983, in
Seattle, Washington. We are principally engaged in the operation of membership warehouses in the
United States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan, Korea, Australia,
Spain, France, Iceland, China, and through a majority-owned subsidiary in Taiwan. Costco operated 815,
795, and 782 warehouses worldwide at August 29, 2021, August 30, 2020, and September 1, 2019,
respectively. The Company operates e-commerce websites in the U.S., Canada, Mexico, U.K., Korea,
Taiwan, Japan, and Australia. Our common stock trades on the NASDAQ Global Select Market, under the
symbol "COST."
We report on a 52/53-week fiscal year, consisting of thirteen four-week periods and ending on the Sunday
nearest the end of August. The first three quarters consist of three periods each, and the fourth quarter
consists of four periods (five weeks in the thirteenth period in a 53-week year). The material seasonal
impact in our operations is increased net sales and earnings during the winter holiday season.
References to 2021, 2020, and 2019 relate to the 52-week fiscal years ended August 29, 2021,
August 30, 2020, and September 1, 2019, respectively.
General
We operate membership warehouses and e-commerce websites based on the concept that offering our
members low prices on a limited selection of nationally-branded and private-label products in a wide
range of categories will produce high sales volumes and rapid inventory turnover. When combined with
the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of
merchandise in no-frills, self-service warehouse facilities, these volumes and turnover enable us to
operate profitably at significantly lower gross margins (net sales less merchandise costs) than most other
retailers. We generally sell inventory before we are required to pay for it, even while taking advantage of
early payment discounts.
We buy most of our merchandise directly from manufacturers and route it to cross-docking consolidation
points (depots) or directly to our warehouses. Our depots receive large shipments from manufacturers
and quickly ship these goods to warehouses. This process creates freight volume and handling
efficiencies, lowering costs associated with traditional multiple-step distribution channels. For our e-
PART I
Management's Discussion and Analysis of Financial Condition and Results of
Operations
20
19
91-1223280
(I.R.S. Employer Identification No.)
999 Lake Drive, Issaquah, WA 98027
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (425) 313-8100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
incorporation or organization)
Common Stock, $.01 Par Value
COST
Name of each exchange on
which registered
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No □
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Trading Symbol
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,"
"accelerated filer”, “smaller reporting company", and "emerging growth company” in Rule 12b-2 of the Exchange Act.
(State or other jurisdiction of
Costco Wholesale Corporation
NEW SOUTH WALES - 4
QUEENSLAND - 2
SOUTH AUSTRALIA - 1
VICTORIA-4
WESTERN AUSTRALIA -1
COR000296_0521
☑
UNITED STATES
(Exact name of registrant as specified in its charter)
SECURITIES AND EXCHANGE COMMISSION
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended August 29, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Washington
Commission file number 0-20355
Washington, D.C. 20549
FORM 10-K
COSTCO.COM.AU
Large accelerated filer
Accelerated filer
Item 4.
Mine Safety Disclosures
Page
3
9
18
Legal Proceedings
18
19
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6.
Item 7.
Reserved
220
19
Non-accelerated filer
Item 3.
Unresolved Staff Comments
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. □
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment
of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15
U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 14, 2021 was
$155,810,963,274.
The number of shares outstanding of the registrant's common stock as of September 28, 2021, was 441,823,811.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on January 20, 2022,
are incorporated by reference into Part III of this Form 10-K.
COSTCO WHOLESALE CORPORATION
Properties
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 29, 2021
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Item 2.
PART I
Item 10.
Lune
packages, hotels, cruises, and other travel products exclusively for Costco members (offered in the U.S.,
Canada, and the U.K.).
69
2013
69
2021
57
2016
56
1994
Item 1A-Risk Factors
Business and Operating Risks
We are highly dependent on the financial performance of our U.S. and Canadian operations.
Our financial and operational performance is highly dependent on our U.S. and Canadian operations,
which comprised 86% and 81% of net sales and operating income in 2021, respectively. Within the U.S.,
we are highly dependent on our California operations, which comprised 28% of U.S. net sales in 2021.
Our California market, in general, has a larger percentage of higher volume warehouses as compared to
our other domestic markets. Any substantial slowing or sustained decline in these operations could
materially adversely affect our business and financial results. Declines in financial performance of our
U.S. operations, particularly in California, and our Canadian operations could arise from, among other
things: slow growth or declines in comparable warehouse sales (comparable sales); negative trends in
operating expenses, including increased labor, healthcare and energy costs; failing to meet targets for
warehouse openings; cannibalizing existing locations with new warehouses; shifts in sales mix toward
lower gross margin products; changes or uncertainties in economic conditions in our markets, including
higher levels of unemployment and depressed home values; and failing to consistently provide high
quality and innovative new products.
We may be unsuccessful implementing our growth strategy, including expanding our business in
existing markets and new markets, and integrating acquisitions, which could have an adverse
impact on our business, financial condition and results of operations.
Our growth is dependent, in part, on our ability to acquire property and build or lease new warehouses
and depots. We compete with other retailers and businesses for suitable locations. Local land use and
other regulations restricting the construction and operation of our warehouses and depots, as well as local
community actions opposed to the location of our warehouses or depots at specific sites and the adoption
of local laws restricting our operations and environmental regulations, may impact our ability to find
suitable locations and increase the cost of sites and of constructing, leasing and operating warehouses
and depots. We also may have difficulty negotiating leases or purchase agreements on acceptable terms.
In addition, certain jurisdictions have enacted or proposed laws and regulations that would prevent or
restrict the operation or expansion plans of certain large retailers and warehouse clubs, including us.
Failure to effectively manage these and other similar factors may affect our ability to timely build or lease
and operate new warehouses and depots, which could have a material adverse effect on our future
growth and profitability.
We seek to expand in existing markets to attain a greater overall market share. A new warehouse may
draw members away from our existing warehouses and adversely affect their comparable sales
performance, member traffic, and profitability.
We intend to continue to open warehouses in new markets. Associated risks include difficulties in
attracting members due to a lack of familiarity with us, attracting members of other wholesale club
operators, our lesser familiarity with local member preferences, and seasonal differences in the market.
Entry into new markets may bring us into competition with new competitors or with existing competitors
with a large, established market presence. We cannot ensure that new warehouses and new e-commerce
websites will be profitable and future profitability could be delayed or otherwise materially adversely
affected.
9
The risks described below could materially and adversely affect our business, financial condition and
results of operations. We could also be affected by additional risks that apply to all companies operating
in the U.S. and globally, as well as other risks that are not presently known to us or that we currently
consider to be immaterial. These Risk Factors should be carefully reviewed in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and
our consolidated financial statements and related notes in Item 8 of this Report.
We have made and may continue to make investments and acquisitions to improve the speed, accuracy
and efficiency of our supply chains and delivery channels. The effectiveness of these investments can be
less predictable than opening new locations and might not provide the anticipated benefits or desired
rates of return.
68
64
Executive Vice President and Chief Financial Officer.
Mr. Galanti has been a director since January 1995.
Executive Vice President, Chief Operating Officer,
Northern Division. Mr. Klauer was Senior Vice
President, Non-Foods and E-commerce Merchandise,
from 2013 to January 2018.
Executive Vice President, Administration. Mr. Callans
was Senior Vice President, Human Resources and
Risk Management, from 2013 to December 2018.
Executive Vice President, Chief Operating Officer,
Southern Division and Mexico. Mr. Miller was Senior
Vice President, Western Canada Region, from 2001 to
January 2018.
Executive Vice President, Chief Operating Officer,
International. Mr. Murphy was Senior Vice President,
International, from 2004 to October 2010.
Executive Vice President, Chief Operating Officer,
Eastern and Canadian Divisions. Mr. Portera has held
these positions since 1994 and has been the Chief
Diversity Officer since 2010.
Executive Vice President, Ancillary Businesses,
Manufacturing, and Business Centers. Mr. Rose was
Senior Vice President, Merchandising, Foods and
Sundries and Private Label, from 1995 to December
2012.
Executive Vice President, Northeast and Southeast
Regions. Mr. Rubanenko was Senior Vice President
and General Manager, Southeast Region, from 2013
to September 2021, and Vice President, Regional
Operations Manager for the Northeast Region, from
1998 to 2013.
Executive Vice President, Chief Operating Officer,
Merchandising. Mr. Vachris was Senior Vice President,
Real Estate Development, from August 2015 to June
2016, and Senior Vice President, General Manager,
Northwest Region, from 2010 to July 2015.
2011
8
Since Age
1995 69
1993
65
2018
59
2019 59
2018
Executive
Officer
President and Chief Executive Officer. Mr. Jelinek has
been President and Chief Executive Officer since
January 2012 and a director since February 2010. He
was President and Chief Operating Officer from
February 2010 to December 2011. Prior to that he was
Executive Vice President, Chief Operating Officer,
Merchandising since 2004.
Our failure to maintain membership growth, loyalty and brand recognition could adversely affect
our results of operations.
We sell many products under our Kirkland Signature brand. Maintaining consistent product quality,
competitive pricing, and availability of these products is essential to developing and maintaining member
loyalty. These products also generally carry higher margins than national brand products and represent a
growing portion of our overall sales. If the Kirkland Signature brand experiences a loss of member
acceptance or confidence, our sales and gross margin results could be adversely affected.
We may incur property, casualty or other losses not covered by our insurance.
Claims for employee health care benefits, workers' compensation, general liability, property damage,
directors' and officers' liability, vehicle liability, inventory loss, and other exposures are funded
predominantly through self-insurance. Insurance coverage is maintained for certain risks to limit
exposures arising from very large losses. The types and amounts of insurance may vary from time to time
based on our decisions with respect to risk retention and regulatory requirements. Significant claims or
events, regulatory changes, a substantial rise in costs of health care or costs to maintain our insurance or
the failure to maintain adequate insurance coverage could have an adverse impact on our financial
condition and results of operations.
Although we maintain specific coverages for catastrophic property losses, we still bear a significant
portion of the risk of losses incurred as a result of any physical damage to, or the destruction of, any
warehouses, depots, manufacturing or home office facilities, loss or spoilage of inventory, and business
interruption. Such losses could materially impact our cash flows and results of operations.
Market and Other External Risks
We face strong competition from other retailers and warehouse club operators, which could
adversely affect our business, financial condition and results of operations.
The retail business is highly competitive. We compete for members, employees, sites, products and
services and in other important respects with a wide range of local, regional and national wholesalers and
retailers, both in the United States and in foreign countries, including other warehouse-club operators,
supermarkets, supercenters, internet retailers, gasoline stations, hard discounters, department and
specialty stores and operators selling a single category or narrow range of merchandise. Such retailers
and warehouse club operators compete in a variety of ways, including pricing, selection and availability,
services, location, convenience, store hours, and the attractiveness and ease of use of websites and
mobile applications. The evolution of retailing in online and mobile channels has improved the ability of
customers to comparison shop, which has enhanced competition. Some competitors have greater
financial resources and technology capabilities, better access to merchandise, and greater market
penetration than we do. Our inability to respond effectively to competitive pressures, changes in the retail
markets or customer expectations could result in lost market share and negatively affect our financial
results.
General economic factors, domestically and internationally, may adversely affect our business,
financial condition, and results of operations.
Our success depends on the continued contributions of our employees, including members of our senior
management and other key operations, IT, merchandising and administrative personnel. Failure to identify
and implement a succession plan for senior management could negatively impact our business. We must
attract, train and retain a large and growing number of qualified employees, while controlling related labor
costs and maintaining our core values. Our ability to control labor and benefit costs is subject to
numerous internal and external factors, including the continuing impacts of the pandemic, regulatory
changes, prevailing wage rates, and healthcare and other insurance costs. We compete with other retail
and non-retail businesses for these employees and invest significant resources in training and motivating
them. There is no assurance that we will be able to attract or retain highly qualified employees in the
future, which could have a material adverse effect on our business, financial condition and results of
operations.
Higher energy and gasoline costs, inflation, levels of unemployment, healthcare costs, consumer debt
levels, foreign-currency exchange rates, unsettled financial markets, weaknesses in housing and real
estate markets, reduced consumer confidence, changes and uncertainties related to government fiscal
and tax policies including changes in tax rates, duties, tariffs, or other restrictions, sovereign debt crises,
pandemics and other health crises, and other economic factors could adversely affect demand for our
products and services, require a change in product mix, or impact the cost of or ability to purchase
inventory. Additionally, actions in various countries, particularly China, the United States and the United
Kingdom, have raised the cost of many items and created uncertainty with respect to tariff impacts on the
costs of some of our merchandise. The degree of our exposure is dependent on (among other things) the
type of goods, rates imposed, and timing of the tariffs. The impact to our net sales and gross margin is
influenced in part by our merchandising and pricing strategies in response to potential cost increases.
While these potential impacts are uncertain, they could have an adverse impact on our results.
Prices of certain commodities, including gasoline and consumable goods used in manufacturing and our
warehouse retail operations, are historically volatile and are subject to fluctuations arising from changes in
domestic and international supply and demand, inflationary pressures, labor costs, competition, market
speculation, government regulations, taxes and periodic delays in delivery. Rapid and significant changes
in commodity prices and our ability and desire to pass them through to our members may affect our sales
and profit margins. These factors could also increase our merchandise costs and selling, general and
administrative expenses, and otherwise adversely affect our operations and financial results. General
economic conditions can also be affected by events like the outbreak of war or acts of terrorism.
Inflationary factors such as increases in merchandise costs may adversely affect our business, financial
condition and results of operations. If inflation on merchandise increases beyond our ability to control we
may not be able to adjust prices to sufficiently offset the effect of the various cost increases without
negatively impacting consumer demand. Certain merchandise categories were impacted by inflation
higher than what we have experienced in recent years due to, among other things, the continuing impacts
of the pandemic and uncertain economic environment.
Suppliers may be unable to timely supply us with quality merchandise at competitive prices or
may fail to adhere to our high standards, resulting in adverse effects on our business,
merchandise inventories, sales, and profit margins.
We depend heavily on our ability to purchase quality merchandise in sufficient quantities at competitive
prices. As the quantities we require continue to grow, we have no assurances of continued supply,
appropriate pricing or access to new products, and any supplier has the ability to change the terms upon
which they sell to us or discontinue selling to us. Member demands may lead to out-of-stock positions
causing a loss of sales and profits.
We buy from numerous domestic and foreign manufacturers and importers. Our inability to acquire
suitable merchandise on acceptable terms or the loss of key suppliers could negatively affect us. We may
not be able to develop relationships with new suppliers, and products from alternative sources, if any, may
be of a lesser quality or more expensive. Because of our efforts to adhere to high quality standards for
which available supply may be limited, particularly for certain food items, the large volumes we demand
may not be consistently available.
Our suppliers (and those they depend upon for materials and services) are subject to risks, including
labor disputes, union organizing activities, financial liquidity, natural disasters, extreme weather
conditions, public health emergencies, supply constraints and general economic and political conditions
that could limit their ability to timely provide us with acceptable merchandise. One or more of our suppliers
might not adhere to our quality control, packaging, legal, regulatory, labor, environmental or animal
welfare standards. These deficiencies may delay or preclude delivery of merchandise to us and might not
be identified before we sell such merchandise to our members. This failure could lead to recalls and
litigation and otherwise damage our reputation and our brands, increase costs, and otherwise adversely
impact our business.
14
13
Membership loyalty and growth are essential to our business. The extent to which we achieve growth in
our membership base, increase the penetration of Executive membership, and sustain high renewal rates
materially influences our profitability. Damage to our brands or reputation may negatively impact
comparable sales, diminish member trust, and reduce renewal rates and, accordingly, net sales and
membership fee revenue, negatively impacting our results of operations.
Inability to attract, train and retain highly qualified employees could adversely impact our
business, financial condition and results of operations.
Omnichannel retailing is rapidly evolving, and we must keep pace with changing member expectations
and new developments by our competitors. Our members are increasingly using mobile phones, tablets,
computers, and other devices to shop and to interact with us through social media, particularly in the
wake of COVID-19. We are making investments in our websites and mobile applications. If we are unable
to make, improve, or develop relevant member-facing technology in a timely manner, our ability to
compete and our results of operations could be adversely affected.
Disruptions in merchandise distribution or processing, packaging, manufacturing, and other
facilities could adversely affect sales and member satisfaction.
We depend on the orderly operation of the merchandise receiving and distribution process, primarily
through our depots. We also rely upon processing, packaging, manufacturing and other facilities to
support our business, which includes the production of certain private-label items. Although we believe
that our operations are efficient, disruptions due to fires, tornadoes, hurricanes, earthquakes, pandemics
or other extreme weather conditions or catastrophic events, labor issues or other shipping problems may
result in delays in the production and delivery of merchandise to our warehouses, which could adversely
affect sales and the satisfaction of our members. Our e-commerce business depends heavily on third-
party and in-house logistics providers and that business is negatively affected when these providers are
unable to provide services in a timely fashion.
We may not timely identify or effectively respond to consumer trends, which could negatively
affect our relationship with our members, the demand for our products and services, and our
market share.
It is difficult to consistently and successfully predict the products and services that our members will
desire. Our success depends, in part, on our ability to identify and respond to trends in demographics and
consumer preferences. Failure to identify timely or effectively respond to changing consumer tastes,
preferences (including those relating to environmental, social and governance practices) and spending
patterns could negatively affect our relationship with our members, the demand for our products and
services, and our market share. If we are not successful at predicting our sales trends and adjusting our
purchases accordingly, we may have excess inventory, which could result in additional markdowns, or we
may experience out-of-stock positions and delivery delays, which could result in higher costs, both of
which would reduce our operating performance. This could have an adverse effect on net sales, gross
margin and operating income.
Availability and performance of our information technology (IT) systems are vital to our business.
Failure to successfully execute IT projects and have IT systems available to our business would
adversely impact our operations.
IT systems play a crucial role in conducting our business. These systems are utilized to process a very
high volume of transactions, conduct payment transactions, track and value our inventory and produce
reports critical for making business decisions. Failure or disruption of these systems could have an
adverse impact on our ability to buy products and services from our suppliers, produce goods in our
manufacturing plants, move the products in an efficient manner to our warehouses and sell products to
our members. We are undertaking large technology and IT transformation projects. The failure of these
10
12
We are required to maintain the privacy and security of personal and business information amidst
multiplying threat landscapes and in compliance with privacy and data protection regulations
globally. Failure to do so could damage our business, including our reputation with members,
suppliers and employees, cause us to incur substantial additional costs, and become subject to
litigation and regulatory action.
The potential impacts of a material cybersecurity attack include reputational damage, litigation,
government enforcement actions, penalties, disruption to systems, unauthorized release of confidential or
otherwise protected information, corruption of data, diminution in the value of our investment in IT
systems and increased cybersecurity protection and remediation costs. This could adversely affect our
competitiveness, results of operations and financial condition and, critically in light of our business model,
loss of member confidence. Further, the insurance coverage we maintain and indemnification
arrangements with third-parties may be inadequate to cover claims, costs, and liabilities relating to
cybersecurity incidents. In addition, data we collect, store and process is subject to a variety of U.S. and
international laws and regulations, such as the European Union's General Data Protection Regulation,
California Consumer Privacy Act, Health Insurance Portability and Accountability Act, and other emerging
privacy and cybersecurity laws across the various states and around the globe, which may carry
significant potential penalties for noncompliance.
11
We are subject to payment-related risks.
We accept payments using a variety of methods, including select credit and debit cards, cash and checks,
co-brand cardholder rebates, Executive member 2% reward certificates, and our shop card. As we offer
new payment options to our members, we may be subject to additional rules, regulations, compliance
requirements, and higher fraud losses. For certain payment methods, we pay interchange and other
related acceptance fees, along with additional transaction processing fees. We rely on third parties to
provide payment transaction processing services for credit and debit cards and our shop card. It could
disrupt our business if these parties become unwilling or unable to provide these services to us. We are
also subject to evolving payment card association and network operating rules, including data security
rules, certification requirements and rules governing electronic funds transfers. For example, we are
subject to Payment Card Industry Data Security Standards, which contain compliance guidelines and
standards with regard to our security surrounding the physical and electronic storage, processing and
transmission of individual cardholder data. If our internal systems are breached or compromised, we may
be liable for card re-issuance costs, subject to fines and higher transaction fees and lose our ability to
accept card payments from our members, and our business and operating results could be adversely
affected.
We might sell products that cause illness or injury to our members, harm to our reputation, and
expose us to litigation.
If our merchandise, including food and prepared food products for human consumption, drugs, children's
products, pet products and durable goods, do not meet or are perceived not to meet applicable safety or
labeling standards or our members' expectations, we could experience lost sales, increased costs,
litigation or reputational harm. The sale of these items involves the risk of illness or injury to our members.
Such illnesses or injuries could result from tampering by unauthorized third parties, product contamination
or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues
introduced during the growing, manufacturing, storage, handling and transportation phases, or faulty
design. Our suppliers are generally contractually required to comply with product safety laws, and we are
dependent on them to ensure that the products we buy comply with safety and other standards. While we
are subject to governmental inspection and regulations and work to comply in all material respects with
applicable laws and regulations, we cannot be sure that consumption or use of our products will not cause
illness or injury or that we will not be subject to claims, lawsuits, or government investigations relating to
such matters, resulting in costly product recalls and other liabilities that could adversely affect our
business and results of operations. Even if a product liability claim is unsuccessful or is not fully pursued,
negative publicity could adversely affect our reputation with existing and potential members and our
corporate and brand image, and these effects could be long-term.
If we do not successfully develop and maintain a relevant omnichannel experience for our
members, our results of operations could be adversely impacted.
Increased security threats and more sophisticated cyber misconduct pose a risk to our systems,
networks, products and services. We rely upon IT systems and networks, some of which are managed by
third parties, in connection with virtually all of our business activities. Additionally, we collect, store and
process sensitive information relating to our business, members, suppliers and employees. Operating
these IT systems and networks, and processing and maintaining this data, in a secure manner, is critical
to our business operations and strategy. Increased remote work due to the COVID-19 pandemic has also
increased the possible attack surfaces. Threats designed to gain unauthorized access to systems,
networks and data, both ours and third parties with whom we work, are increasing in frequency and
sophistication. Cybersecurity attacks may range from random attempts to coordinated and targeted
attacks, including sophisticated computer crimes and advanced persistent threats. Phishing attacks have
emerged as particularly prominent, including as vectors for ransomware attacks, which have increased in
breadth and frequency. While we train our employees as part of our security efforts, that training cannot
be completely effective. These threats pose a risk to the security of our systems and networks and the
confidentiality, integrity, and availability of our data. It is possible that our IT systems and networks, or
those managed by third parties such as cloud providers or suppliers that otherwise host confidential
information, could have vulnerabilities, which could go unnoticed for a period of time. While our
cybersecurity and compliance efforts seek to mitigate such risks, there can be no guarantee that the
actions and controls we and our third-party service providers have implemented and are implementing,
will be sufficient to protect our systems, information or other property.
Position
projects could adversely impact our business plans and potentially impair our day to day business
operations. Given the high volume of transactions we process, it is important that we build strong digital
resiliency to prevent disruption from events such as power outages, computer and telecommunications
failures, viruses, internal or external security breaches, errors by employees, and catastrophic events
such as fires, earthquakes, tornadoes and hurricanes. Any debilitating failure of our critical IT systems,
data centers and backup systems would require significant investments in resources to restore IT
services and may cause serious impairment in our business operations including loss of business
services, increased cost of moving merchandise and failure to provide service to our members. We are
currently making substantial investments in maintaining and enhancing our digital resiliency and failure or
delay in these projects could be costly and harmful to our business. Failure to deliver IT transformation
efforts efficiently and effectively could result in the loss of our competitive position and adversely impact
our financial condition and results of operations.
Yoram Rubanenko
53,900
49,900
47,400
44,600
111,600
105,500
98,500
58,100
Paid cardholders (except affiliates) are eligible to upgrade to an Executive membership in the U.S. and
Canada, for an additional annual fee of $60. Executive memberships are also available in Mexico, the
U.K., Japan, Korea, and Taiwan, for which the additional annual fee varies. Executive members earn a
2% reward on qualified purchases (generally up to a maximum reward of $1,000 per year), which can be
redeemed only at Costco warehouses. This program also offers (except in Mexico and Korea), access to
additional savings and benefits on various business and consumer services, such as auto and home
insurance, the Costco auto purchase program, and check printing. These services are generally provided
by third parties and vary by state and country. Executive members totaled 25.6 million and represented
55% of paid members (excluding affiliates) in the U.S. and Canada and 17% of paid members (excluding
affiliates) in our Other International operations at the end of 2021. They generally shop more frequently
and spend more than other members.
Human Capital
Our Code of Ethics requires that we "Take Care of Our Employees," which is fundamental to the
obligation to "Take Care of Our Members." We must also carefully control our selling, general and
administrative (SG&A) expenses, so that we can sell high quality goods and services at low prices.
Compensation and benefits for employees is our largest expense after the cost of merchandise and is
carefully monitored.
At the end of 2021, we employed 288,000 employees worldwide. The large majority (approximately 95%)
is employed in our membership warehouses and distribution channels and approximately 17,000
employees are represented by unions. We also utilize seasonal employees during peak periods. The total
number of employees by segment is:
United States
Canada
Other International
Total employees
50
61,700
11,000
11,300
Ron M. Vachris
Certain financial information for our segments and geographic areas is included in Note 12 to the
consolidated financial statements included in Item 8 of this Report.
Membership
Our members may utilize their memberships at all of our warehouses and websites. Gold Star
memberships are available to individuals; Business memberships are limited to businesses, including
individuals with a business license, retail sales license or comparable document. Business members may
add additional cardholders (affiliates), to which the same annual fee applies. Affiliates are not available for
Gold Star members. Our annual fee for these memberships is $60 in our U.S. and Canadian operations
and varies in other countries. All paid memberships include a free household card.
Our member renewal rate was 91% in the U.S. and Canada and 89% worldwide at the end of 2021. The
majority of members renew within six months following their renewal date. Our renewal rate is a trailing
calculation that captures renewals during the period seven to eighteen months prior to the reporting date.
Our membership counts include active memberships as well as memberships that have not renewed
within the 12 months prior to the reporting date. At the end of 2020, we standardized our membership
count methodology globally to be consistent with the U.S. and Canada, which resulted in the addition to
the count of approximately 2.0 million total cardholders for 2020, of which 1.3 million were paid members.
The change did not impact 2019. Membership fee income and the renewal rate calculations were not
affected. Our membership was made up of the following (in thousands):
Gold Star
Business, including affiliates
Total paid members
Household cards
Total cardholders
2021
2020
2019
50,200
46,800
42,900
11,500
Number of Employees
2021
We have direct buying relationships with many producers of brand-name merchandise. We do not obtain
a significant portion of merchandise from any one supplier. The COVID-19 pandemic created
unprecedented supply constraints, including disruptions and delays that have impacted and could
continue to impact the flow and availability of certain products. When sources of supply become
unavailable, we seek alternative sources. We also purchase and manufacture private-label merchandise,
as long as quality and member demand are high and the value to our members is significant.
2019
We believe that, to varying degrees, our trademarks, trade names, copyrights, proprietary processes,
trade secrets, trade dress, domain names and similar intellectual property add significant value to our
business and are important to our success. We have invested significantly in the development and
protection of our well-recognized brands, including the Costco Wholesale trademarks and our private-
label brand, Kirkland Signature. We believe that Kirkland Signature products are high quality, offered at
prices that are generally lower than national brands, and help lower costs, differentiate our merchandise
offerings, and generally earn higher margins. We expect to continue to increase the sales penetration of
our private-label items.
We rely on trademark and copyright laws, trade-secret protection, and confidentiality, license and other
agreements with our suppliers, employees and others to protect our intellectual property. The availability
and duration of trademark registrations vary by country; however, trademarks are generally valid and may
be renewed indefinitely as long as they are in use and registrations are maintained.
Available Information
Our U.S. website is www.costco.com. We make available through the Investor Relations section of that
site, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, Proxy Statements and Forms 3, 4 and 5, and any amendments to those reports, as soon as
reasonably practicable after filing such materials with or furnishing such documents to the Securities and
Exchange Commission (SEC). The information found on our website is not part of this or any other report
filed with or furnished to the SEC. The SEC maintains a site that contains reports, proxy and information
statements, and other information regarding issuers, such as the Company, that file electronically with the
SEC at www.sec.gov.
We have adopted a code of ethics for senior financial officers, pursuant to Section 406 of the Sarbanes-
Oxley Act. Copies of the code are available free of charge by writing to Secretary, Costco Wholesale
Corporation, 999 Lake Drive, Issaquah, WA 98027. If the Company makes any amendments to this code
(other than technical, administrative, or non-substantive amendments) or grants any waivers, including
implicit waivers, to the CEO, chief financial officer or principal accounting officer and controller, we will
disclose (on our website or in a Form 8-K report filed with the SEC) the nature of the amendment or
waiver, its effective date, and to whom it applies.
7
Information about our Executive Officers
The executive officers of Costco, their position, and ages are listed below. All have over 25 years of
service with the Company.
W. Craig Jelinek
Richard A. Galanti
Jim C. Klauer
Patrick J. Callans
Russ D. Miller
James P. Murphy
Joseph P. Portera
Timothy L. Rose
2020
Intellectual Property
Our industry is highly competitive, based on factors such as price, merchandise quality and selection,
location, convenience, distribution strategy, and customer service. We compete on a worldwide basis with
global, national, and regional wholesalers and retailers, including supermarkets, supercenters, internet
retailers, gasoline stations, hard discounters, department and specialty stores, and operators selling a
single category or narrow range of merchandise. Walmart, Target, Kroger, and Amazon are among our
significant general merchandise retail competitors in the U.S. We also compete with other warehouse
clubs including Walmart's Sam's Club and BJ's Wholesale Club, and many of the major metropolitan
areas in the U.S. and certain of our Other International locations have multiple clubs.
Name
6
192,000
Competition
167,000
47,000
46,000
49,000
46,000
42,000
181,000
288,000
273,000
254,000
We believe that our warehouses are among the most productive in the retail industry, owing in substantial
part to the commitment and efficiency of our employees. We seek to provide them not merely with
employment but careers. Many attributes of our business contribute to the objective; the more significant
include: competitive compensation and benefits for those working in our membership warehouses and
distributions channels; a commitment to promoting from within; and maintaining a ratio of at least 50% of
our employee base being full-time employees. These attributes contribute to what we consider, especially
for the industry, a high retention rate. In 2021, in the U.S. that rate was above 90% for employees who
have been with us for at least one year.
The commitment to "Take Care of Our Employees" is also the foundation of our approach to diversity,
equity and inclusion and creating an inclusive and respectful workplace. In 2021, we added training and
communication for managers on topics of race, bias and equity, and greater visibility of our employee
demographics. Embracing differences is important to the growth of our Company. It leads to more
opportunities, innovation, and employee satisfaction and connects us to the communities where we do
business.
45,000
Costco is firmly committed to helping protect the health and safety of our members and employees and to
serving our communities. In response to the COVID-19 pandemic and its associated challenges, we
began providing premium pay to the majority of our hourly employees in March 2020 and continued for a
full year through February 2021, at which time a portion of the premium was built permanently into our
hourly wage scales in the U.S. In fall 2020, we also began offering employees additional paid time off to
attend to child care and schooling needs through the 2021 school year. As the global effect of coronavirus
(COVID-19) continues to evolve, we are closely monitoring the changing situation and complying with
public health guidance.
For more detailed information regarding our programs and initiatives, see “Employees" within our
Sustainability Commitment (located on our website). This report and other information on our website are
not incorporated by reference into and do not form any part of this Annual Report.
110
564
89
146
105
454
45
16
101
Other International
(1)
Lease Land
and/or
Building
Own Land
and Building
18
(1) 121 of the 171 leases are land-only leases, where Costco owns the building.
Total
Canada
United States and Puerto Rico
At August 29, 2021, we operated 815 membership warehouses:
644
Total
171
Shares
Purchased as
Part of Publicly
At the end of 2021, our warehouses contained approximately 118.9 million square feet of operating floor
space: 83.2 million in the U.S.; 14.9 million in Canada; and 20.8 million in Other International. Total
square feet associated with distribution and logistics facilities were approximately 31.4 million.
Additionally, we operate various processing, packaging, manufacturing and other facilities to support our
business, which includes the production of certain private-label items.
$
102,000
381.50
102,000 $
Maximum Dollar
Value of Shares
that May Yet be
Purchased under
the Program
Announced
Warehouse Properties
Total Number of
Program(1)
Average Price
Paid per
Share
815
Total Number
Issuer Purchases of Equity Securities
Payment of dividends is subject to declaration by the Board of Directors. Factors considered in
determining dividends include our profitability and expected capital needs. Subject to these qualifications,
we presently expect to continue to pay dividends on a quarterly basis.
Our common stock is traded on the NASDAQ Global Select Market under the symbol "COST." On
September 28, 2021, we had 9,958 stockholders of record.
Market Information and Dividend Policy
Item 5-Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
PART II
Not applicable.
Item 4-Mine Safety Disclosures
See discussion of Legal Proceedings in Note 11 to the consolidated financial statements included in
Item 8 of this Report.
Item 3-Legal Proceedings
The following table sets forth information on our common stock repurchase activity for the fourth quarter
of 2021 (dollars in millions, except per share data):
Item 2-Properties
We believe that the price of our stock currently reflects high market expectations for our future operating
results. Any failure to meet or delay in meeting these expectations, including our warehouse and e-
commerce comparable sales growth rates, membership renewal rates, new member sign-ups, gross
margin, earnings, earnings per share, new warehouse openings, or dividend or stock repurchase policies
could cause the price of our stock to decline.
Item 1B—Unresolved Staff Comments
Evolving macroeconomic factors, including general economic uncertainty, unemployment rates,
and recessionary pressures;
The severity and duration of the pandemic, including future mutations or related variants of the
virus in areas in which we operate;
•
•
•
•
•
Other factors and uncertainties include, but are not limited to:
Failure to appropriately respond, or the perception of an inadequate response to evolving events around
the pandemic, could cause reputational harm to our brand and subject us to lost sales, as well as claims
from employees, members, suppliers, regulators or other parties. Additionally, a future outbreak of
confirmed cases of COVID-19 in our facilities could result in temporary or sustained workforce shortages
or facility closures, which would negatively impact our business and results of operations. Some
jurisdictions have taken measures intended to expand the availability of workers compensation or to
change the presumptions applicable to workers compensation measures. These actions may increase our
exposure to claims and increase our costs.
behaviors change, which may challenge our ability to anticipate and/or adjust inventory levels to meet that
demand. Similarly, increased demand for online purchases of products has impacted our fulfillment
operations, resulting in delays in deliveries and lost sales from being out of stock for certain SKUs.
The pandemic is continuing to impact the global supply chain, with restrictions and limitations on business
activities causing disruption and delay, which have strained certain domestic and international supply
chains, and could continue to negatively affect the flow or availability of certain products. Member
demand for certain products has and may continue to fluctuate as the pandemic progresses and member
The pandemic has resulted in widespread and continuing impacts on the global economy and on our
employees, members, suppliers and other people and entities with which we do business. There is
considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent
and duration of measures to try to contain the virus, such as travel bans and restrictions, quarantines,
shelter-in-place orders, and business and government shutdowns. The pandemic and any preventative or
protective actions that governments or we may take may result in business disruption, reduced member
traffic and reduced sales in certain merchandise categories, and increased operating expenses.
The continuing impacts of the COVID-19 pandemic are highly unpredictable and volatile and are affecting
certain business operations, demand for our products and services, in-stock positions, costs of doing
business, availability of labor, access to inventory, supply chain operations, our ability to predict future
performance, exposure to litigation, and our financial performance, among other things.
The COVID-19 pandemic continues to affect our business, financial condition and results of
operations in many respects.
Natural disasters and extreme weather conditions, such as hurricanes, typhoons, floods, earthquakes,
wildfires, droughts; acts of terrorism or violence, including active shooter situations; energy shortages;
public health issues, including pandemics and quarantines, particularly in California or Washington state,
where our centralized operating systems and administrative personnel are located, could negatively affect
our operations and financial performance. Such events could result in physical damage to our properties,
limitations on store operating hours, less frequent visits by members to physical locations, the temporary
closure of warehouses, depots, manufacturing or home office facilities, the temporary lack of an adequate
work force, disruptions to our IT systems, the temporary or long-term disruption in the supply of products
from some local or overseas suppliers, the temporary disruption in the transport of goods to or from
overseas, delays in the delivery of goods to our warehouses or depots, and the temporary reduction in the
availability of products in our warehouses. Public health issues, whether occurring in the U.S. or abroad,
could disrupt our operations, disrupt the operations of suppliers or members, or have an adverse impact
on consumer spending and confidence levels. These events could also reduce demand for our products
or make it difficult or impossible to procure products. We may be required to suspend operations in some
or all of our locations, which could have a material adverse effect on our business, financial condition and
results of operations.
Natural disasters, extreme weather conditions, public health emergencies or other catastrophic
events could negatively affect our business, financial condition, and results of operations.
A portion of the products we purchase is paid for in a currency other than the local currency of the country
in which the goods are sold. Currency fluctuations may increase our merchandise costs and may not be
passed on to members. Consequently, fluctuations in currency exchange rates may adversely affect our
results of operations.
During 2021, our international operations, including Canada, generated 28% and 36% of our net sales
and operating income, respectively. Our international operations have accounted for an increasing portion
of our warehouses, and we plan to continue international growth. To prepare our consolidated financial
statements, we translate the financial statements of our international operations from local currencies into
U.S. dollars using current exchange rates. Future fluctuations in exchange rates that are unfavorable to
us may adversely affect the financial performance of our Canadian and Other International operations and
have a corresponding adverse period-over-period effect on our results of operations. As we continue to
expand internationally, our exposure to fluctuations in foreign exchange rates may increase.
Fluctuations in foreign exchange rates may adversely affect our results of operations.
112
3,338
Changes in labor markets affecting us and our suppliers;
Unknown consequences on our business performance and initiatives stemming from the
substantial investment of time and other resources to the pandemic response;
•
The pace of recovery when the pandemic subsides.
resources.
Our business requires compliance with many laws and regulations. Failure to achieve compliance could
subject us to lawsuits and other proceedings, and lead to damage awards, fines, penalties, and
remediation costs. We are or may become involved in a number of legal proceedings and audits,
including grand jury investigations, government and agency investigations, and consumer, employment,
tort, unclaimed property laws, and other litigation. We cannot predict with certainty the outcomes of these
proceedings and other contingencies, including environmental remediation and other proceedings
commenced by governmental authorities. The outcome of some of these proceedings, audits, unclaimed
property laws, and other contingencies could require us to take, or refrain from taking, actions which could
negatively affect our operations or could require us to pay substantial amounts of money, adversely
affecting our financial condition and results of operations. Additionally, defending against these lawsuits
and proceedings may involve significant expense and diversion of management's attention and
We are involved in a number of legal proceedings and audits and some of these outcomes could
adversely affect our business, financial condition and results of operations.
Operations at our facilities require the treatment and disposal of wastewater, stormwater and agricultural
and food processing wastes, the use and maintenance of refrigeration systems, including ammonia-based
chillers, noise, odor and dust management, the operation of mechanized processing equipment, and
other operations that potentially could affect the environment and public health and safety. Failure to
comply with current and future environmental, health and safety standards could result in the imposition of
fines and penalties, illness or injury of our employees, and claims or lawsuits related to such illnesses or
injuries, and temporary closures or limits on the operations of facilities.
We are subject to a wide and increasingly broad array of federal, state, regional, local and international
laws and regulations relating to the use, storage, discharge and disposal of hazardous materials,
hazardous and non-hazardous wastes and other environmental matters. Failure to comply with these
laws could result in harm to our members, employees or others, significant costs to satisfy environmental
compliance, remediation or compensatory requirements, or the imposition of severe penalties or
restrictions on operations by governmental agencies or courts that could adversely affect our business,
financial condition and results of operations.
Significant changes in or failure to comply with regulations relating to the use, storage, discharge
and disposal of hazardous materials, hazardous and non-hazardous wastes and other
environmental matters could adversely impact our business, financial condition and results of
operations.
17
We are subject to a variety of taxes and tax collection and remittance obligations in the U.S. and
numerous foreign jurisdictions. Additionally, at any point in time, we may be under examination for value
added, sales-based, payroll, product, import or other non-income taxes. We may recognize additional tax
expense, be subject to additional tax liabilities, or incur losses and penalties, due to changes in laws,
regulations, administrative practices, principles, assessments by authorities and interpretations related to
tax, including tax rules in various jurisdictions. We compute our income tax provision based on enacted
tax rates in the countries in which we operate. As tax rates vary among countries, a change in earnings
attributable to the various jurisdictions in which we operate could result in an unfavorable change in our
overall tax provision. Additionally, changes in the enacted tax rates or adverse outcomes in tax audits,
including transfer pricing disputes, could have a material adverse effect on our financial condition and
results of operations.
Changes in tax rates, new U.S. or foreign tax legislation, and exposure to additional tax liabilities
could adversely affect our financial condition and results of operations.
Section 404 of the Sarbanes-Oxley Act of 2002 requires management assessments of the effectiveness
of internal control over financial reporting and disclosure controls and procedures. If we are unable to
maintain effective internal control over financial reporting or disclosure controls and procedures, our ability
to record, process and report financial information accurately and to prepare financial statements within
required time periods could be adversely affected, which could subject us to litigation or investigations
requiring management resources and payment of legal and other expenses, negatively affect investor
confidence in our financial statements and adversely impact our stock price.
None.
We are exposed to risks relating to evaluations of controls required by Section 404 of the
Sarbanes-Oxley Act.
Changes in accounting standards and subjective assumptions, estimates and judgments by
management related to complex accounting matters could significantly affect our financial
condition and results of operations.
At the end of 2021, we operated 251 warehouses outside of the U.S., and we plan to continue expanding
our international operations. Future operating results internationally could be negatively affected by a
variety of factors, many similar to those we face in the U.S., certain of which are beyond our control.
These factors include political and economic conditions, regulatory constraints, currency regulations,
policy changes such as the withdrawal of the U.K. from the European Union, and other matters in any of
the countries or regions in which we operate, now or in the future. Other factors that may impact
international operations include foreign trade (including tariffs and trade sanctions), monetary and fiscal
policies and the laws and regulations of the U.S. and foreign governments, agencies and similar
organizations, and risks associated with having major facilities in locations which have been historically
less stable than the U.S. Risks inherent in international operations also include, among others, the costs
and difficulties of managing international operations, adverse tax consequences, and difficulty in enforcing
intellectual property rights.
We are subject to risks associated with the legislative, judicial, accounting, regulatory, political
and economic factors specific to the countries or regions in which we operate, which could
adversely affect our business, financial condition and results of operations.
Legal and Regulatory Risks
16
Failure to meet financial market expectations could adversely affect the market price and volatility
of our stock.
We use natural gas, diesel fuel, gasoline, and electricity in our distribution and warehouse operations.
Government regulations limiting carbon dioxide and other greenhouse gas emissions may increase
compliance and merchandise costs, and other regulation affecting energy inputs could materially affect
our profitability. Climate change, extreme weather conditions, wildfires, droughts and rising sea levels
could affect our ability to procure commodities at costs and in quantities we currently experience. We also
sell a substantial amount of gasoline, the demand for which could be impacted by concerns about climate
change and which face increased regulation.
Factors associated with climate change could adversely affect our business.
To the extent that COVID-19 continues to adversely affect the U.S. and global economy, our business,
results of operations, cash flows, or financial condition, it may also heighten other risks described in this
section, including but not limited to those related to consumer behavior and expectations, competition,
brand reputation, implementation of strategic initiatives, cybersecurity threats, payment-related risks,
technology systems disruption, supply chain disruptions, labor availability and cost, litigation, operational
risk as a result of remote work arrangements and regulatory requirements.
The long-term impact of the pandemic on our business, including consumer behaviors; and
Disruption and volatility within the financial and credit markets.
Accounting principles and related pronouncements, implementation guidelines, and interpretations we
apply to a wide range of matters that are relevant to our business, including self-insurance liabilities, are
highly complex and involve subjective assumptions, estimates and judgments by our management.
Changes in rules or interpretation or changes in underlying assumptions, estimates or judgments by our
management could significantly change our reported or expected financial performance and have a
material impact on our consolidated financial statements.
15
176
108,000
During 2021, our sales mix began returning to pre-pandemic levels. This included sales increases in non-
foods and in many of our warehouse ancillary and other businesses, certain of which experienced
closures or restrictions in 2020. COVID-related supply and logistics constraints have adversely affected
some merchandise categories and are expected to do so for the foreseeable future.
COVID-19
We paid a special cash dividend of $10.00 per share in December 2020 and in April 2021, increased
the quarterly cash dividend from $0.70 to $0.79 per share totaling $5,748.
Net income increased 25% to $5,007, or $11.27 per diluted share compared to $4,002, or $9.02 per
diluted share in 2020;
The effective tax rate in 2021 was 24.0% compared to 24.4% in 2020;
Gross margin percentage decreased seven basis points, driven primarily by a shift in sales
penetration from our core merchandise categories to our warehouse ancillary and other businesses;
SG&A expenses as a percentage of net sales decreased 40 basis points, primarily due to leveraging
increased sales and decreased incremental wages related to COVID-19;
Membership fee revenue increased 9% to $3,877, driven by sign-ups and upgrades to Executive
membership;
Net sales increased 18% to $192,052 driven by a 16% increase in comparable sales and sales at
new warehouses opened in 2020 and 2021;
We opened 22 new warehouses, including 2 relocations: 12 net new in the U.S., 4 net new in our
Canadian segment, and 4 new in our Other International segment, compared to 16 new
warehouses, including 3 relocations in 2020;
•
•
•
•
We paid $515 in incremental wages during 2021 related to COVID-19. The incremental wage and benefit
costs associated with COVID-19, which began on March 1, 2020 and ended on February 28, 2021,
totaled approximately $825.
•
Highlights for 2021 included:
Our fiscal year ends on the Sunday closest to August 31. References to 2021, 2020, and 2019 relate to
the 52-week fiscal years ended August 29, 2021, August 30, 2020, and September 1, 2019, respectively.
Certain percentages presented are calculated using actual results prior to rounding. Unless otherwise
noted, references to net income relate to net income attributable to Costco.
22
22
In discussions of our consolidated operating results, we refer to the impact of changes in foreign
currencies relative to the U.S. dollar, which are references to the differences between the foreign-
exchange rates we use to convert the financial results of our international operations from local currencies
into U.S. dollars for financial reporting purposes. This impact of foreign-exchange rate changes is
calculated based on the difference between the current period's currency exchange rates and that of the
comparable prior period. The impact of changes in gasoline prices on net sales is calculated based on the
difference between the current period's average price per gallon sold and that of the comparable prior
period.
Our operating model is generally the same across our U.S., Canadian, and Other International operating
segments (see Note 12 to the consolidated financial statements included in Item 8 of this Report). Certain
operations in the Other International segment have relatively higher rates of square footage growth, lower
wage and benefit costs as a percentage of sales, less or no direct membership warehouse competition, or
lack an e-commerce business.
Our financial performance depends heavily on controlling costs. While we believe that we have achieved
successes in this area, some significant costs are partially outside our control, particularly health care and
utility expenses. With respect to the compensation of our employees, our philosophy is not to seek to
minimize their wages and benefits. Rather, we believe that achieving our longer-term objectives of
reducing employee turnover and enhancing employee satisfaction requires maintaining compensation
levels that are better than the industry average for much of our workforce. This may cause us, for
example, to absorb costs that other employers might seek to pass through to their workforces. Because
our business operates on very low margins, modest changes in various items in the consolidated
statements of income, particularly merchandise costs and selling, general and administrative expenses,
can have substantial impacts on net income.
The membership format is an integral part of our business and has a significant effect on our profitability.
This format is designed to reinforce member loyalty and provide continuing fee revenue. The extent to
which we achieve growth in our membership base, increase the penetration of our Executive members,
and sustain high renewal rates materially influences our profitability. Our paid membership growth rate
may be adversely impacted when warehouse openings occur in existing markets as compared to new
markets.
We also achieve net sales growth by opening new warehouses. As our warehouse base grows, available
and desirable sites become more difficult to secure, and square footage growth becomes a comparatively
less substantial component of growth. The negative aspects of such growth, however, including lower
initial operating profitability relative to existing warehouses and cannibalization of sales at existing
warehouses when openings occur in existing markets, are continuing to decline in significance as they
relate to the results of our total operations. Our rate of operating floor space square footage growth is
generally higher in foreign markets, due to the smaller base in those markets, and we expect that to
continue. Our e-commerce business growth, domestically and internationally, has also increased our
sales but it generally has a lower gross margin percentage relative to our warehouse operations.
uncertainty with respect to how tariffs will affect the costs of some of our merchandise. The degree of our
exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs.
Certain merchandise categories were impacted by inflation higher than what we have experienced in
recent years. The impact to our net sales and gross margin is influenced in part by our merchandising and
pricing strategies in response to cost increases. While these potential impacts are uncertain, they could
have an adverse impact on our results.
24
21
Our philosophy is to provide our members with quality goods and services at competitive prices. We do
not focus in the short-term on maximizing prices charged, but instead seek to maintain what we believe is
a perception among our members of our "pricing authority" on quality goods - consistently providing the
most competitive values. Our investments in merchandise pricing may include reducing prices on
merchandise to drive sales or meet competition and holding prices steady despite cost increases instead
of passing the increases on to our members, all negatively impacting gross margin as a percentage of net
sales (gross margin percentage). We believe our gasoline business draws members, but it generally has
a lower gross margin percentage relative to our non-gasoline business. It also has lower SG&A expenses
as a percent of net sales compared to our non-gasoline business. A higher penetration of gasoline sales
will generally lower our gross margin percentage. Rapidly changing gasoline prices may significantly
impact our near-term net sales growth. Generally, rising gasoline prices benefit net sales growth which,
given the higher sales base, negatively impacts our gross margin percentage but decreases our SG&A
expenses as a percentage of net sales. A decline in gasoline prices has the inverse effect. Additionally,
actions in various countries, particularly China, the United States and the United Kingdom, have created
•
We believe that the most important driver of our profitability is increasing net sales, particularly
comparable sales growth. Net sales includes our core merchandise categories (foods and sundries, non-
foods, and fresh foods), warehouse ancillary (includes gasoline, pharmacy, optical, food court, hearing
aids, and tire installation) and other businesses (includes e-commerce, business centers, travel and
other). We define comparable sales as net sales from warehouses open for more than one year, including
remodels, relocations and expansions, and sales-related to e-commerce websites operating for more than
one year. Comparable sales growth is achieved through increasing shopping frequency from new and
existing members and the amount they spend on each visit (average ticket). Sales comparisons can also
be particularly influenced by certain factors that are beyond our control: fluctuations in currency exchange
rates (with respect to the consolidation of the results of our international operations); and changes in the
cost of gasoline and associated competitive conditions. The higher our comparable sales exclusive of
these items, the more we can leverage certain of our selling, general and administrative (SG&A)
expenses, reducing them as a percentage of sales and enhancing profitability. Generating comparable
sales growth is foremost a question of making available to our members the right merchandise at the right
prices, a skill that we believe we have repeatedly demonstrated over the long-term. Another substantial
factor in net sales growth is the health of the economies in which we do business, including the effects of
inflation or deflation, especially the United States. Net sales growth and gross margins are also impacted
by our competition, which is vigorous and widespread, across a wide range of global, national and
regional wholesalers and retailers, including those with e-commerce operations. While we cannot control
or reliably predict general economic health or changes in competition, we believe that we have been
successful historically in adapting our business to these changes, such as through adjustments to our
pricing and merchandise mix, including increasing the penetration of our private-label items and through
online offerings.
Effective March 1, 2021, we permanently increased wages for hourly and most salaried warehouse
employees. The estimated annualized pre-tax cost is approximately $400. Additionally, in certain areas in
the United States governments have mandated or are considering mandating extra pay for classes of
employees that include our employees, which has and will result in higher costs.
23
18 %
U.S.
Increases in comparable sales:
Total Company
5 %
13 %
23 %
3%
5 %
22 %
9%
9%
16 %
23
149,351
$
192,052
$
Other International
Canada
U.S.
Increases in net sales:
Net Sales
2019
2020
2021
Net Sales
RESULTS OF OPERATIONS
163,220 $
The following Management's Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) is intended to promote understanding of the results of operations and financial condition. MD&A
is provided as a supplement to, and should be read in conjunction with, our consolidated financial
statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K). This
section generally discusses the results of operations for 2021 compared to 2020. For discussion related
to the results of operations and changes in financial condition for 2020 compared to 2019 refer to Part II,
Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our
fiscal year 2020 Form 10-K, which was filed with the United States Securities and Exchange Commission
(SEC) on October 7, 2020. In 2021, we combined the hardlines and softlines merchandise categories into
non-foods. This change did not have a material impact on the discussion of our results of operations.
Overview
Item 7-Management's Discussion and Analysis of Financial Conditions and Results of
Operations (amounts in millions, except per share, share, membership fee, and warehouse count data)
20
169
163
607 $ 155
186
158
144
137
124
116
113
109
99
EA
170
$
182
155
144
140
125
115
109
108
$
30
163
136
122
26
169
175
188
20
Item 6-Reserved
2017 was a 53-week fiscal year
*First year sales annualized.
Fiscal Year
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
217
192
182
85
163
159
162
164
160
155
815
232
205
195
9%
8%
15%
8%
9/1/19
8/30/20
8/29/21
Costco
S&P 500
S&P 500 Retail
The following graph provides information concerning average sales per warehouse over a 10 year period.
Average Sales Per Warehouse*
(Sales In Millions)
2015
2014
2013
2012 & Before
9/2/18
Totals
# of Whses
2021
2020
2019
2018
2017
2016
22222223211
20
26
EA
$
140
Year Opened
9/3/17
8/28/16
0
3,296
63,000
412.73
63,000
3,270
45,000
446.15
45,000
3,250
318,000 $
398.76
318,000
Period
May 10-June 6, 2021
June 7-July 4, 2021
July 5-August 1, 2021
August 2-August 29, 2021
of Shares
Purchased
Total fourth quarter
(1) The repurchase program is conducted under a $4,000 authorization approved by our Board of Directors in April 2019, which
expires in April 2023.
19
Performance Graph
The following graph compares the cumulative total shareholder return (stock price appreciation and the
reinvestment of dividends) on an investment of $100 in Costco common stock, S&P 500 Index, and the
S&P 500 Retail Index over the five years from August 28, 2016, through August 29, 2021.
Comparison of 5-Year Cumulative Total Returns
Dollars
400
300
200
100
$
387.32
132
$ 129
11 %
13 %
5 %
7%
12 %
6%
9%
14 %
Total Company
Other International
Canada
U.S.
prices (1)
6%
of changes in foreign currency and gasoline
6%
8%
16 %
Total Company
2 %
9%
19%
Other International
2%
5 %
20%
Canada
8%
Increases in comparable sales excluding the impact
13 %
9%
6%
138
172
$
116
119
141
172
$
121
142
158
176
206
$
87
97
118
131
145
173
$
83
24
24
Comparable sales increased 16% during 2021 and were positively impacted by increases in shopping
frequency and average ticket. There was an increase of 44% in e-commerce comparable sales in 2021,
driven by an increase of 80% in the first half of the year.
Comparable Sales
Changes in foreign currencies relative to the U.S. dollar positively impacted net sales by approximately
$2,759, or 169 basis points, compared to 2020, attributable to our Canadian and Other International
operations. Changes in gasoline prices positively impacted net sales by $1,636, or 100 basis points,
compared to 2020, due to a 12% increase in the average price per gallon. The volume of gasoline sold
increased approximately 10%, positively impacting net sales by $1,469, or 90 basis points.
Net sales increased $28,832 or 18% during 2021. The improvement was attributable to an increase in
comparable sales of 16%, and sales at new warehouses opened in 2020 and 2021. While sales in all core
merchandise categories increased, sales were particularly strong in non-foods. Sales increases were also
strong in our warehouse ancillary and other businesses, predominantly e-commerce and gasoline.
Certain merchandise categories were impacted by inflation higher than what we have experienced in
recent years.
(1) Excluding the impact of the revenue recognition standard for the year ended September 1, 2019.
Net Sales
152
108,000
94
August 29,
2021
Bank Credit Facilities and Commercial Paper Programs
We maintain bank credit facilities for working capital and general corporate purposes. At August 29, 2021,
we had borrowing capacity under these facilities of $1,050. Our international operations maintain $574 of
the total borrowing capacity under bank credit facilities, of which $201 is guaranteed by the
Company. Short-term borrowings outstanding under the bank credit facilities at the end of 2021 were
immaterial, and there were none outstanding at the end of 2020.
The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $235. The
outstanding commitments under these facilities at the end of 2021 totaled $197, most of which were
standby letters of credit which do not expire or have expiration dates within one year. The bank credit
facilities have various expiration dates, most of which are within one year, and we generally intend to
renew these facilities. The amount of borrowings available at any time under our bank credit facilities is
reduced by the amount of standby and commercial letters of credit outstanding.
Off-Balance Sheet Arrangements
In the opinion of management, we have no off-balance sheet arrangements that have had or are
reasonably likely to have a material current or future effect on our financial condition or financial
statements.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with U.S. generally accepted
accounting principles (U.S. GAAP) requires that we make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting
period. We base our estimates on historical experience and on assumptions that we believe to be
reasonable, and we continue to review and evaluate these estimates. For further information on
significant accounting policies, see discussion in Note 1 to the consolidated financial statements included
in Item 8 of this Report.
Insurance/Self-insurance Liabilities
Claims for employee health-care benefits, workers' compensation, general liability, property damage,
directors' and officers' liability, vehicle liability, inventory loss, and other exposures are funded
predominantly through self-insurance. Insurance coverage is maintained for certain risks to seek to limit
exposures arising from very large losses. We use different risk management mechanisms, including a
wholly-owned captive insurance subsidiary, and participate in a reinsurance program. Liabilities
associated with the risks that we retain are not discounted and are estimated by using historical claims
experience, demographic factors, severity factors, and other actuarial assumptions. The costs of claims
are highly unpredictable and can fluctuate as a result of inflation rates, regulatory or legal changes, and
unforeseen developments in claims over time. While we believe our estimates are reasonable and
provide for a certain degree of coverage to account for these variables, actual claims and costs could
differ significantly from recorded liabilities. Historically, adjustments to our estimates have not been
material.
Recent Accounting Pronouncements
We do not expect that any recently issued accounting pronouncements will have a material effect on our
financial statements.
Cash dividends declared in 2021 totaled $12.98 per share, as compared to $2.70 per share in 2020.
Dividends in 2021 included a special dividend of $10.00 per share, resulting in an aggregate payment of
approximately $4,430. In April 2021, the Board of Directors increased our quarterly cash dividend from
$0.70 to $0.79 per share.
29
Item 7A-Quantitative and Qualitative Disclosures About Market Risk (amounts in millions)
Our exposure to financial market risk results from fluctuations in interest rates and foreign currency
exchange rates. We do not engage in speculative or leveraged transactions or hold or issue financial
instruments for trading purposes.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our investment holdings that
are diversified among various instruments considered to be cash equivalents, as defined in Note 1 to the
consolidated financial statements included in Item 8 of this Report, as well as short-term investments in
government and agency securities with effective maturities of generally three months to five years at the
date of purchase. The primary objective of our investment activities is to preserve principal and
secondarily to generate yields. The majority of our short-term investments are in fixed interest-rate
securities. These securities are subject to changes in fair value due to interest rate fluctuations.
Our policy limits investments in the U.S. to direct U.S. government and government agency obligations,
repurchase agreements collateralized by U.S. government and government agency obligations, U.S.
government and government agency money market funds, and insured bank balances. Our wholly-owned
captive insurance subsidiary invests in U.S. government and government agency obligations and U.S.
government and government agency money market funds. Our Canadian and Other International
subsidiaries' investments are primarily in money market funds, bankers' acceptances, and bank
certificates of deposit, generally denominated in local currencies.
A 100 basis point change in interest rates as of the end of 2021 would have had an immaterial
incremental change in fair market value. For those investments that are classified as available-for-sale,
the unrealized gains or losses related to fluctuations in market volatility and interest rates are reflected
within stockholders' equity in accumulated other comprehensive income in the consolidated balance
sheets.
The nature and amount of our long-term debt may vary as a result of business requirements, market
conditions, and other factors. As of the end of 2021, long-term debt with fixed interest rates was $7,531.
Fluctuations in interest rates may affect the fair value of the fixed-rate debt. See Note 5 to the
consolidated financial statements included in Item 8 of this Report for more information on our long-term
debt.
Foreign Currency Risk
Our foreign subsidiaries conduct certain transactions in non-functional currencies, which exposes us to
fluctuations in exchange rates. We manage these fluctuations, in part, through the use of forward foreign-
exchange contracts, seeking to economically hedge the impact of these fluctuations on known future
expenditures denominated in a non-functional foreign-currency. The contracts are intended primarily to
economically hedge exposure to U.S. dollar merchandise inventory expenditures made by our
international subsidiaries whose functional currency is other than the U.S. dollar. We seek to mitigate risk
with the use of these contracts and do not intend to engage in speculative transactions. For additional
information related to the Company's forward foreign-exchange contracts, see Notes 1 and 4 to the
consolidated financial statements included in Item 8 of this Report. A hypothetical 10% strengthening of
the functional currency compared to the non-functional currency exchange rates at August 29, 2021,
I would have decreased the fair value of the contracts by $149 and resulted in an unrealized loss in the
consolidated statements of income for the same amount.
Commodity Price Risk
We are exposed to fluctuations in prices for energy, particularly electricity and natural gas, and other
commodities used in retail and manufacturing operations, which we seek to partially mitigate through
fixed-price contracts for certain of our warehouses and other facilities, predominantly in the U.S. and
Canada. We also enter into variable-priced contracts for some purchases of electricity and natural gas, in
addition to some of the fuel for our gas stations, on an index basis. These contracts meet the
characteristics of derivative instruments, but generally qualify for the "normal purchases and normal
sales" exception under authoritative guidance and require no mark-to-market adjustment.
29
Dividends
28
During 2021 and 2020, we repurchased 1,358,000 and 643,000 shares of common stock, at average
prices of $364.39 and $308.45, respectively, totaling approximately $495 and $198, respectively. These
amounts may differ from the stock repurchase balances in the accompanying consolidated statements of
cash flows due to changes in unsettled stock repurchases at the end of each fiscal year. Purchases are
made from time-to-time, as conditions warrant, in the open market or in block purchases and pursuant to
plans under SEC Rule 10b5-1. Repurchased shares are retired, in accordance with the Washington
Business Corporation Act. The remaining amount available to be purchased under our approved plan was
$3,250 at the end of 2021.
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
2021
2020
2019
$
8,958 $
(3,535)
(6,488)
8,861 $
(3,891)
6,356
(2,865)
(1,147)
(1,147)
Our primary sources of liquidity are cash flows generated from our operations, cash and cash equivalents,
and short-term investments. Cash and cash equivalents and short-term investments were $12,175 and
$13,305 at the end of 2021 and 2020, respectively. Of these balances, unsettled credit and debit card
receivables represented approximately $1,816 and $1,636 at the end of 2021 and 2020, respectively.
These receivables generally settle within four days. Cash and cash equivalents were positively impacted
by a change in exchange rates of $46 and $70 in 2021 and 2020, respectively, and negatively impacted
by $15 in 2019.
Material contractual obligations arising in the normal course of business primarily consist of purchase
obligations, long-term debt and related interest payments, leases, and construction and land purchase
obligations. See Notes 5 and 6 to the consolidated financial statements included in Item 8 of this Report
for amounts outstanding on August 29, 2021, related to debt and leases.
Purchase obligations consist of contracts primarily related to merchandise, equipment, and third-party
services, the majority of which are due in the next 12 months. Construction and land purchase obligations
consist of contracts primarily related to the development and opening of new and relocated warehouses,
the majority of which (other than leases) are due in the next 12 months.
27
Management believes that our cash and investment position and operating cash flows as well as capacity
under existing and available credit agreements will be sufficient to meet our liquidity and capital
requirements for the foreseeable future. We believe that our U.S. current and projected asset position is
sufficient to meet our U.S. liquidity requirements.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $8,958 in 2021, compared to $8,861 in 2020. Our cash
flow provided by operations is primarily from net sales and membership fees. Cash flow used in
operations generally consists of payments to merchandise suppliers, warehouse operating costs,
including payroll and employee benefits, utilities, and credit and debit card processing fees. Cash used in
operations also includes payments for income taxes. Changes in our net investment in merchandise
inventories (the difference between merchandise inventories and accounts payable) is impacted by
several factors, including how fast inventory is sold, the forward deployment of inventory to accelerate
delivery times, payment terms with our suppliers, and early payments to obtain discounts from suppliers.
Cash Flows from Investing Activities
Net cash used in investing activities totaled $3,535 in 2021, compared to $3,891 in 2020, and is primarily
related to capital expenditures. In 2020, we acquired Innovel (Costco Wholesale Logistics) and a minority
interest in Navitus. Net cash flows from investing activities also includes purchases and maturities of
short-term investments.
Capital Expenditures
Our primary requirements for capital are acquiring land, buildings, and equipment for new and remodeled
warehouses. Capital is also required for information systems, manufacturing and distribution facilities,
initial warehouse operations, and working capital. In 2021, we spent $3,588 on capital expenditures, and
it is our current intention to spend approximately $3,800 to $4,200 during fiscal 2022. These expenditures
are expected to be financed with cash from operations, existing cash and cash equivalents, and short-
term investments. We opened 22 new warehouses, including two relocations, in 2021, and plan to open
approximately up to 35 additional new warehouses, including five relocations, in 2022. We have
experienced delays in real estate and construction activities due to COVID-19. There can be no
assurance that current expectations will be realized and plans are subject to change upon further review
of our capital expenditure needs or based on the current economic environment.
Cash Flows from Financing Activities
Net cash used in financing activities totaled $6,488 in 2021, compared to $1,147 in 2020. Cash flows
used in financing activities primarily related to the payment of dividends, repurchases of common stock,
and withholding taxes on stock-based awards.
In 2020, we issued $4,000 in aggregate principal amount of Senior Notes and repaid $3,200 of Senior
Notes.
Stock Repurchase Programs
30
Item 8-Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets of the Company as of August 29, 2021 and
August 30, 2020, the related consolidated statements of income, comprehensive income, equity, and cash
flows for the 52-week periods ended August 29, 2021, August 30, 2020 and September 1, 2019, and the
related notes (collectively, the consolidated financial statements), and our report dated October 5, 2021
expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on the Company's internal control over financial reporting based on our audit. We are a
public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ KPMG LLP
Seattle, Washington
October 5, 2021
33
33
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(amounts in millions, except per share data)
REVENUE
Net sales
Membership fees
Total revenue
OPERATING EXPENSES
Merchandise costs
Selling, general and administrative
Preopening expenses
Operating income
OTHER INCOME (EXPENSE)
Interest expense
Interest income and other, net
We have audited Costco Wholesale Corporation and subsidiaries' (the Company) internal control over financial
reporting as of August 29, 2021, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of August 29,
2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
The following table summarizes our significant sources and uses of cash and cash equivalents:
Opinion on Internal Control Over Financial Reporting
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Costco Wholesale Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation and
subsidiaries (the Company) as of August 29, 2021 and August 30, 2020, the related consolidated
statements of income, comprehensive income, equity, and cash flows for the 52-week periods ended
August 29, 2021, August 30, 2020 and September 1, 2019, and the related notes (collectively, the
consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of August 29, 2021 and August 30, 2020,
and the results of its operations and its cash flows for the 52-week periods ended August 29, 2021,
August 30, 2020 and September 1, 2019, in conformity with U.S. generally accepted accounting
principles.
-
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (PCAOB), the Company's internal control over financial reporting as of August 29,
2021, based on criteria established in Internal Control Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report dated October 5,
2021 expressed an unqualified opinion on the effectiveness of the Company's internal control over
financial reporting.
Change in Accounting Principle
The Company changed its method of accounting for leases as of September 2, 2019, due to the adoption
of Accounting Standards Update 2016-02 - Leases (ASC 842).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits. We
are a public accounting firm registered with the PCAOB and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the
consolidated financial statements that was communicated or required to be communicated to the audit
committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial
statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of a critical audit matter does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing
a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
31
Evaluation of workers' compensation self-insurance liabilities
As discussed in Note 1 to the consolidated financial statements, the Company estimates its self-
insurance liabilities by considering historical claims experience, demographic factors, severity
factors, and other actuarial assumptions. The estimated self-insurance liabilities as of August 29,
2021 were $1,257 million, a portion of which related to workers' compensation self-insurance
liabilities for the United States operations.
We identified the evaluation of the Company's workers' compensation self-insurance liabilities for
the United States operations as a critical audit matter because of the extent of specialized skill
and knowledge needed to evaluate the underlying assumptions and judgments made by the
Company in the actuarial models. Specifically, subjective auditor judgment was required to
evaluate the Company's selected loss rates and initial expected losses used in the actuarial
models.
The following are the primary procedures we performed to address this critical audit matter. We
evaluated the design and tested the operating effectiveness of certain internal controls over the
Company's self-insurance workers' compensation process. This included controls related to the
development and selection of the assumptions listed above used in the actuarial calculation and
review of the actuarial report. We involved actuarial professionals with specialized skills and
knowledge who assisted in:
/s/ KPMG LLP
Assessing the actuarial models used by the Company for consistency with generally
accepted actuarial standards
Evaluating the Company's ability to estimate self-insurance workers' compensation
liabilities by comparing its historical estimates with actual incurred losses and paid losses
Evaluating the above listed assumptions underlying the Company's actuarial estimates by
developing an independent expectation of the self-insurance workers' compensation
liabilities and comparing them to the amounts recorded by the Company
We have served as the Company's auditor since 2002.
Seattle, Washington
October 5, 2021
32
32
Costco Wholesale Corporation:
To the Stockholders and Board of Directors
LIQUIDITY AND CAPITAL RESOURCES
The effective tax rate for 2021 included discrete net tax benefits of $163, including a benefit of $75 due to
excess benefits from stock compensation, $70 related to the special dividend payable through our 401(k)
plan, and $19 related to a reduction in the valuation allowance against certain deferred tax assets.
Excluding these benefits, the tax rate was 26.4% for 2021.
22.3 %
16,465
$
18,281
$
21,368
$
132,886
149,351
163,220 $
144,939
192,052 $
170,684
$
2019
2020
2021
Gross margin percentage
Gross margin
Less merchandise costs
Net sales
Gross Margin
Membership fees increased 9% in 2021, driven by sign-ups and upgrades to Executive membership.
Excluding the positive impact of changes in foreign currencies relative to the U.S. dollar, membership fees
increased 8%. At the end of 2021, our member renewal rates were 91% in the U.S. and Canada and 89%
worldwide. Our renewal rate is a trailing calculation that captures renewals during the period seven to
eighteen months prior to the reporting date. We account for membership fee revenue on a deferred basis,
recognized ratably over the one-year membership period.
7 %
6%
3,352
3,541 $
3,877 $
9%
11.13 %
2019
11.20 %
The gross margin of our core merchandise categories (foods and sundries, non-foods and fresh foods),
when expressed as a percentage of core merchandise sales (rather than total net sales), increased 23
basis points. This measure eliminates the impact of changes in sales penetration and gross margins from
our warehouse ancillary and other businesses. The increase was across all categories, most significantly
in non-foods.
13
$ 76 $ 55 $ 86
2019
2020
2021
Other International
Canada
Warehouse openings, including relocations
United States
Preopening expenses
Preopening
SG&A expenses as a percentage of net sales decreased 40 basis points compared to 2020. SG&A
expenses as a percentage of net sales excluding the impact of gasoline price inflation was 9.69%, a
decrease of 32 basis points. Warehouse operations and other businesses were lower by 24 basis points,
largely attributable to payroll leveraging increased sales. Incremental wages as a result of COVID-19,
which ended on February 28, 2021, were lower by eight basis points. Central operating costs were lower
by five basis points. Stock compensation expense was lower by three basis points, and costs associated
with the acquisition of Innovel were lower by one basis point. These decreases were offset by an increase
of five basis points related to a partial reversal of a product tax assessment in 2020, as well as an
increase of four basis points related to a write-off of certain information technology assets in the fourth
quarter of 2021 that are no longer expected to be utilized as part of the modernization of our information
systems. Changes in foreign currencies relative to the U.S. dollar increased our SG&A expenses by
approximately $228 in 2021.
10.04 %
10.01 %
SG&A expenses as a percentage of net sales
14,994
2019
16,332
18,461 $
9.61%
2020
2021
SG&A expenses
Selling, General and Administrative Expenses
25
Gross margin on a segment basis, when expressed as a percentage of the segment's own sales and
excluding the impact of changes in gasoline prices on net sales (segment gross margin percentage),
decreased in our U.S. segment, due to our warehouse ancillary and other businesses, our core
merchandise categories, and the LIFO charge, partially offset by the reserve for certain inventory in 2020.
Our Canadian and Other International segments increased, primarily due to our warehouse ancillary and
other businesses and certain of our core merchandise categories. These increases were partially offset by
increased 2% rewards.
Total gross margin percentage decreased seven basis points compared to 2020. Excluding the impact of
gasoline price inflation on net sales in 2021, gross margin percentage was 11.22%, an increase of two
basis points. This increase was due to a two basis point improvement in our core merchandise
categories, predominantly non-foods, and in our warehouse ancillary and other businesses, largely e-
commerce. The comparison was also positively impacted by a three basis point reserve on inventory
recorded in 2020 with no such reserve this year. Gross margin percentage was negatively impacted three
basis points due to increased 2% rewards and two basis points due to a LIFO charge for higher
merchandise costs. Changes in foreign currencies relative to the U.S. dollar positively impacted gross
margin by approximately $301 in 2021.
11.02 %
52 Weeks Ended 52 Weeks Ended
2020
Membership fees increase
41 $
89 $
126
56
27
46
(4)
25
$
143 $
92 $
178
The decrease in interest income in 2021 was primarily due to lower interest rates in the U.S. and Canada,
partially offset by higher average cash and investment balances. Foreign-currency transaction gains, net
include mark-to-market adjustments for forward foreign-exchange contracts and revaluation or settlement
of monetary assets and liabilities by our Canadian and Other International operations. See Derivatives
and Foreign Currency sections in Note 1 to the consolidated financial statements included in Item 8 of this
Report. During 2020, other, net was impacted by a $36 charge related to the repayment of certain Senior
Notes.
Provision for Income Taxes
Provision for income taxes
Effective tax rate
2021
2020
$
1,601
24.0 %
$
1,308
24.4 %
2019
1,061
2019
2021
2020
Interest income and other, net
Membership fees
Membership Fees
18
4
4
22
4
16
25
Total warehouse openings, including relocations
Preopening expenses include startup costs for new warehouses and relocations, developments in new
international markets, new manufacturing and distribution facilities, and expansions at existing
warehouses and corporate facilities. Preopening expenses vary due to the number of warehouse and
facility openings, the timing of the opening relative to our year-end, whether the warehouse is owned or
leased, and whether the opening is in an existing, new or international market.
Interest Expense
Interest expense
2021
2020
2019
$
171 $
160 $
150
Interest expense primarily relates to Senior Notes. For more information on our debt arrangements, refer
to the consolidated financial statements included in Item 8 of this Report.
26
Interest Income and Other, Net
Interest income
Foreign-currency transaction gains, net
Other, net
2021
35
83
52 Weeks Ended
$
Basic
NET INCOME PER COMMON SHARE
ATTRIBUTABLE TO COSTCO:
3,659
4,002 $
$
5,007
$
NET INCOME ATTRIBUTABLE TO COSTCO
(45)
(57)
(72)
Net income attributable to noncontrolling
interests
3,704
4,059
9.05 $
5,079
8.32
$
August 30,
2020
34
The accompanying notes are an integral part of these consolidated financial statements.
439,755
442,923
443,901
444,346
442,297
443,089
Diluted
Basic
Shares used in calculation (000's)
8.26
$
9.02
11.27 $
Diluted
Net income including noncontrolling interests
11.30 $
1,308
132,886
16,332
18,461
144,939
170,684
166,761
195,929
3,352
3,541
3,877
149,351
163,220 $
192,052 $
$
1,061
14,994
76
152,703
September 1,
2019
1,601
55
5,367
6,680
Provision for income taxes
INCOME BEFORE INCOME TAXES
178
92
4,765
(150)
(160)
(171)
4,737
5,435
6,708
86
143
1,935
41,190
36,851
COMMITMENTS AND CONTINGENCIES
EQUITY
Preferred stock $0.01 par value; 100,000,000 shares authorized;
no shares issued and outstanding
Common stock $0.01 par value; 900,000,000 shares authorized;
441,825,000 and 441,255,000 shares issued and outstanding
6,698
Additional paid-in capital
7,031
Accumulated other comprehensive loss
(1,137)
(1,297)
2,415
4
2,558
Current portion of long-term debt
TOTAL LIABILITIES
Retained earnings
Other current liabilities
Total current liabilities
2,042
1,851
799
95
2,642
4,561
3,728
24,844
OTHER LIABILITIES
Long-term debt, excluding current portion
6,692
7,514
Long-term operating lease liabilities
Other long-term liabilities
29,441
Noncontrolling interests
Total
12,879
BALANCE AT
SEPTEMBER 2, 2018
Net income
Foreign-currency translation
adjustment and other, net
Stock-based compensation
Release of vested restricted
stock units (RSUs),
including tax effects
Other
Repurchases of common stock
438,189 $
Comprehensive
Income (Loss)
Retained
Earnings
Total Costco
Stockholders'
Equity
Noncontrolling
Interests
Deferred membership fees
(791)
(000's) Amount Capital
11,666
Accumulated
Shares
17,564
18,284
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
514
18,078
421
18,705
Paid-in
59,268 $
The accompanying notes are an integral part of these consolidated financial statements.
36
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(amounts in millions)
Common Stock
Additional
55,556
1,393
OTHER ASSETS
Accrued member rewards
80
37
$
COMPREHENSIVE INCOME ATTRIBUTABLE
TO COSTCO
5,167
4,141
3,422
The accompanying notes are an integral part of these consolidated financial statements.
35
COSTCO WHOLESALE CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in millions, except par value and share data)
CURRENT ASSETS
Cash and cash equivalents
ASSETS
93
3,459
(245)
3,704
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in millions)
NET INCOME INCLUDING NONCONTROLLING
INTERESTS
Foreign-currency translation adjustment and
other, net
52 Weeks Ended
August 29,
2021
5,079
Short-term investments
52 Weeks Ended
August 30,
2020
4,059
181
162
Comprehensive income
5,260
4,221
Less: Comprehensive income attributable to
noncontrolling interests
52 Weeks Ended
September 1,
2019
Receivables, net
Merchandise inventories
Other current assets
21,807
2,890
2,788
3,381
2,841
59,268 $
55,556
23,492
LIABILITIES AND EQUITY
Accounts payable
$
16,278 $
14,172
Accrued salaries and benefits
4,090
3,605
CURRENT LIABILITIES
1,671
28,120
1,023
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Other long-term assets
TOTAL ASSETS
August 29,
2021
August 30,
2020
29,505
11,258 $
917
1,028
1,803
1,550
14,215
12,242
1,312
12,277
(536)
Total Costco stockholders' equity
(1,199) $ 7,887 $
The Company's valuation techniques used to measure the fair value of money market mutual funds are
based on quoted market prices, such as quoted net asset values published by the fund as supported in
an active market. Valuation methodologies used to measure the fair value of all other non-derivative
financial instruments are based on independent external valuation information. The pricing process uses
data from a variety of independent external valuation information providers, including trades, bid price or
spread, two-sided markets, quotes, benchmark curves including but not limited to treasury benchmarks
and LIBOR or Secured Overnight Financing Rate and swap curves, discount rates, and market data
feeds. All are observable in the market or can be derived principally from or corroborated by observable
market data. The Company reports transfers in and out of Levels 1, 2, and 3, as applicable, using the fair
40
40
value of the individual securities as of the beginning of the reporting period in which the transfer(s)
occurred.
Current financial liabilities have fair values that approximate their carrying values. Long-term financial
liabilities include the Company's long-term debt, which are recorded on the balance sheet at issuance
price and adjusted for unamortized discounts or premiums and debt issuance costs, and are being
amortized to interest expense over the term of the loan. The estimated fair value of the Company's long-
term debt is based primarily on reported market values, recently completed market transactions, and
estimates based upon interest rates, maturities, and credit.
Receivables, Net
Receivables consist primarily of vendor, reinsurance, credit card incentive, third-party pharmacy and other
receivables. Vendor receivables include discounts and volume rebates. Balances are generally presented
on a gross basis, separate from any related payable due. In certain circumstances, these receivables may
be settled against the related payable to that vendor, in which case the receivables are presented on a
net basis. Reinsurance receivables are held by the Company's wholly-owned captive insurance
subsidiary and primarily represent amounts ceded through reinsurance arrangements gross of the
amounts assumed under reinsurance, which are presented within other current liabilities in the
consolidated balance sheets. Credit card incentive receivables primarily represent amounts earned under
the co-branded credit card arrangement in the U.S. Third-party pharmacy receivables generally relate to
amounts due from members' insurers. Other receivables primarily consist of amounts due from
governmental entities, mostly tax-related items.
Receivables are recorded net of an allowance for credit losses which considers creditworthiness of
vendors and third parties, historical experience and current economic trends. Write-offs of receivables
were immaterial in 2021, 2020, and 2019.
Merchandise Inventories
Merchandise inventories consist of the following:
United States
Canada
Other International
Merchandise inventories
$
2021
2020
10,248 $
8,871
1,456
1,310
Level 3: Significant unobservable inputs that are not corroborated by market data.
2,511
14,215 $
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market
data.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Fair value is estimated by
applying a fair value hierarchy, which requires maximizing the use of observable inputs when measuring
fair value. The three levels of inputs are:
38
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data)
Note 1-Summary of Significant Accounting Policies
Description of Business
Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries
operate membership warehouses based on the concept that offering members low prices on a limited
selection of nationally-branded and private-label products in a wide range of merchandise categories will
produce high sales volumes and rapid inventory turnover. At August 29, 2021, Costco operated 815
warehouses worldwide: 564 in the United States (U.S.) located in 46 states, Washington, D.C., and
Puerto Rico, 105 in Canada, 39 in Mexico, 30 in Japan, 29 in the United Kingdom (U.K.), 16 in Korea, 14
in Taiwan, 12 in Australia, three in Spain, and one each in Iceland, France and China. The Company
operates e-commerce websites in the U.S., Canada, U.K., Mexico, Korea, Taiwan, Japan, and Australia.
Basis of Presentation
The consolidated financial statements include the accounts of Costco, its wholly-owned subsidiaries, and
subsidiaries in which it has a controlling interest. The Company reports noncontrolling interests in
consolidated entities as a component of equity separate from the Company's equity. All material inter-
company transactions between and among the Company and its consolidated subsidiaries have been
eliminated in consolidation. The Company's net income excludes income attributable to the noncontrolling
interest in Taiwan. Unless otherwise noted, references to net income relate to net income attributable to
Costco.
Fiscal Year End
The Company operates on a 52/53-week fiscal year basis with the year ending on the Sunday closest to
August 31. References to 2021, 2020, and 2019 relate to the 52-week fiscal years ended August 29,
2021, August 30, 2020, and September 1, 2019, respectively.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles
(U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. These
estimates and assumptions take into account historical and forward-looking factors that the Company
believes are reasonable, including but not limited to the potential impacts arising from the novel
coronavirus (COVID-19) and related public and private sector policies and initiatives. Actual results could
differ from those estimates and assumptions.
Cash and Cash Equivalents
The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with
a maturity of three months or less at the date of purchase, and proceeds due from credit and debit card
transactions with settlement terms of up to four days. Credit and debit card receivables were $1,816 and
$1,636 at the end of 2021 and 2020, respectively.
39
The Company provides for the daily replenishment of major bank accounts as payments are presented.
Included in accounts payable at the end of 2021 and 2020, are $999 and $810, respectively, representing
the excess of outstanding payments over cash on deposit at the banks on which the payments were
drawn.
Short-Term Investments
Short-term investments generally consist of debt securities (U.S. Government and Agency Notes), with
maturities at the date of purchase of three months to five years. Investments with maturities beyond five
years may be classified, based on the Company's determination, as short-term based on their highly
liquid nature and because they represent the investment of cash that is available for current operations.
Short-term investments classified as available-for-sale are recorded at fair value using the specific
identification method with the unrealized gains and losses reflected in accumulated other comprehensive
income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities, if any,
are determined on a specific identification basis and are recorded in interest income and other, net in the
consolidated statements of income. These available-for-sale investments have a low level of inherent
credit risk given they are issued by the U.S. Government and Agencies. Changes in their fair value are
primarily attributable to changes in interest rates and market liquidity. Short-term investments classified as
held-to-maturity are financial instruments that the Company has the intent and ability to hold to maturity
and are reported net of any related amortization and are not remeasured to fair value on a recurring
basis.
The Company periodically evaluates unrealized losses in its investment securities for credit impairment,
using both qualitative and quantitative criteria. In the event a security is deemed to be impaired as the
result of a credit loss, the Company recognizes the loss in interest income and other, net in the
consolidated statements of income.
Fair Value of Financial Instruments
The Company accounts for certain assets and liabilities at fair value. The carrying value of the Company's
financial instruments, including cash and cash equivalents, receivables and accounts payable,
approximate fair value due to their short-term nature or variable interest rates. See Notes 3, 4, and 5 for
the carrying value and fair value of the Company's investments, derivative instruments, and fixed-rate
debt, respectively.
Level 1: Quoted market prices in active markets for identical assets or liabilities.
The accompanying notes are an integral part of these consolidated financial statements.
2,061
Merchandise inventories are stated at the lower of cost or market. U.S. merchandise inventories are
valued by the cost method of accounting, using the last-in, first-out (LIFO) basis. The Company believes
the LIFO method more fairly presents the results of operations by more closely matching current costs
with current revenues. The Company records an adjustment each quarter, if necessary, for the projected
annual effect of inflation or deflation, and these estimates are adjusted to actual results determined at
year-end, after actual inflation or deflation rates and inventory levels have been determined. An
immaterial charge was recorded to merchandise costs to increase the cumulative LIFO valuation on
merchandise inventories at August 29, 2021. As of August 30, 2020, U.S. merchandise inventories valued
at LIFO approximated first-in, first-out (FIFO) after considering the lower of cost or market principle.
Canadian and Other International merchandise inventories are predominantly valued using the cost and
retail inventory methods, respectively, using the FIFO basis.
37,658
34,703
(14,166)
(12,896)
$
23,492 $
Accumulated depreciation and amortization
Property and equipment, net
21,807
The Company evaluates long-lived assets for impairment on an annual basis, when relocating or closing
a facility, or when events or changes in circumstances may indicate the carrying amount of the asset
group, generally an individual warehouse, may not be fully recoverable. For asset groups held and used,
including warehouses to be relocated, the carrying value of the asset group is considered recoverable
when the estimated future undiscounted cash flows generated from the use and eventual disposition of
the asset group exceed the respective carrying value. In the event that the carrying value is not
considered recoverable, an impairment loss is recognized for the asset group to be held and used equal
to the excess of the carrying value above the estimated fair value of the asset group. For asset groups
classified as held-for-sale (disposal group), the carrying value is compared to the disposal group's fair
value less costs to sell. The Company estimates fair value by obtaining market appraisals from third party
brokers or using other valuation techniques. Impairment charges recognized in 2021 were immaterial.
There were no impairment charges recognized in 2020 or 2019.
Leases
The Company leases land and/or buildings at warehouses and certain other office and distribution
facilities. Leases generally contain one or more of the following options, which the Company can exercise
at the end of the initial term: (a) renew the lease for a defined number of years at the then-fair market
rental rate or rate stipulated in the lease agreement; (b) purchase the property at the then-fair market
value; or (c) a right of first refusal in the event of a third-party offer.
42
42
Some leases include free-rent periods and step-rent provisions, which are recognized on a straight-line
basis over the original term of the lease and any extension options that the Company is reasonably
certain to exercise from the date the Company has control of the property. Certain leases provide for
periodic rent increases based on price indices or the greater of minimum guaranteed amounts or sales
volume. Our leases do not contain any material residual value guarantees or material restrictive
covenants.
The Company determines at inception whether a contract is or contains a lease. The Company initially
records right-of-use (ROU) assets and lease obligations for its finance and operating leases based on the
discounted future minimum lease payments over the term. The lease term is defined as the
noncancelable period of the lease plus any options to extend when it is reasonably certain that the
Company will exercise the option. As the rate implicit in the Company's leases is not easily determinable,
the present value of the sum of the lease payments is calculated using the Company's incremental
borrowing rate. The rate is determined using a portfolio approach based on the rate of interest the
Company would pay to borrow an amount equal to the lease payments on a collateralized basis over a
similar term. The Company uses quoted interest rates from financial institutions to derive the incremental
borrowing rate. Impairment of ROU assets is evaluated in a similar manner as described in Property and
Equipment, net above.
The Company's asset retirement obligations (ARO) primarily relate to leasehold improvements that at the
end of a lease must be removed. These obligations are generally recorded as a discounted liability, with
an offsetting asset at the inception of the lease term based upon the estimated fair value of the costs to
remove the improvements. These liabilities are accreted over time to the projected future value of the
obligation. The ARO assets are depreciated using the same depreciation method as the leasehold
improvement assets and are included with buildings and improvements. Estimated ARO liabilities
associated with these leases are included in other liabilities in the accompanying consolidated balance
sheet.
Goodwill and Acquired Intangible Assets
Goodwill represents the excess of acquisition cost over the fair value of the net assets acquired and is not
subject to amortization. The Company reviews goodwill annually in the fourth quarter for impairment or
when circumstances indicate carrying value may exceed the fair value. This evaluation is performed at
the reporting unit level. If a qualitative assessment indicates that it is more likely than not that the fair
value is less than carrying value, a quantitative analysis is completed using either the income or market
approach, or a combination of both. The income approach estimates fair value based on expected
discounted future cash flows, while the market approach uses comparable public companies and
transactions to develop metrics to be applied to historical and expected future operating results.
Goodwill is included in other long-term assets in the consolidated balance sheets. The following table
summarizes goodwill by reportable segment:
United
States
Operations
1,276
12,242
1,507
8,749
The Company provides for estimated inventory losses between physical inventory counts using estimates
based on experience. The provision is adjusted periodically to reflect physical inventory counts, which
generally occur in the second and fourth fiscal quarters. Inventory cost, where appropriate, is reduced by
estimates of vendor rebates when earned or as the Company progresses towards earning those rebates,
provided that they are probable and reasonably estimable.
41
11
Property and Equipment, Net
Property and equipment are stated at cost. Depreciation and amortization expense is computed primarily
using the straight-line method over estimated useful lives. Leasehold improvements made after the
beginning of the initial lease term are depreciated over the shorter of the estimated useful life of the asset
or the remaining term of the initial lease plus any renewals that are reasonably certain at the date the
leasehold improvements are made.
The Company capitalizes certain computer software and costs incurred in developing or obtaining
software for internal use. During development, these costs are included in construction in progress. To the
extent that the assets become ready for their intended use, these costs are included in equipment and
fixtures and amortized on a straight-line basis over their estimated useful lives. In the fourth quarter of
2021, the Company recognized an $84 write-off of certain information technology assets, which was
recorded in selling, general and administrative expenses, in the consolidated statements of income.
Repair and maintenance costs are expensed when incurred. Expenditures for remodels, refurbishments
and improvements that add to or change the way an asset functions or that extend the useful life are
capitalized. Assets removed during the remodel, refurbishment or improvement are retired. Assets
classified as held-for-sale at the end of 2021 and 2020 were immaterial. The following table summarizes
the Company's property and equipment balances at the end of 2021 and 2020:
Land
Buildings and improvements
Equipment and fixtures
Construction in progress
Estimated Useful
Lives
2021
2020
N/A
7,507 $
6,696
5-50 years
19,139
17,982
3-20 years
9,505
N/A
Canadian
Operations
286
$
Acquisitions
(1,163)
Other investing activities, net
(62)
30
Net cash used in investing activities
(3,535)
(3,891)
(4)
(2,865)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in bank payments outstanding
188
137
210
Proceeds from short-term borrowings
41
Proceeds from issuance of long-term debt
3,992
298
Repayments of long-term debt
(94)
(2,998)
(3,200)
(2,810)
Additions to property and equipment
Equity
Accounts payable
1,838
2,261
322
Other operating assets and liabilities, net
1,057
728
623
Net cash provided by operating activities
8,958
8,861
6,356
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments
(1,331)
(1,626)
(1,094)
Maturities and sales of short-term investments
1,446
1,678
1,231
(3,588)
- $ - $
(89)
(312)
2,329
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR
12,277
8,384
6,055
CASH AND CASH EQUIVALENTS END OF YEAR
$
11,258 $
12,277
$
8,384
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
$
Income taxes, net
$
149 $
1,527 $
124 $
1,052 $
141
1,187
Cash dividend declared, but not yet paid
3,893
Tax withholdings on stock-based awards
(1,019)
(15)
(330)
(272)
Repurchases of common stock
(496)
(196)
(247)
Cash dividend payments
(5,748)
(1,479)
(1,038)
Other financing activities, net
(67)
(71)
(9
Net cash used in financing activities
(6,488)
(1,147)
(1,147)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS
46
70
Net change in cash and cash equivalents
Other
International
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Total
441,255
(1,193)
(1,193)
(1,193)
(198)
(198)
(188)
(330)
(330)
621
162
23
21
621
|8
Net income
AUGUST 30, 2020
BALANCE AT
Cash dividends declared
(10)
(643)
4
Repurchases of common stock
6,698
12,879
Cash dividends declared
(23)
(312)
1,928
(1,358)
Repurchases of common stock
including tax effects
Release of vested RSUs,
668
Stock-based compensation
160
441,825
adjustment and other, net
Foreign-currency translation
5,079
72
18,705
རྒྱས
5,007
5,007
421
18,284
(1,297)
BALANCE AT
2,273
621
Cash dividends declared and
(247)
(247)
(231)
(272)
(272)
(272) - -
(16)
2,533
(1,097)
:== 598 (237) =
4 $ 6,107 $
----3,659
598
(245)
(8)
(237)
598
3,704
45
3,659
Operations
12,799 $
$ 13,103
304
other
Release of vested RSUs,
_ _____ _ _ (1,057) _
(1,057)
Stock-based compensation
including tax effects
139
139
Foreign-currency translation
adjustment and other, net
4,059
57
5
4,002
4,002
15,584
341
15,243
10,258
(1,436)
6,417
4
439,625
Net income
SEPTEMBER 1, 2019
BALANCE AT
(1,057)
AUGUST 29, 2021
(330)
21
15 $
(1) Other consists of changes to the purchase price allocation. See Note 2.
43
Definite-lived intangible assets, which are not material, are included in other long-term assets on the
consolidated balance sheets and are amortized on a straight-line basis over their estimated lives, which
approximates the pattern of expected economic benefit.
Insurance/Self-insurance Liabilities
Claims for employee health care benefits, workers' compensation, general liability, property damage,
directors' and officers' liability, vehicle liability, inventory loss, and other exposures are funded
predominantly through self-insurance. Insurance coverage is maintained for certain risks to limit
exposures arising from very large losses. The Company uses different risk management mechanisms,
including a wholly-owned captive insurance subsidiary (the captive) and participates in a reinsurance
program. Liabilities associated with the risks that are retained by the Company are not discounted and are
estimated, in part, by considering historical claims experience, demographic factors, severity factors, and
other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if
future occurrences and claims differ from these assumptions and historical trends. At the end of 2021 and
2020, these insurance liabilities were $1,257 and $1,188 in the aggregate, respectively, and were
included in accrued salaries and benefits and other current liabilities in the consolidated balance sheets,
classified based on their nature.
The captive receives direct premiums, which are netted against the Company's premium costs in selling,
general and administrative expenses, in the consolidated statements of income. The captive participates
in a reinsurance program that includes other third-party participants. The reinsurance agreement is one
year in duration, and new agreements are entered into by each participant at their discretion at the
commencement of the next calendar year. The participant agreements and practices of the reinsurance
program limit a participating members' individual risk. Income statement adjustments related to the
reinsurance program and related impacts to the consolidated balance sheets are recognized as
information becomes known. In the event the Company leaves the reinsurance program, the Company
retains its primary obligation to the policyholders for prior activity.
Derivatives
The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of
business. It manages these fluctuations, in part, through the use of forward foreign-exchange contracts,
seeking to economically hedge the impact of fluctuations of foreign exchange on known future
expenditures denominated in a non-functional foreign-currency. The contracts relate primarily to U.S.
dollar merchandise inventory expenditures made by the Company's international subsidiaries with
functional currencies other than the U.S. dollar. Currently, these contracts do not qualify for derivative
hedge accounting. The Company seeks to mitigate risk with the use of these contracts and does not
intend to engage in speculative transactions. Some of these contracts contain credit-risk-related
contingent features that require settlement of outstanding contracts upon certain triggering events. There
were no derivative instruments in a net liability position at the end of 2021 and for those in a net liability
position at the end of 2020, the amount needed to settle the instruments immediately if the credit-risk-
related contingent features were triggered was immaterial. The aggregate notional amounts of open,
unsettled forward foreign-exchange contracts were $1,331 and $1,036 at the end of 2021 and 2020,
respectively. See Note 4 for information on the fair value of unsettled forward foreign-exchange contracts
at the end of 2021 and 2020.
The unrealized gains or losses recognized in interest income and other, net in the accompanying
consolidated statements of income relating to the net changes in the fair value of unsettled forward
foreign-exchange contracts were immaterial in 2021, 2020 and 2019.
The Company is exposed to fluctuations in prices for energy, particularly electricity and natural gas, and
other commodity products used in retail and manufacturing operations, which it seeks to partially mitigate
through the use of fixed-price contracts for certain of its warehouses and other facilities, primarily in the
U.S. and Canada. The Company also enters into variable-priced contracts for some purchases of natural
gas, in addition to fuel for its gas stations, on an index basis. These contracts meet the characteristics of
44
(1,892)
Merchandise inventories
Changes in operating assets and liabilities:
147
104
59
9
42
85
28 $
953 $
$
Balance at August 29, 2021
$
13
$
160
Balance at September 1, 2019
27
$
13 $
53
Changes in currency translation
595
1
Acquisition
934
934
Balance at August 30, 2020
Changes in currency translation and other (1)
947 $
6
27 $
14 $
988
1
1
619
996
665
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
37
The accompanying notes are an integral part of these consolidated financial statements.
$ 18,078
514
17,564 $
11,666 $
7,031 $
$
4
$
(5,748)
(5,748)
(495)
(495)
(472)
(5,748)
(312)
(312)
668
668
181
(amounts in millions)
CASH FLOWS FROM OPERATING ACTIVITIES
(1,137) $
Adjustments to reconcile net income including noncontrolling interests
194
286
1,492
Net income including noncontrolling interests
1,645
1,781
Deferred income taxes
Other non-cash operating activities, net
Non-cash lease expense
Depreciation and amortization
to net cash provided by operating activities:
Stock-based compensation
$
52 Weeks
Ended
August 29,
2021
52 Weeks
Ended
August 30,
2020
3,704
September 1,
2019
$
52 Weeks
Ended
4,059
5,079 $
1,000
800
1,250
1,000
1,000
800 $
1,000
1,250
2020
1,750
Total long-term debt
1.750% Senior Notes due April 2032
1,000
1,000
Other long-term debt
731
857
7,531
Less unamortized debt discounts and issuance costs
2021
7,657
1,750
2.300% Senior Notes due May 2022
2.750% Senior Notes due May 2024
3.000% Senior Notes due May 2027
1.375% Senior Notes due June 2027
1.600% Senior Notes due April 2030
1
In April 2020, the Company issued $4,000 in aggregate principal amount of Senior Notes as follows:
$1,250 of 1.375% due June 2027; $1,750 of 1.600% due April 2030; and $1,000 of 1.750% due April
2032. In May 2020, a portion of the proceeds from the issuance were used to repay, prior to maturity, the
outstanding $1,000 and $500 principal balances and interest on the 2.150% and 2.250% Senior Notes,
respectively. The early redemption resulted in a $36 charge which was recorded in interest income and
other, net in 2020.
393 $
17
40
508
2020
(2)
(21)
408 $
488
(1) At August 29, 2021, $12 cash and cash equivalents and $381 short-term investments are included in the accompanying
consolidated balance sheets. At August 30, 2020, $60 cash and cash equivalents and $448 short-term investments are
included in the consolidated balance sheets.
(2) The asset and the liability values are included in other current assets and other current liabilities, respectively, in the
consolidated balance sheets.
At the end of 2021 and 2020, the fair value of the Company's long-term debt, including the current portion,
was approximately $7,692 and $7,987, respectively. The carrying value of long-term debt consisted of the
following:
At August 29, 2021, and August 30, 2020, the Company did not hold any Level 1 or 3 financial assets or
liabilities that were measured at fair value on a recurring basis. There were no transfers between levels
during 2021 or 2020.
2021
Assets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as
financial assets measured at amortized cost and long-lived nonfinancial assets. These assets are
measured at fair value if determined to be impaired. Fair value adjustments to nonfinancial assets during
2021 were immaterial and there were no fair value adjustments to these items during 2020.
Note 5-Debt
Short-Term Borrowings
The Company maintains various short-term bank credit facilities, with a borrowing capacity of $1,050 and
$967, in 2021 and 2020, respectively. Borrowings on these short-term facilities were immaterial during
2021 and 2020. Short-term borrowings outstanding were $41 at the end of 2021. There were no
outstanding balances at the end of 2020.
Long-Term Debt
The Company's long-term debt consists primarily of Senior Notes, described below. The Company at its
option may redeem the Senior Notes at any time, in whole or in part, at a redemption price plus accrued
interest. The redemption price is equal to the greater of 100% of the principal amount or the sum of the
present value of the remaining scheduled payments of principal and interest to maturity. Additionally, upon
certain events, the holder has the right to require the Company to purchase this security at a price of
101% of the principal amount plus accrued and unpaid interest to the date of the event. Interest on all
outstanding long-term debt is payable semi-annually. The estimated fair value of Senior Notes is valued
using Level 2 inputs.
449
49
Other long-term debt consists of Guaranteed Senior Notes issued by the Company's Japanese
subsidiary, valued using Level 3 inputs. In June 2021, the Japanese subsidiary repaid approximately $94
of its Guaranteed Senior Notes.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
48
$
799
Operating lease right-of-use assets
Finance lease assets (1)
Total lease assets
Liabilities
Current
Operating lease liabilities (2)
Finance lease liabilities (2)
Long-term
Operating lease liabilities
Finance lease liabilities (3)
Total lease liabilities
Assets
(1) Included in other long-term assets in the consolidated balance sheets.
(2) Included in other current liabilities in the consolidated balance sheets.
(3) Included in other long-term liabilities in the consolidated balance sheets.
Operating leases
Finance leases
Weighted-average discount rate
Operating leases
EA
2021
2020
2,890 $
1,000
Level 2
2,788
Weighted-average remaining lease term (years)
The tables below present information regarding the Company's lease assets and liabilities.
Note 6-Leases
7,531
95
Long-term debt, excluding current portion
6,692 $
7,514
(1) Net of unamortized debt discounts and issuance costs.
Maturities of long-term debt during the next five fiscal years and thereafter are as follows:
2022
2023
2024
2025
2026
Thereafter
Total
50
50
$
800
91
1,109
136
100
5,295
$
Less current portion (1)
$
Basis
Investment in government and agency securities (1)
Forward foreign-exchange contracts, in asset position (2)
Forward foreign-exchange contracts, in (liability) position (2)
Preopening expenses include startup costs for new warehouses and relocations, developments in new
international markets, new manufacturing and distribution facilities, and expansions at existing
warehouses and corporate facilities and are expensed as incurred.
Preopening Expenses
Stock-based compensation expense is predominantly included in selling, general and administrative
expenses in the consolidated statements of income. Certain stock-based compensation costs are
capitalized or included in the cost of merchandise. See Note 8 for additional information on the
Company's stock-based compensation plans.
Compensation expense for stock-based awards is predominantly recognized using the straight-line
method over the requisite service period for the entire award. Awards for employees and non-employee
directors provide for accelerated vesting based on cumulative years of service with the Company.
Compensation expense for the accelerated shares is recognized upon achievement of the long-service
term. The cumulative amount of compensation cost recognized at any point in time equals at least the
portion of the grant-date fair value of the award that is vested at that date. The fair value of RSUs is
calculated as the market value of the common stock on the measurement date less the present value of
the expected dividends forgone during the vesting period.
46
46
RSUS granted to employees generally vest over five years and allow for quarterly vesting of the pro-rata
number of stock-based awards that would vest on the next anniversary of the grant date in the event of
retirement or voluntary termination. Actual forfeitures are recognized as they occur.
Stock-Based Compensation
The Company's 401(k) retirement plan is available to all U.S. employees over the age of 18 who have
completed 90 days of employment. The plan allows participants to make wage deferral contributions, a
portion of which the Company matches. In addition, the Company provides each eligible participant an
annual discretionary contribution. The Company also has a defined contribution plan for Canadian
employees and contributes a percentage of each employee's wages. Certain subsidiaries in the
Company's Other International operations have defined benefit and defined contribution plans, which are
not material. Amounts expensed under all plans were $748, $676, and $614 for 2021, 2020, and 2019,
respectively, and are predominantly included in selling, general and administrative expenses in the
consolidated statements of income.
Retirement Plans
Income Taxes
Selling, general and administrative expenses consist primarily of salaries, benefits and workers'
compensation costs for warehouse employees (other than fresh foods departments and certain ancillary
businesses which are reflected in merchandise costs) as well as all regional and home office employees,
including buying personnel. Selling, general and administrative expenses also include substantially all
building and equipment depreciation, stock compensation expense, credit and debit card processing fees,
utilities, as well as other operating costs incurred to support warehouse and e-commerce website
operations.
The Company has agreements to receive funds from vendors for discounts and a variety of other
programs. These programs are evidenced by signed agreements that are reflected in the carrying value
of the inventory when earned or as the Company progresses towards earning the rebate or discount, and
as a component of merchandise costs as the merchandise is sold. Other vendor consideration is
generally recorded as a reduction of merchandise costs upon completion of contractual milestones, terms
of the related agreement, or by another systematic approach.
Vendor Consideration
Merchandise costs consist of the purchase price or manufacturing costs of inventory sold, inbound and
outbound shipping charges and all costs related to the Company's depot, fulfillment and manufacturing
operations, including freight from depots to selling warehouses, and are reduced by vendor consideration.
Merchandise costs also include salaries, benefits, depreciation, and utilities in fresh foods and certain
ancillary departments.
Merchandise Costs
Citibank, N.A. became the exclusive issuer of co-branded credit cards to U.S. members in June
2016. The Company receives various forms of consideration, including a royalty on purchases made on
the card outside of Costco, a portion of which, after giving rise to estimated breakage, is used to fund the
rebate that cardholders receive. The rebates are issued in February and expire on December 31.
Breakage is estimated based on redemption data.
The Company sells and otherwise provides proprietary shop cards that do not expire and are redeemable
at the warehouse or online for merchandise or membership. Revenue from shop cards is recognized
upon redemption, and estimated breakage is recognized based on redemption data. The Company
accounts for outstanding shop card balances as a shop card liability, net of estimated breakage. Shop
card liabilities are included in other current liabilities in the consolidated balance sheets.
45
5
In most countries, the Company's Executive members qualify for a 2% reward on qualified purchases,
subject to an annual maximum value, which does not expire and can be redeemed only at Costco
warehouses. The Company accounts for this reward as a reduction in sales, net of the estimated impact
of non-redemptions (breakage), with the corresponding liability classified as accrued member rewards in
the consolidated balance sheets. Estimated breakage is computed based on redemption data. For 2021,
2020, and 2019, the net reduction in sales was $2,047, $1,707, and $1,537 respectively.
The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the
one-year membership period. Deferred membership fees at the end of 2021 and 2020 were $2,042 and
$1,851, respectively.
Selling, General and Administrative Expenses
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributed to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits
and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences and carry-forwards
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A valuation allowance is
established when necessary to reduce deferred tax assets to amounts that are more likely than not
expected to be realized.
The timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax
positions requires significant judgment. The benefits of uncertain tax positions are recorded in the
Company's consolidated financial statements only after determining a more-likely-than-not probability that
the uncertain tax positions will withstand challenge from tax authorities. When facts and circumstances
change, the Company reassesses these probabilities and records any changes as appropriate.
Net Income per Common Share Attributable to Costco
592
Held-to-maturity:
381
6 $
375 $
$
Government and agency securities
Available-for-sale:
Gains, Net
Recorded
Unrealized
Basis
Cost
2021:
The Company's investments were as follows:
Note 3-Investments
The net purchase price of $999 has been allocated to the tangible and intangible assets of $294 and
liabilities assumed of $235, based on fair values on the acquisition date. The remaining unallocated net
purchase price of $940 was recorded as goodwill. Goodwill represents the acquisition's benefits to the
Company, which include the ability to serve more members and improve delivery times, enabling growth
in certain segments of our U.S. e-commerce operations. The Company assigned this goodwill, which is
deductible for tax purposes, to reporting units within the U.S. segment. Changes to the purchase price
allocation originally recorded in 2020 were not material.
On March 17, 2020, the Company acquired Innovel Solutions for $999, using existing cash and cash
equivalents. Innovel (now known as Costco Wholesale Logistics or CWL) provides final-mile delivery,
installation and white-glove capabilities for big and bulky products in the United States and Puerto Rico.
Its financial results have been included in the Company's consolidated financial statements from the date
of acquisition.
Note 2-Acquisition of Innovel
47
Repurchased shares of common stock are retired, in accordance with the Washington Business
Corporation Act. The par value of repurchased shares is deducted from common stock and the excess
repurchase price over par value is deducted by allocation to additional paid-in capital and retained
earnings. The amount allocated to additional paid-in capital is the current value of additional paid-in
capital per share outstanding and is applied to the number of shares repurchased. Any remaining amount
is allocated to retained earnings. See Note 7 for additional information.
Stock Repurchase Programs
The computation of basic net income per share uses the weighted average number of shares that were
outstanding during the period. The computation of diluted net income per share uses the weighted
average number of shares in the basic net income per share calculation plus the number of common
shares that would be issued assuming vesting of all potentially dilutive common shares outstanding using
the treasury stock method for shares subject to RSUs.
The Company is the principal for the majority of its transactions and recognizes revenue on a gross basis.
The Company is the principal when it has control of the merchandise or service before it is transferred to
the member, which generally is established when Costco is primarily responsible for merchandising
decisions, maintains the relationship with the member, including assurance of member service and
satisfaction, and has pricing discretion.
Total
The Company offers merchandise in the following core merchandise categories: foods and sundries, non-
foods (previously hardlines and softlines), and fresh foods. The Company also provides expanded
products and services through warehouse ancillary and other businesses. The majority of revenue from
merchandise sales is recognized at the point of sale. Revenue generated through e-commerce or special
orders is generally recognized upon shipment to the member. For merchandise shipped directly to the
member, shipping and handling costs are expensed as incurred as fulfillment costs and included in
merchandise costs in the consolidated statements of income. In certain ancillary businesses, revenue is
deferred until the member picks up merchandise at the warehouse. Deferred sales are included in other
current liabilities in the consolidated balance sheets.
Revenue Recognition
Gross unrecognized holding gains and losses on available-for-sale securities were not material for the
years ended August 29, 2021, and August 30, 2020. At the end of 2021 and 2020, there were no
available-for-sale securities in a continuous unrealized-loss position. There were no sales of available-for-
sale securities during 2021 or 2020.
The maturities of available-for-sale and held-to-maturity securities at the end of 2021 are as follows:
Available-For-Sale
Cost Basis
Fair Value
Held-To-Maturity
Due in one year or less
$
190 $
Due after one year through five years
1,028
185
536
Total
$
375 $
381 $
536
48
Note 4-Fair Value Measurement
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The table below presents information regarding the Company's financial assets and financial liabilities
that are measured at fair value on a recurring basis and indicate the level within the hierarchy reflecting
the valuation techniques utilized to determine such fair value.
191 $
190
12 $
580
580
1,016 $
The Company recognizes foreign-currency transaction gains and losses related to revaluing or settling
monetary assets and liabilities denominated in currencies other than the functional currency in interest
income and other, net in the consolidated statements of income. Generally, these include the U.S. dollar
cash and cash equivalents and the U.S. dollar payables of consolidated subsidiaries revalued to their
functional currency. Also included are realized foreign-currency gains or losses from settlements of
forward foreign-exchange contracts. These items were immaterial in 2021, 2020, and 2019.
The functional currencies of the Company's international subsidiaries are the local currency of the country
in which the subsidiary is located. Assets and liabilities recorded in foreign currencies are translated at the
exchange rate on the balance sheet date. Translation adjustments are recorded in accumulated other
comprehensive loss. Revenues and expenses of the Company's consolidated foreign operations are
translated at average exchange rates prevailing during the year.
Foreign Currency
derivative instruments, but generally qualify for the “normal purchases and normal sales" exception under
authoritative guidance and require no mark-to-market adjustment.
536
Total short-term investments
$
911 $
6
917
2020:
Available-for-sale:
Government and agency securities
Held-to-maturity:
Certificates of deposit
Total short-term investments
Cost
Basis
Unrealized
Gains, Net
Recorded
Basis
436 $
12 $
448
$
The Company adopted Accounting Standards Update (ASU) 2014-09 in 2019, which provided for
changes in the recognition of revenue from contracts with customers. The Company recognizes sales for
the amount of consideration collected from the member, which includes gross shipping fees where
applicable, and is net of sales taxes collected and remitted to government agencies and member returns.
The Company reserves for estimated returns based on historical trends in merchandise returns and
reduces sales and merchandise costs accordingly. The Company records, on a gross basis, a refund
liability and an asset for recovery, which are included in other current liabilities and other current assets,
respectively, in the consolidated balance sheets.
3,890 $
536
2021
Total Cost
1,358 $
643
364.39 $
308.45
495
198
247
1,097
225.16
These amounts may differ from repurchases of common stock in the consolidated statements of cash
flows due to changes in unsettled stock repurchases at the end of each fiscal year. Purchases are made
from time to time, as conditions warrant, in the open market or in block purchases and pursuant to plans
under SEC Rule 10b5-1.
Note 8-Stock-Based Compensation
The Company grants stock-based compensation, primarily to employees and non-employee directors.
Grants to all executive officers are generally performance-based. Through a series of shareholder
approvals, there have been amended and restated plans and new provisions implemented by the
Company. RSUs are subject to quarterly vesting upon retirement or voluntary termination. Employees
who attain at least 25 years of service with the Company receive shares under accelerated vesting
provisions on the annual vesting date. The 2019 Incentive Plan authorized the issuance
of 17,500,000 shares (10,000,000 RSUs) of common stock for future grants, plus the remaining shares
that were available for grant and the future forfeited shares from grants under the previous plan, up to a
maximum aggregate of 27,800,000 shares (15,885,000 RSUs). The Company issues new shares of
common stock upon vesting of RSUs. Shares for vested RSUs are generally delivered to participants
annually, net of shares withheld for taxes.
In conjunction with a special cash dividend paid in the second quarter of 2021, and in accordance with the
plans, the number of shares subject to outstanding RSUs was increased on the dividend record date to
preserve their value. They were adjusted by multiplying the number of outstanding shares by a factor of
1.019 (rounded up to a whole share), representing the ratio of the Nasdaq closing price of $391.77 on
November 30, 2020, which was the last trading day immediately prior to the ex-dividend date, to the
Nasdaq opening price of $384.50 on the ex-dividend date, December 1, 2020. The outstanding RSUs
increased by approximately 94,000. The adjustment did not result in additional stock-based compensation
expense, as the fair value of the awards did not change. As further required by the plans, the maximum
number of shares issuable was proportionally adjusted, which resulted in an additional 220,000 RSU
shares available to be granted.
53
Summary of Restricted Stock Unit Activity
RSUS granted to employees and to non-employee directors generally vest over five and three years,
respectively. Additionally, the terms of the RSUs, including performance-based awards, provide for
accelerated vesting for employees and non-employee directors who have attained 25 or more and five or
more years of service with the Company, respectively. Recipients are not entitled to vote or receive
dividends on unvested and undelivered shares. At the end of 2021, 12,001,000 shares were available to
be granted as RSUs under the 2019 Incentive Plan.
The following awards were outstanding at the end of 2021:
•
Share
(000's)
Average
Price per
Shares
Repurchased
2,507
1,070
3,655
1,589
791
537
$
2,864 $
•
1,052
529
52
Note 7-Equity
Dividends
Cash dividends declared in 2021 totaled $12.98 per share, as compared to $2.70 per share in 2020.
Dividends in 2021 included a special dividend of $10.00 per share, resulting in an aggregate payment of
approximately $4,430. The Company's current quarterly dividend rate is $0.79 per share.
Stock Repurchase Programs
3,380
2021
2020
2019
(1) Operating lease payments have not been reduced by future sublease income of $99.
(2) Excludes $665 of lease payments for leases that have been signed but not commenced.
Less amount representing interest
Present value of lease liabilities
4,218,000 time-based RSUs, which vest upon continued employment or service over specified
periods of time; and
The following table summarizes RSU transactions during 2021:
2021
2020
2019
Stock-based compensation expense
Less recognized income tax benefit
665 $
140
619 $
595
128
128
Stock-based compensation expense, net
$
525 $
491 $
467
54
54
Certificates of deposit
The following table summarizes stock-based compensation expense and the related tax benefits:
Summary of Stock-Based Compensation
The weighted-average grant date fair value of RSUs granted was $369.15, $294.08, and $224.00 in 2021,
2020, and 2019, respectively. The remaining unrecognized compensation cost related to non-vested
RSUs at the end of 2021 was $728 and the weighted-average period of time over which this cost will be
recognized is 1.6 years. Included in the outstanding balance at the end of 2021 were approximately
1,516,000 RSUs vested but not yet delivered.
257.88
Outstanding at the end of 2020
Granted
Vested and delivered
Forfeited
Special cash dividend
Outstanding at the end of 2021
Number of
Units
(in 000's)
Weighted-Average
Grant Date Fair
Value
131,000 performance-based RSUs, of which 104,000 were granted to executive officers subject to
the determination of the attainment of performance targets for 2021. This determination occurred
in September 2021, at which time at least 33% of the units vested, as a result of the long service
of all executive officers. The remaining awards vest upon continued employment over specified
periods of time.
5,174 $
(2,764)
(137)
94
4,349 $
207.55
369.15
235.64
253.53
N/A
1,982
Total (2)
The Company's stock repurchase program is conducted under a $4,000 authorization by the Board of
Directors, which expires in April 2023. As of the end of 2021, the remaining amount available under the
approved plan was $3,250. The following table summarizes the Company's stock repurchase activity:
74
Thereafter
Finance lease costs:
Amortization of lease assets (1)
Interest on lease liabilities (2)
Variable lease costs (3)
Total lease costs
2021
2020
296 $
252
50
31
37
33
151
87
$
The components of lease expense, excluding short-term lease costs and sublease income (which were
not material), were as follows:
6.34 %
2.23 %
4.91 %
222 $
231
72
31
2,642
2,558
980
657
534 $
3,916 $
21
22
2020
22
21
20
Finance leases
2.16%
3,477
403
Operating lease costs (1)
(3) Included in selling, general and administrative expenses and merchandise costs in the consolidated statements of income.
As of August 29, 2021, future minimum payments during the next five fiscal years and thereafter are as
follows:
Operating Leases (1)
Finance Leases
2022
2023
2024
2026
260
317
$
273
92
232
87
191
159
(1) Included in selling, general and administrative expenses and merchandise costs in the consolidated statements of income.
(2) Included in interest expense in the consolidated statements of income.
192
107
399
2025
354
51
Leased assets obtained in exchange for finance lease liabilities
2021
2020
Cash paid for amounts included in the measurement of lease
liabilities:
Operating cash flows — operating leases
Operating cash flows - finance leases
$
282 $
Supplemental cash flow information related to leases was as follows:
37
33
Financing cash flows - finance leases
-
67
49
Leased assets obtained in exchange for operating lease
liabilities
350
258
2019
4,931 $
4,204 $
1,749
1,163
1,174
$
2021
5,367 $
4,765
2020
2019
718 $
616 $
328
2020
6,680 $
2021
Note 9- Taxes
Total foreign
Income Taxes
Income before income taxes is comprised of the following:
Domestic
Foreign
Total
The provisions for income taxes are as follows:
Federal:
Current
Deferred
Total federal
State:
Current
Deferred
Total state
Foreign:
Current
Deferred
Total provision for income taxes
3,591
2020
802
5,962
39,589
23,492
5,182
2,317
15,993
3,588
704
13,717
272
1,781
265
177
1,339
6,708
1,270
1,176
4,262
2,612
59,268
$ 122,142 $
22,434 $
38,366
21,807
4,719
2,172
14,916
2,810
492
258
2,060
1,645
242
155
1,248
5,435
942
860
3,633
$166,761
22,185
$ 141,398 $ 27,298 $ 27,233 $ 195,929
5,270
Total
Canadian
Operations
The Company is principally engaged in the operation of membership warehouses through wholly owned
subsidiaries in the U.S., Canada, Mexico, Japan, U.K., Korea, Australia, Spain, Iceland, France, and
China and through a majority-owned subsidiary in Taiwan. Reportable segments are largely based on
management's organization of the operating segments for operational decisions and assessments of
financial performance, which considers geographic locations. The material accounting policies of the
segments are as described in Note 1. Inter-segment net sales and expenses have been eliminated in
computing total revenue and operating income. Certain operating expenses, predominantly stock-based
compensation, incurred on behalf of the Company's Canadian and Other International operations, are
included in the U.S. operations because those costs generally come under the responsibility of U.S.
management.
Note 12-Segment Reporting
61
The Company does not believe that any pending claim, proceeding or litigation, either alone or in the
aggregate, will have a material adverse effect on the Company's financial position, results of operations or
cash flows; however, it is possible that an unfavorable outcome of some or all of the matters, however
unlikely, could result in a charge that might be material to the results of an individual fiscal quarter or year.
On June 23, 2020, a putative class action was filed against the Company, the “Board of Directors," the
"Costco Benefits Committee” and others under the Employee Retirement Income Security Act, in the
United States District Court for the Eastern District of Wisconsin. Dustin S. Soulek v. Costco Wholesale,
et al., Case No. 1:20-cv-937. The class is alleged to be beneficiaries of the Costco 401(k) plan from June
23, 2014, and the claims are that the defendants breached their fiduciary duties in the operation and
oversight of the plan. The complaint seeks injunctive relief, damages, interest, costs, and attorneys' fees.
On September 11, 2020, the defendants filed a motion to dismiss the complaint, and on September 21 the
plaintiffs filed an amended complaint, which the defendants have also moved to dismiss.
Members of the Board of Directors, one other individual, and the Company were defendants in a
shareholder derivative action related to the internal controls and related disclosures identified in the
putative class actions, alleging that the individual defendants breached their fiduciary duties. Wedekind v.
Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, Richard Libenson,
John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco
Wholesale Corp. (W.D. Wash.; filed Dec. 11, 2018). Similar actions were filed in King County Superior
Court on February 20, 2019, Elliott v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti,
Craig Jelinek, Richard Libenson, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary
Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-04824-7), April 16, 2019, Brad Shuman,
et ano. v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, John
Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco
Wholesale Corp. (Case No. 19-2-10460-1), and June 12, 2019, Rahul Modi v. Hamilton James, Susan
Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, John Meisenbach, Charles Munger, Jeffrey
Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-15514-1). In
light of the dismissal in Johnson noted above, the plaintiffs in the derivative actions agreed voluntarily to
dismiss their complaints.
60
60
The following table provides information for the Company's reportable segments:
The Company and its CEO and CFO were defendants in putative class actions brought on behalf of
shareholders who acquired Company stock between June 6 and October 25, 2018. Johnson v. Costco
Wholesale Corp., et al. (W.D. Wash.; filed Nov. 5, 2018); Chen v. Costco Wholesale Corp., et al. (W.D.
Wash.; filed Dec. 11, 2018). The complaints alleged violations of the federal securities laws stemming
from the Company's disclosures concerning internal control over financial reporting. A consolidated
amended complaint was filed on April 16, 2019. On November 26, 2019, the court entered an order
dismissing the consolidated amended complaint and granting the plaintiffs leave to file a further amended
complaint. A further amended complaint was filed on March 9, which the court dismissed with prejudice on
August 19, 2020. On July 20, 2021, the Ninth Circuit affirmed the dismissal.
In July 2021, a former temporary staffing employee filed a class action against the Company and a
staffing company alleging violations of the California Labor Code regarding payment of wages, meal and
rest periods, wage statements, the timeliness of wages and final wages, and for unfair business practices.
Dimas v. Costco Wholesale Corp. (Case No. STK-CV-UOE-2021-0006024; San Joaquin Superior Court).
The Company has not yet responded to the complaint.
In February 2021, a former employee filed a class action against the Company alleging violations of
California Labor Code regarding payment of wages, meal and rest periods, wage statements,
reimbursement of expenses, payment of final wages to terminated employees, and for unfair business
practices. Edwards v. Costco Wholesale Corp. (Case No. 5:21-cv-00716: C.D. Cal.). In May 2021, the
Company filed a motion to dismiss the complaint, which was granted with leave to amend. In June 2021,
the plaintiff filed an amended complaint, which the Company moved to dismiss later that month. The court
granted the motion in part in July 2021 with leave to amend. In August 2021, the plaintiff filed a second
amended complaint and filed a separate representative action under PAGA asserting the same Labor
Code claims and seeking civil penalties and attorneys' fees. The Company has filed an answer to the
second amended class action complaint denying the material allegations.
In December 2020, a former employee filed suit against the Company asserting collective and class
claims on behalf of non-exempt employees under the Fair Labor Standards Act and New York Labor Law
for failure to pay for all hours worked on a weekly basis and failure to provide proper wage statements
and notices. The plaintiff also asserts individual retaliation claims. Cappadora v. Costco Wholesale Corp.
(Case No. 1:20-cv-06067; E.D.N.Y.). An amended complaint was filed, and the Company has denied the
material allegations of the amended complaint. In August 2021, a former employee filed a similar suit,
asserting collective and class claims on behalf of non-exempt employees under the FLSA and New York
law. Umadat v. Costco Wholesale Corp. (Case No. 2:21-cv-4814; E.D.N.Y.). The Company has not yet
responded to the complaint.
59
In July 2020, an employee filed an action under PAGA on behalf of all California non-exempt employees
alleging violations of California Labor Code provisions regarding meal and rest periods, minimum wage,
overtime, wage statements, reimbursement of expenses, and payment of wages at termination. Schwab
v. Costco Wholesale Corporation (Case No. 37-2020-00023551-CU-OE-CTL; San Diego County Superior
Court). In August 2020, the Company filed a motion to strike portions of the complaint, which was denied,
and an answer has been filed denying the material allegations of the complaint.
In April 2020, an employee, alleging underpayment of sick pay, filed a class and representative action
against the Company, alleging claims under California law for failure to pay all wages at termination and
for Labor Code penalties under PAGA. Kristy v. Costco Wholesale Corp. (Case No. 5:20-cv-04119; N.D.
Cal.). The case was stayed due to the plaintiff's bankruptcy, and his individual claim was settled for an
immaterial amount. A request for dismissal of the class and representative action is pending.
In June 2019, an employee filed a class action against the Company alleging claims under California law
for failure to pay overtime, to provide meal and rest periods, itemized wage statements, to timely pay
wages due to terminating employees, to pay minimum wages, and for unfair business practices. Martinez
v. Costco Wholesale Corp. (Case No. 3:19-cv-05624-EMC; N.D. Cal.). The Company filed an answer
denying the material allegations of the complaint. In June 2021, the plaintiff agreed to dismiss his claims
for failure to provide meal and rest breaks and to pay minimum wages. In July 2021, the parties reached
an agreement settling for an immaterial amount the remaining claim and related derivative claims.
In May 2019, an employee filed a class action against the Company alleging claims under California law
for failure to pay overtime, to provide itemized wage statements, to timely pay wages due to terminating
employees, to pay minimum wages, and for unfair business practices. Rough v. Costco Wholesale Corp.
(Case No. 2:19-cv-01340; E.D. Cal.). Relief is sought under the California Labor Code, including civil
penalties and attorneys' fees. The Company has moved for partial summary judgement, and the parties
have filed competing motions regarding class certification. In August 2019, the plaintiff filed a companion
case in state court seeking penalties under PAGA. Rough v. Costco Wholesale Corp. (Case No.
FCS053454; Sonoma County Superior Court). Relief is sought under the California Labor Code, including
civil penalties and attorneys' fees. The state court action has been stayed pending resolution of the
federal action.
Beginning in December 2017, the United States Judicial Panel on Multidistrict Litigation has consolidated
numerous cases concerning the impacts of opioid abuses filed against various defendants by counties,
cities, hospitals, Native American tribes, third-party payors, and others. In re National Prescription Opiate
Litigation (MDL No. 2804) (N.D. Ohio). Included are cases that name the Company, including actions filed
by counties and cities in Michigan, New Jersey, Oregon, Virginia and South Carolina, a third-party payor
in Ohio, and a hospital in Texas, class actions filed on behalf of infants born with opioid-related medical
conditions in 40 states, and class actions and individual actions filed on behalf of individuals seeking to
recover alleged increased insurance costs associated with opioid abuse in 43 states and American
Samoa. Claims against the Company in state courts in New Jersey, Oklahoma, Utah, and Arizona have
been dismissed. The Company is defending all of the pending matters.
2021
Total revenue
Operating income
United States
Operations
Disaggregated Revenue
Total assets
Property and equipment, net
Additions to property and equipment
Depreciation and amortization
Operating income
Total revenue
2019
Total assets
Property and equipment, net
Additions to property and equipment
Depreciation and amortization
Operating income
Total revenue
2020
Total assets
Additions to property and equipment
Property and equipment, net
Depreciation and amortization
Other
International
Operations
11,920
55,556
$ 111,751 $
None.
Item 9B-Other Information
63
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f)
or 15d-15(f) of the Exchange Act) that occurred during the fourth quarter of 2021 that have materially
affected, or are reasonably likely to materially affect, the Company's internal control over financial
reporting.
Changes in Internal Control Over Financial Reporting
Based on its assessment, management has concluded that our internal control over financial reporting
was effective as of August 29, 2021. The attestation of KPMG LLP, our independent registered public
accounting firm, on the effectiveness of our internal control over financial reporting is included with the
consolidated financial statements in Item 8 of this Report.
Under the supervision of and with the participation of our management, we assessed the effectiveness of
our internal control over financial reporting as of August 29, 2021, using the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated
Framework (2013).
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
PART III
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes
those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable
assurance that our transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles and that our receipts and expenditures are
being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that
I could have a material effect on our financial statements.
Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed in
the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the rules and forms of the SEC and to ensure that information
required to be disclosed is accumulated and communicated to management, including our principal
executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive
Officer and the Chief Financial Officer, with assistance from other members of management, have
reviewed the effectiveness of our disclosure controls and procedures as of August 29, 2021 and, based
on their evaluation, have concluded that the disclosure controls and procedures were effective as of such
date.
Evaluation of Disclosure Controls and Procedures
Item 9A-Controls and Procedures
Item 9-Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
62
62
149,351
163,220 $
Management's Annual Report on Internal Control Over Financial Reporting
Item 10-Directors, Executive Officers and Corporate Governance
Information relating to the availability of our code of ethics for senior financial officers and a list of our
executive officers appear in Part I, Item 1 of this Report. The information required by this Item concerning
our directors and nominees for director is incorporated herein by reference to the sections entitled
"Proposal 1: Election of Directors," "Directors" and "Committees of the Board" in Costco's Proxy
Statement for its 2022 annual meeting of shareholders, which will be filed with the SEC within 120 days of
the end of our fiscal year ("Proxy Statement").
Item 11-Executive Compensation
84
64
All schedules have been omitted because the required information is not present or is not
present in amounts sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial statements, including the
notes thereto.
Financial Statement Schedules:
2.
See the listing of Financial Statements included as a part of this Form 10-K in Item 8 of
Part II.
Financial Statements:
1.
Documents filed as part of this report are as follows:
(a)
Item 15-Exhibits, Financial Statement Schedules
PART IV
The information required by this Item is incorporated herein by reference to the sections entitled
"Independent Public Accountants" in Costco's Proxy Statement.
Item 14-Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference to the sections entitled “Proposal
1: Election of Directors,” “Directors," "Committees of the Board," "Shareholder Communications to the
Board," "Meeting Attendance," "Report of the Compensation Committee of the Board of Directors,"
"Certain Relationships and Transactions" and "Report of the Audit Committee” in Costco's Proxy
Statement.
Item 13-Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to the section entitled "Principal
Shareholders" and "Equity Compensation Plan Information” in Costco's Proxy Statement.
Item 12-Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information required by this Item is incorporated herein by reference to the sections entitled
"Compensation of Directors,” “Executive Compensation," and "Compensation Discussion and Analysis" in
Costco's Proxy Statement.
192,052 $
$
Total net sales
28,571
32,162
20,890
4,479
2,044
14,367
2,998
509
303
2,186
1,492
223
143
1,126
4,737
750
924
3,063
19,586 $ 152,703
21,366 $
4,369
In March 2019, employees filed a class action against the Company alleging claims under California law
for failure to pay overtime, to provide meal and rest periods and itemized wage statements, to timely pay
wages due to terminating employees, to pay minimum wages, and for unfair business practices. Relief is
sought under the California Labor Code, including civil penalties and attorneys' fees. Nevarez v. Costco
Wholesale Corp. (Case No. 2:19-cv-03454; C.D. Cal.). The Company filed an answer denying the
material allegations of the complaint. In December 2019, the court issued an order denying class
certification. In January 2020, the plaintiffs dismissed their Labor Code claims without prejudice, and the
court remanded the action to state court. The remand was appealed; the appeal in abeyance due to a
pending settlement for an immaterial amount that was agreed upon in February 2021. The preliminary
approval hearing of the settlement is scheduled for October 2021.
8,869
The following table summarizes net sales by merchandise category; sales from e-commerce websites
and business centers have been allocated to their respective merchandise categories:
26,550
31,626
Warehouse Ancillary and Other Businesses
19,948
23,204
27,183
Fresh Foods
41,160
44,807
55,966
Non-Foods
59,672
68,659 $
77,277 $
$
Foods and Sundries
2019
2020
2021
45,400
222
In January 2019, a former seasonal employee filed a class action, alleging failure to provide California
seasonal employees meal and rest breaks, proper wage statements, and appropriate wages. Jadan v.
Costco Wholesale Corp. (Case No. 19-CV-340438; Santa Clara Superior Court). The complaint seeks
relief under the California Labor Code, including civil penalties and attorneys' fees. In October 2019, the
parties reached an agreement on a class settlement for an immaterial amount, which received court
approval in January 2021.
In December 2018, a depot employee raised similar claims, alleging that depot employees in California
did not receive suitable seating or reasonably comfortable workplace temperature conditions. Lane v.
Costco Wholesale Corp. (Case No. CIVDS 1908816; San Bernardino Superior Court). The Company filed
an answer denying the material allegations of the complaint. In October 2019, the parties reached an
agreement to settle for an immaterial amount the seating claims on a representative basis, which received
court approval in February 2020. The workplace temperature claims continue in litigation.
31
(1.4)
(77)
(0.7)
(46)
Other
(2.6)
(123)
0.7
2017 Tax Act
(18)
(0.5)
(24)
(1.3)
(91)
Employee stock ownership plan (ESOP)
-
(1)
(0.4)
Total
$1,601
24.0 % $ 1,308
Merchandise inventories
Property and equipment
Deferred tax liabilities:
Total net deferred tax assets
Valuation allowance
Total deferred tax assets
Other
Accrued liabilities and reserves
Operating lease liabilities
Foreign tax credit carry forward
Deferred income/membership fees
Equity compensation
Deferred tax assets:
The components of the deferred tax assets (liabilities) are as follows:
The Company recognized total net tax benefits of $163, $81 and $221 in 2021, 2020 and 2019,
respectively. These include benefits of $75, $77 and $59, respectively, related to the stock-based
compensation accounting standard adopted in 2018, in addition to the impacts of the 2017 Tax Act noted
above. During 2021, there was a net tax benefit of $70 related to the portion of the special dividend paid
through our 401(k) plan.
During 2019, the Company recognized net tax benefits of $123 related to the 2017 Tax Act. This benefit
included $105 related to U.S. taxation of deemed foreign dividends, partially offset by losses of current
year foreign tax credits.
55
22.3 %
24.4 % $ 1,061
1.7
Operating lease right-of-use assets
92
92
377
523
(98)
(34)
405
372
557
204
307
238
26
8
11
178
230
265
550
693
276
$
1,601 $
1,308 $
Foreign taxes, net
3.6
171
3.6
190
3.6
243
State taxes, net
21.0 %
21.0 % $ 1,001
21.0 % $ 1,127
$ 1,403
Federal taxes at statutory rate
2019
2020
2021
The reconciliation between the statutory tax rate and the effective rate for 2021, 2020, and 2019 is as
follows:
Except for certain provisions, the Tax Cuts and Jobs Act (2017 Tax Act) was effective for tax years
beginning on or after January 1, 2018. Most provisions became effective for the Company for 2019,
including limitations on the ability to claim foreign tax credits, repeal of the domestic manufacturing
deduction, and limitations on certain business deductions. Provisions with significant impacts that were
effective starting in the second quarter of 2018 and throughout 2019 included: a lower U.S. federal
income tax rate, remeasurement of certain net deferred tax liabilities, and a transition tax on deemed
repatriation of certain foreign earnings. The lower U.S. tax rate of 21.0% was effective for all of 2021,
2020, and 2019.
1,061
1.4
Foreign branch deferreds
Other
Total deferred tax liabilities
The Company is subject to multiple examinations for value added, sales-based, payroll, product, import or
other non-income taxes in various jurisdictions. In certain cases, the Company has received assessments
from the authorities. In the fourth quarter of 2020, the Company reached an agreement on a product tax
audit resulting in a benefit of $84. The Company recorded a charge of $123 in 2019 regarding this matter.
Other possible losses or range of possible losses associated with these examinations are either
immaterial or an estimate of the possible loss or range of loss cannot be made at this time. If certain
matters or a group of matters were to be decided adversely to the Company, could result in a charge
that might be material to the results of an individual fiscal quarter or year.
Other Taxes
The Company files income tax returns in the United States, various state and local jurisdictions, in
Canada, and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject
to U.S. federal, state or local examination for years before fiscal 2017. The Company is currently subject
to examination in California for fiscal years 2013 to present.
The Company is currently under audit by several jurisdictions in the United States and abroad. Some
audits may conclude in the next 12 months, and the unrecognized tax benefits recorded in relation to the
audits may differ from actual settlement amounts. It is not practical to estimate the effect, if any, of any
amount of such change during the next 12 months to previously recorded uncertain tax positions in
connection with the audits. The Company does not anticipate that there will be a material increase or
decrease in the total amount of unrecognized tax benefits in the next 12 months.
Accrued interest and penalties related to income tax matters are classified as a component of income tax
expense. Accrued interest and penalties recognized during 2021 and 2020, and accrued at the end of
each respective period were not material.
The gross unrecognized tax benefit includes tax positions for which the ultimate deductibility is highly
certain but there is uncertainty about the timing of such deductibility. At the end of 2021 and 2020, these
amounts were immaterial. Because of the impact of deferred tax accounting, other than interest and
penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would
accelerate the payment of cash to the taxing authority. The total amount of such unrecognized tax
benefits that if recognized would favorably affect the effective income tax rate in future periods is $30 and
$28 at the end of 2021 and 2020, respectively.
30
(3)
44
33 $
(3)
8
2
1
2
27
30 $
2020
(1)
57
Note 10-Net Income per Common and Common Equivalent Share
The following table shows the amounts used in computing net income per share and the weighted
average number of shares of basic and of potentially dilutive common shares outstanding (shares in
000's):
The Company is a defendant in an action commenced in August 2013 under the California Labor Code
Private Attorneys General Act (PAGA) alleging violation of California Wage Order 7-2001 for failing to
provide seating to employees who work at entrance and exit doors in California warehouses. Canela v.
Costco Wholesale Corp., et al. (Case No. 2013-1-CV-248813; Santa Clara Superior Court). The complaint
seeks relief under the California Labor Code, including civil penalties and attorneys' fees. The Company
filed an answer denying the material allegations of the complaint.
The Company is involved in a number of claims, proceedings and litigations arising from its business and
property ownership. In accordance with applicable accounting guidance, the Company establishes an
accrual for legal proceedings if and when those matters present loss contingencies that are both probable
and reasonably estimable. There may be exposure to loss in excess of any amounts accrued. The
Company monitors those matters for developments that would affect the likelihood of a loss (taking into
account where applicable indemnification arrangements concerning suppliers and insurers) and the
accrued amount, if any, thereof, and adjusts the amount as appropriate. As of the date of this Report, the
Company has recorded immaterial accruals with respect to certain matters described below, in addition to
other immaterial accruals for matters not described below. If the loss contingency at issue is not both
probable and reasonably estimable, the Company does not establish an accrual, but will continue to
monitor the matter for developments that will make the loss contingency both probable and reasonably
estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in
excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or
range of loss (including any loss in excess of the accrual) cannot, in the Company's view, be reasonably
estimated because, among other things: (i) the remedies or penalties sought are indeterminate or
unspecified; (ii) the legal and/or factual theories are not well developed; and/or (iii) the matters involve
complex or novel legal theories or a large number of parties.
442,923
443,901
3,168
1,604
1,257
444,346
3,659
439,755
4,002 $
442,297
5,007 $
443,089
$
2019
2021
Legal Proceedings
Note 11-Commitments and Contingencies
Weighted average diluted shares
RSUs
Weighted average basic shares
Net income attributable to Costco
2021
$
Gross unrecognized tax benefit at end of year
Gross decreases-tax positions in prior years
Lapse of statute of limitations
1,677
(105)
(214)
1,796
1,891
62
639
681
832
769
101
146
144
161
80
72 $
2020
2021
Net deferred tax liabilities
1,691
58
(935)
(216)
Gross increases-tax positions in prior years
Gross increases-current year tax positions
Gross unrecognized tax benefit at beginning of year
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2021 and
2020 is as follows:
56
56
The Company no longer considers fiscal year earnings of non-U.S. consolidated subsidiaries after 2017
to be indefinitely reinvested (other than China) and has recorded the estimated incremental foreign
withholding taxes (net of available foreign tax credits) and state income taxes payable assuming a
hypothetical repatriation to the U.S. The Company continues to consider undistributed earnings of certain
non-U.S. consolidated subsidiaries, which totaled $3,070, to be indefinitely reinvested and has not
provided for withholding or state taxes.
In 2021 and 2020, the Company had valuation allowances of $214 and $105, respectively, primarily
related to foreign tax credits that the Company believes will not be realized due to carry forward
limitations. The foreign tax credit carry forwards are set to expire beginning in fiscal 2030.
The deferred tax accounts at the end of 2021 and 2020 include deferred income tax assets of $444 and
$406, respectively, included in other long-term assets; and deferred income tax liabilities of $754 and
$665, respectively, included in other long-term liabilities.
(259)
(310) $
(1,950)
(1,987)
(40)
(81)
(92)
(801)
(744)
(228)
(800)
77
H. Keith Thompson - Construction
Quality and value in 828 locations and on Costco.com
10-Q/A
9/1/2013
5/10/2015
10/16/2013
8/31/2015
Card Agreement
10.8.1**
First Amendment to Citi, N.A. Co-
Branded Credit Card Agreement
10-Q
11/22/2015 12/17/2015
10.8.2**
Second Amendment to Citi, N.A.
10-Q
2/14/2016
3/9/2016
Citibank, N.A. Co-Branded Credit
Co-Branded Credit Card
10.8.3**
Third Amendment to Citi, N.A. Co-
10-K
8/28/2016 10/12/2016
Branded Credit Card Agreement
10.8.4**
Fourth Amendment to Citi, N.A.
10-Q
2/18/2018
3/15/2018
Co-Branded Credit Card
Agreement
10.8.5**
Agreement
Fifth Amendment to Citi, N.A. Co-
10.8**
Deferred Compensation Plan
Agreement, effective January 1,
2019, between W. Craig Jelinek
and Costco Wholesale
Corporation
10.5.2*
Extension of the Term of the
10-Q
11/24/2019 12/23/2019
Executive Employment
Agreement, effective January 1,
2020, between W. Craig Jelinek
and Costco Wholesale
Corporation
10-K
10.5.3*
10-Q
11/22/2020 12/16/2020
Executive Employment
Agreement, effective January 1,
2021, between W. Craig Jelinek
and Costco Wholesale
Corporation
10.6
Form of Indemnification
COR000075 0421
12/13/1999
Agreement
10.7*
Extension of the Term of the
Executive Employment
10-Q
3/13/2019
101.SCH Inline XBRL Taxonomy Extension
Schema Document
101.CAL
Inline XBRL Taxonomy Extension
Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension
Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension
Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension
Presentation Linkbase Document
104
Cover Page Interactive Data File
(formatted as inline XBRL and
contained in Exhibit 101)
* Management contract, compensatory plan or arrangement.
**
X
X
Portions of this exhibit have been omitted under a confidential treatment order issued by the Securities and Exchange
Commission.
Inline XBRL Instance Document
(c) Financial Statement Schedules―None.
None.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
October 5, 2021
COSTCO WHOLESALE CORPORATION
(Registrant)
By
/s/ RICHARD A. GALANTI
Richard A. Galanti
Executive Vice President, Chief Financial Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
October 5, 2021
By
Item 16-Form 10-K Summary
2/17/2019
101.INS
32.1
Branded Credit Card Agreement
60
66
Exhibit
Number
Filed
Exhibit Description
Herewith
Form
Period Ended
10.8.6**
Sixth Amendment to Citi, N.A. Co-
Branded Credit Card Agreement
10-K
9/1/2019
Section 1350 Certifications
Incorporated by Reference
10.8.7**
Seventh Amendment to Citi, N.A.
10-Q
2/14/2021
3/10/2021
Co-Branded Credit Card
Agreement
Subsidiaries of the Company
23.1
Consent of Independent
Registered Public Accounting Firm
31.1
Rule 13a14(a) Certifications
X
Filing Date
10/11/2019
11/25/2018 12/20/2018
10-Q
Extension of the Term of the
Form of 1.375% Senior Notes due
June 20, 2027
8-K
4/17/2020
4.3
Form of 1.600% Senior Notes due
8-K
4/17/2020
April 20, 2030
4.4
Form of 1.750% Senior Notes due
8-K
4/17/2020
April 20, 2032
4.2
4.5
8-K
5/16/2017
May 18, 2022
4.6
Form of 2.750% Senior Notes due
8-K
5/16/2017
May 18, 2024
4.7
Form of 3.000% Senior Notes due
May 18, 2027
8-K
5/16/2017
4.8
Form of 2.300% Senior Notes due
Description of Common Stock
dated as of March 20, 2002
(incorporated by reference to
Exhibits 4.1 and 4.2 to the
Company's Current Report on the
Form 8-K filed on March 25, 2002)
3/25/2002
(b) Exhibits: The required exhibits are filed as part of this Annual Report on Form 10-K or are
incorporated herein by reference.
Exhibit
Number
3.1
Exhibit Description
Articles of Incorporation as
Incorporated by Reference
Filed
Herewith
Form
10-Q
Period Ended
2/16/2020
Filing Date
3/12/2020
amended of Costco Wholesale
Corporation
National Association, as Trustee,
3.2
8-K
Wholesale Corporation
3.2.1
Amendments to Sections 3.3, 3.4,
8-K
and 3.6 of the Bylaws of Costco
Wholesale Corporation (to be
effective and first apply with
respect to the Company's 2022
1/29/2020
9/16/2020
Annual Meeting of Shareholders)
4.1
First Supplemental Indenture
between Costco Wholesale
Corporation and U.S. Bank
8-K
Bylaws as amended of Costco
10-K
8/30/2020
10/7/2020
Filed
Herewith
Form
Period Ended
Filing Date
10-Q
11/24/2019
12/23/2019
Agreement-Non-Executive
Director
10.3.4*
2019 Stock Incentive Plan Letter
Agreement for 2020 Performance-
Based Restricted Stock Units-
Executive
10-Q
Incorporated by Reference
11/24/2019
10.4*
Fiscal 2021 Executive Bonus Plan
8-K
10.5*
Executive Employment
10-Q
11/20/2016
10/15/2020
12/16/2016
Agreement, effective January 1,
2017, between W. Craig Jelinek
and Costco Wholesale
Corporation
10.5.1*
12/23/2019
Restricted Stock Unit Award
2019 Stock Incentive Plan
10.3.3*
10.1*
Costco Wholesale Executive
Health Plan
10-K
9/2/2012 10/19/2012
10.2*
2019 Incentive Plan
DEF 14
12/17/2019
10.3*
Seventh Restated 2002 Stock
Incentive Plan
DEF 14A
12/19/2014
10.3.1*
2019 Stock Incentive Plan
10-Q
11/24/2019 12/23/2019
Restricted Stock Unit Award
Agreement-Employee
10.3.2*
2019 Stock Incentive Plan
10-Q
11/24/2019 12/23/2019
Restricted Stock Unit Award
Agreement - Non-U.S. Employee
65
99
Exhibit
Exhibit Description
Number
By
By
14A
President, Chief Executive Officer and
Dennis Davenport - Operations, Los Angeles
Russ Decaire - GMM, Foods & Sundries, Northwest
Guy Delmonte - Operations, Southeast
Jeff Elliott - Treasury
Debbie Ells - GMM, Non-Foods, Canada
Liz Elsner - Ecommerce
Christopher Fleming - Operations, W. Canada
Sheri Flies - Global Sustainability & Compliance
Anthony Fontana - Operations, Northeast
Jack Frank - Real Estate, Western Division
Joseph Grachek III - Internal Audit
Kevin Green - Operations, Midwest
Martin Groleau - GMM, Ecommerce Marketing,
Operations & Contact Center, Canada
Peter Gruening - Costco Travel
Brad Hanna - Pharmacy
Doris Harley - GMM, Foods & Sundries, Southeast
Eric Harris - Warehouse Operations & Facilities
Jim Harrison - Transportation
David Harruff - Operations, Northwest
VICE PRESIDENTS
Ben Culver - Fuel, Car Wash & Ecommerce Photo
Anthony Dattilo - Costco Logistics
Timothy Haser - Information Systems
Doug Holbrook - Deli, Meat & Produce Operations
Scott Howe - Assistant Accounting Controller
Ross Hunt - Administration, Canada
Bob Huskey - GMM, Meat
Jeff Ishida - Real Estate, Eastern Division
Steven Jewer - GMM, Foods & Sundries, E. Canada
Anna Johnston - Information Systems
Teresa Jones - Depot Operations
Peter Kelly - Country Manager, U.K. & Iceland
Jim Kenyon - GMM, Foods & Sundries, Midwest
Ken Kimble - GMM, Corporate Foods & Sundries
Ryan Knisley - Information Systems
William Koza - Operations, Midwest
Robert Leiss - Operations, Australia
Robert Leuck - Operations, Northeast
Torsten Lubach - Information Systems
Steve Mantanona - GMM, Merchandising, Mexico
Randy Martel - Operations, E. Canada
Mark Mattis - Information Systems
Tracy Mauldin-Avery - GMM, Foods & Sundries, San Diego
Susan McConnaha - Community Relations, Journeys,
Diversity & Inclusion
John Hickey - GMM, Foods & Sundries, Southeast Region
Daniel McMurray - Operations, Midwest
Julie Cruz - Operations, Southeast
Don Coleman - Information Systems
Senior Vice President, General Manager - Lincoln Premium Poultry
Louie Silveira
Senior Vice President, General Manager - Europe
David Skinner
Senior Vice President, General Manager - Western Canadian Region
Richard Stephens
Senior Vice President, Pharmacy
John Sullivan
Senior Vice President, General Counsel & Corporate Secretary
John D. Thelan
Senior Vice President, Depots & Traffic
Sandy Torrey
Senior Vice President, Membership, Marketing, Services
& Publishing
Ron M. Vachris
Michael Cotton - Operations, Northwest
Executive Vice President, COO - Merchandising
Senior Vice President, Merchandising - Non Foods, Ecommerce,
Membership & Marketing - Canadian Division
W. Richard Wilcox
Senior Vice President, General Manager - San Diego Region
Terry Williams
Senior Vice President, CIO - Information Systems
Kim Alexander - GMM, Corporate Non-Foods
Michael Anderson - Information Systems
James Andruski - GMM, Foods & Sundries, W. Canada
Kathleen Ardourel - Global Ecommerce
Marc-André Bally - Ancillary & Business Centers, Canada
Tiffany Barbre - Assistant Accounting Controller
Patty Bauer - Information Systems
Christopher Bolves - Operations, Northwest
Timothy Bowersock - Information Systems
Kimberly Brown - Operations, Texas
Jon Bubitz - GMM, Corporate Non-Foods
Elaina Budge - GMM, Foods & Sundries, Bay Area
Paul Cano - Operations, Bay Area
Greg Carter - GMM, Foods & Sundries, Los Angeles
Michael Casebier - Operations, Texas
Walter Chao - Regional Manager, Taiwan
Angela Chaparro - Operations, Los Angeles
Frank Chislette - Operations, E. Canada
Mike Cho - Country Manager, Korea
Azmina Virani
Erin Medved-Burnham - GMM, Corp. Foods & Sundries
Leah Monica - Member Service Centers
Joe Moore - Corporate Tax
ADDITIONAL INFORMATION
Shareholder Information
/s/ W. CRAIG JELINEK
W. Craig Jelinek
Annual Meeting
Thursday, January 20, 2022 at 2:00 PM Pacific
www.virtualshareholdermeeting.com/COST2022
Independent Public Accountants
KPMG LLP
1918 Eighth Avenue, Suite 2900
Seattle, WA 98101
Stock Exchange Listing
The Nasdaq Global Select Market
Stock Symbol: COST
Transfer Agent
Computershare
Costco Shareholder Relations
[THIS PAGE INTENTIONALLY LEFT BLANK]
Correspondence should be mailed to:
Louisville, KY 40233
Overnight correspondence should be sent to:
462 South 4th Street, Suite 1600
Louisville, KY 40202
Telephone: (800) 249-8982
TDD for Hearing Impaired: (800) 490-1493
Outside U.S.: (201) 680-6578
Website: https://www.computershare.com/investor
FSC
www.fsc.org
MIX
Paper from
responsible sources
FSC® C132107
COSTCO
WHOLESALE
P.O. Box 505000
[THIS PAGE INTENTIONALLY LEFT BLANK]
Janet Wiebke - GMM, Corporate Non-Foods
Craig Wilson - Food Safety & Quality Assurance
Earl Wiramanaden - GMM, Fresh Foods, International
Jason Zapp - GMM, Non-Foods, Canada
Karim Zeffouini - Operations, Northeast
Jill Whittaker - Operations, San Diego
Robert Murvin - GMM, Foods & Sundries, Texas
Keith Neal - GMM, Produce
Jim Nelson - GMM, Corporate Non-Foods
Pietro Nenci - GMM, Foods & Sundries and Ecommerce
Foods & Sundries, Canada
Patrick Noone - Country Manager, Australia
Scott O'Brien - GMM, Corporate Foods & Sundries
Eric Orren - Construction, International
Frank Padilla - GMM, Bakery, Service Deli & Food Court
Thomas Padilla - Operations, Northwest
Daniel Parent - Operations, E. Canada
Robert Parker - Operations, Business Centers
Fred Paulsell - Corporate Purchasing
Larry Pifer - Operations, E. Canada
Nevin Pottinger - Operations, W. Canada
Paul Pulver - Operations, Northeast
Harish Rao - Information Systems
Scott Riekers - Operations, Northeast
Giro Rizzuti - GMM, Non-Foods, Canada
Jeanne Rosolino - Operations, San Diego
Jason Rothman - Assistant Accounting Controller
Chris Rylance - Information Systems
Moises Saenz - Country Manager, Mexico
Drew Sakuma - Operations, Bay Area
Art Salas - U.S. Optical
Scott Schruber - Operations, U.K.
Stuart Shamis - Legal, Canada
Geoff Shavey - GMM, Corporate Non-Foods
Cheryl Smeby - GMM, Corporate Non-Foods
Dick Snyder - Operations, Midwest
James Stafford - GMM, Foods & Sundries, Northeast
Joseph Stanovcak - Operations, San Diego
Steve Supkoff - Costco Logistics
Gary Swindells - Country Manager, France
Cathy Tabor - Information Systems
Mauricio Talayero - CFO, Mexico
Ken Theriault - Country Manager, Japan
Brian Thomas - Operations, Los Angeles
Michael Thompson - Operations, W. Canada
Todd Thull - Construction
Adrian Thummler - Operations, Mexico
Chris Tingman - GMM, International
Tony Tran - GMM, Fresh Foods, Canada
Kevin Trejo - Operations, Bay Area
Diane Tucci - Country Manager, Spain
Howard Tulk - Operations, Japan
Tony Unan - Legal, International
Brenda Weber - Human Resources
Jack Weisbly - GMM, Corporate Non-Foods
Mick Wendell - Construction
Randy White - Construction
Walt Shafer
Senior Vice President, General Manager - Northeast Region
Copies of Costco's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q will be provided to any
shareholder upon written request to Investor Relations, Costco Wholesale Corporation, 999 Lake Drive, Issaquah,
Washington 98027. Internet users can access recent sales and earnings releases, the annual report and SEC filings,
as well as our Costco website, at http://www.costco.com. E-mail users can direct their investor relations questions to
investor@costco.com. The SEC maintains a site that contains reports, proxy and information statements, and other
information regarding issuers, such as the Company, that file electronically with the SEC at www.sec.gov.
Executive Vice President, COO - Eastern Division
/s/ KENNETH D. DENMAN
Kenneth D. Denman
Director
/s/ CHARLES T. MUNGER
Charles T. Munger
Director
/s/ JOHN W. STANTON
John W. Stanton
Director
Susan L. Decker(a)
CEO and Founder, Raftr;
Former President, Yahoo! Inc.
Kenneth D. Denman(a)(c)
General Partner, Sway Ventures; Former President
and Chief Executive Officer, Emotient, Inc.
Richard A. Galanti
(Principal Accounting Officer)
Executive Vice President and
Hamilton E. James
Chairman of the Board, Costco Wholesale;
Executive Vice Chairman, The Blackstone Group
W. Craig Jelinek
DIRECTORS AND OFFICERS
President and Chief Executive Officer, Costco Wholesale
Sally Jewell(a)(b)
BOARD OF DIRECTORS
Former Interim CEO, The Nature Conservancy; Former Secretary of
the Interior; Former CEO and Director, Recreational Equipment Inc.
Richard M. Libenson
Director Emeritus
Charles T. Munger(a)*
Vice Chairman of the Board, Berkshire Hathaway Inc.;
Chairman of the Board, Daily Journal Corporation
Jeffrey S. Raikes(c)*
Chief Financial Officer, Costco Wholesale
Controller
Senior Vice President and Corporate
Daniel M. Hines
Adam Self
Director
/s/ RICHARD A. GALANTI
Richard A. Galanti
Executive Vice President, Chief Financial
Officer and Director
(Principal Financial Officer)
/s/ SUSAN L. DECKER
Susan L. Decker
Director
By
/s/ HAMILTON E. JAMES
By
By
By
By
/s/ SALLY JEWELL
Sally Jewell
Director
By
/s/ JEFFREY S. RAIKES
By
Jeffrey S. Raikes
Director
By
/s/ MARY (MAGGIE) A. WILDEROTTER
Mary (Maggie) A. Wilderotter
Director
68
80
Hamilton E. James
Chairman of the Board
/s/ DANIEL M. HINES
Co-Founder, The Raikes Foundation;
Former CEO, Bill and Melinda Gates Foundation
21.1
Chairman, First Avenue Entertainment LLLP;
Darby Greek
Senior Vice President, General Manager - Texas Region
Nancy Griese
Senior Vice President, Merchandising - Foods & Sundries
Daniel M. Hines
Senior Vice President, Corporate Controller
W. Craig Jelinek
President and Chief Executive Officer
Yoon Kim
Senior Vice President, Merchandising - Non-Foods & Ecommerce
James Klauer
Executive Vice President, COO - Northern Division
David Messner
Senior Vice President, Real Estate Development
Russ Miller
Executive Vice President, COO - Southwest Division & Mexico
Senior Vice President, Country Manager - Mexico
Ali Moayeri
Executive Vice President, COO - International Division
Robert E. Nelson III
Senior Vice President, Treasury, Financial Planning &
Investor Relations
Mario Omoss
Senior Vice President, General Manager - Northwest Region
Mike Parrott
Senior Vice President, Ecommerce
Executive Vice President, COO - Eastern & Canadian Divisions and
Chief Diversity Officer
Pierre Riel
Senior Vice President, Country Manager - Canada
Timothy L. Rose
Executive Vice President, Ancillary Businesses, Manufacturing &
Business Centers
John W. Stanton(b)*
Yoram B. Rubanenko
Senior Vice President, Construction & Purchasing
James P. Murphy
Jaime Gonzalez
Joseph P. Portera
Sarah George
Maggie A. Wilderotter(b)(c)
Senior Vice President, Merchandising - Fresh Foods
Trilogy International Partners, Inc. and Trilogy Equity Partners
CEO and Chairman, Grand Reserve Inn;
Former Executive Chairman, Frontier Communications
(a) Audit Committee
(b) Compensation Committee
(c) Nominating and Governance Committee
*2021 Committee Chair
Jeffrey Abadir
EXECUTIVE AND SENIOR OFFICERS
Senior Vice President, General Manager - Bay Area Region
Claudine Adamo
Senior Vice President, Merchandising - Non-Foods & Ecommerce
Patrick J. Callans
Executive Vice President, Administration
Richard Chang
Board Committees
Richard C. Chavez
Senior Vice President, General Manager - Los Angeles Region
John B. Gaherty
Senior Vice President, General Manager - Asia
Executive Vice President and Chief Financial Officer
Senior Vice President, General Manager - Eastern Canadian Region
Caton Frates
Wendy Davis
Senior Vice President, Pharmacy
Senior Vice President, General Manager - Southeast Region
Gino Dorico
Victor A. Curtis
Business Development
Senior Vice President, Costco Wholesale Industries &
Jeff Cole
Business Development
Senior Vice President, Costco Wholesale Industries &
Senior Vice President, General Manager - Midwest Region
Richard A. Galanti
SECURITIES AND EXCHANGE COMMISSION
NEW SOUTH WALES - 4
QUEENSLAND - 3
SOUTH AUSTRALIA - 1
VICTORIA - 4
UNITED STATES
☑
COR000296 1623
AUCKLAND -1
NEW ZEALAND
WESTERN AUSTRALIA - 2
Washington, D.C. 20549
TAIWAN
COSTCO.COM.AU
AUSTRALIA
COSTCO.COM.TW
CHIAYI CITY -1
HSINCHU CITY-1
KAOHSIUNG CITY - 2
NEW TAIPEI CITY - 3
TAICHUNG CITY - 2
TAINAN CITY-1
TAIPEI CITY-2
TAOYUAN CITY - 2
SHANGHAI - 2
JIANGSU -1
ZHEJIANG-2
CHINA
YAMAGATA-1
TOYAMA-1
SHIZUOKA-1
TOCHIGI-1
TOKYO-1
FORM 10-K
SAITAMA - 2
AUSTRALIAN CAPITAL
TERRITORY-1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Registrant's telephone number, including area code: (425) 313-8100
or
OSAKA - 2
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ☑ No □
Securities registered pursuant to Section 12(g) of the Act: None
The NASDAQ Global Select Market
Name of each exchange on
which registered
COST
Common Stock, $.005 Par Value
Trading Symbol
Title of each class
For the fiscal year ended September 3, 2023
Securities registered pursuant to Section 12(b) of the Act:
999 Lake Drive, Issaquah, WA 98027
(I.R.S. Employer Identification No.)
91-1223280
incorporation or organization)
(State or other jurisdiction of
Washington
(Exact name of registrant as specified in its charter)
Costco Wholesale Corporation
Commission file number 0-20355
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Address of principal executive offices) (Zip Code)
MIYAGI -1
Spain
KUMAMOTO-1
14
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☑ No ☐
2
France
29 Kingdom
United
1
5
Iceland
China
Australia
Taiwan
Japan
18
Korea
1
Sweden
SASKATCHEWAN - 3
QUÉBEC - 23
ONTARIO 40
NEW BRUNSWICK - 3
NEWFOUNDLAND AND
LABRADOR-1
NOVA SCOTIA - 2
BRITISH COLUMBIA - 14
MANITOBA - 3
33
KYOTO-1
15
1
ISHIKAWA-1
KANAGAWA - 3
FUKUOKA -2
GIFU-1
GUNMA - 2
HIROSHIMA -1
HOKKAIDO-2
HYOGO - 2
IBARAKI – 2
CHIBA - 3
AICHI - 2
COSTCO.CO.JP
JAPAN
ULSAN -1
SEJONG-1
SEOUL - 4
GYEONGGI-DO-5
INCHEON - 1
DAEJEON-1
GIMHAE - 1
New
Zealand
COSTCO.CO.KR
BUSAN -1
CHEONAN -1
DAEGU - 2
SWEDEN
STOCKHOLM-1
ÎLE-DE-FRANCE - 2
FRANCE
MADRID - 2
BISCAY-1
ANDALUCÍA-1
SPAIN
ICELAND
KAUPTÚN - 1
COSTCO.CO.UK
ENGLAND - 25
SCOTLAND -3
WALES - 1
UNITED
KINGDOM
KOREA
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File
required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
☑ No ☐
Page
Large accelerated filer
Item 13.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 12.
62
62
22
Executive Compensation
Item 11.
Directors, Executive Officers and Corporate Governance
Item 10.
PART III
62
62
61
2 2 2 2
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Item 9C.
Other Information
Item 9B.
Controls and Procedures
Item 9A.
Item 14.
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
233
62
4
We operate membership warehouses and e-commerce websites based on the concept that offering our
members low prices on a limited selection of nationally-branded and private-label products in a wide
range of categories will produce high sales volumes and rapid inventory turnover. When combined with
the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of
merchandise in no-frills, self-service warehouse facilities, these volumes and turnover enable us to
operate profitably at significantly lower gross margins (net sales less merchandise costs) than most other
retailers. We often sell inventory before we are required to pay for it, even while taking advantage of early
payment discounts.
General
We report on a 52/53-week fiscal year, consisting of thirteen four-week periods and ending on the Sunday
nearest the end of August. The first three quarters consist of three periods each, and the fourth quarter
consists of four periods (five weeks in the thirteenth period in a 53-week year). The material seasonal
impact in our operations is increased net sales and earnings during the winter holiday season.
References to 2023 relate to the 53-week fiscal year ended September 3, 2023. References to 2022 and
2021 relate to the 52-week fiscal years ended August 28, 2022, and August 29, 2021.
Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983, in
Seattle, Washington. We are principally engaged in the operation of membership warehouses in the
United States (U.S.) and Puerto Rico, Canada, Mexico, Japan, the United Kingdom (U.K.), Korea,
Australia, Taiwan, China, Spain, France, Iceland, New Zealand, and Sweden. Costco operated 861, 838,
and 815 warehouses worldwide at September 3, 2023, August 28, 2022, and August 29, 2021. The
Company operates e-commerce websites in the U.S., Canada, Mexico, the U.K., Korea, Taiwan, Japan,
and Australia. Our common stock trades on the NASDAQ Global Select Market, under the symbol
"COST."
Item 1-Business
PART I
Certain statements contained in this document constitute forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. For these purposes, forward-looking statements
are statements that address activities, events, conditions or developments that the Company expects or
anticipates may occur in the future and may relate to such matters as net sales growth, changes in
comparable sales, cannibalization of existing locations by new openings, price or fee changes, earnings
performance, earnings per share, stock-based compensation expense, warehouse openings and
closures, capital spending, the effect of adopting certain accounting standards, future financial reporting,
financing, margins, return on invested capital, strategic direction, expense controls, membership renewal
rates, shopping frequency, litigation, and the demand for our products and services. In some cases,
forward-looking statements can be identified because they contain words such as "anticipate,” “believe,”
"continue," "could,” “estimate,” “expect,” “intend,” “likely,” “may,” “might,” “plan,” “potential,” “predict,”
"project," "seek,” “should,” “target," "will," "would," or similar expressions and the negatives of those terms.
Such forward-looking statements involve risks and uncertainties that may cause actual events, results, or
performance to differ materially from those indicated by such statements, including, without limitation, the
factors set forth in the section titled "Item 1A-Risk Factors", and other factors noted in the section titled
"Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations" and in
the consolidated financial statements and related notes in Item 8 of this Report. Forward-looking
statements speak only as of the date they are made, and we do not undertake to update these
statements, except as required by law.
INFORMATION RELATING TO FORWARD LOOKING STATEMENTS
3
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
67
63
866
Signatures
Form 10-K Summary
Item 16.
Exhibits, Financial Statement Schedules
Item 15.
PART IV
62
62
66
Item 9.
31
Financial Statements and Supplementary Data
Item 1B.
Risk Factors
Item 1A.
Business
Item 1.
PART I
TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 3, 2023
COSTCO WHOLESALE CORPORATION
Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
January 18, 2024, are incorporated by reference into Part III of this Form 10-K.
Item 2.
DOCUMENTS INCORPORATED BY REFERENCE
The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 12,
2023 was $221,351,787,419.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No ☑
Indicate by check mark whether any of those error corrections are restatements that required a recovery
analysis of incentive-based compensation received by any of the registrant's executive officers during the
relevant recovery period pursuant to §240.10D-1(b). □
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the
financial statements of the registrant included in the filing reflect the correction of an error to previously
issued financials statements.
Indicate by check mark whether the registrant has filed a report on and attestation to its management's
assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the
Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued
its audit report. ☑
If an emerging growth company, indicate by check mark if the registrant has elected not to use the
extended transition period for complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
Smaller reporting company
Emerging growth company
☑ Accelerated filer
ㅁㅁㅁ
Non-accelerated filer
The number of shares outstanding of the registrant's common stock as of October 3, 2023, was
442,740,572.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of
"large accelerated filer," "accelerated filer,” “smaller reporting company,” and “emerging growth company"
in Rule 12b-2 of the Exchange Act.
Unresolved Staff Comments
Item 3.
Item 8.
29
Quantitative and Qualitative Disclosures About Market Risk
Item 7A.
21
Management's Discussion and Analysis of Financial Condition and Results of
Operations
20
19
120
Reserved
Properties
Item 6.
Item 7.
PART II
Item 5.
19
19
19
18
9
4
Mine Safety Disclosures
Item 4.
Legal Proceedings
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
61
ALBERTA - 19
Cray Jelek
XXL
December 7, 2023
Dear Costco Shareholders,
Forty years ago this past September, the first Costco warehouse opened in Seattle. We grew to nearly three
billion dollars in sales in less than six years. Our operating philosophy then and now remains simple: provide our
members quality merchandise and services at the lowest possible prices. We achieve this through our
commitment to carrying out our mission statement and adhering to our code of ethics.
The successes and challenges we faced in fiscal year 2023 reinforced the foundational business model of Costco,
focusing on the most productive items and bringing quality goods to market in volume. Although we experienced
inflationary pressures and general economic uncertainties, our buying and operations staff ensured that quality
and value remained priorities.
Net sales for the 53-week year totaled $237.7 billion, an increase of 7%, with a comparable sales increase of 3%.
Net income was $6.3 billion, or $14.16 per diluted share, an increase of 8%. Revenue from membership fees
increased 8% to $4.6 billion, and our membership base grew to nearly 128 million cardholders, with a 90%
renewal rate.
In fiscal year 2023, Costco's expansion included opening 23 net new locations: 13 in the U.S., three in China, two
each in Japan and Australia and one in South Korea, in addition to our first warehouses in New Zealand
(Auckland) and Sweden (Stockholm).
This year we introduced new Kirkland Signature ™ items, which illustrate our commitment to provide cost savings
and improve quality. Our new bakery items included a peanut-butter chocolate pie, a lemon blueberry loaf, and a
lemon meringue cheesecake; each was met with tremendous enthusiasm. Other new KS items included cat food,
garlic butter shrimp, barbecue grills and yellow golf balls, each showing significant savings over comparable brand
name products.
Our ecommerce business provides a broader selection of merchandise that complements our warehouses. This
includes appliances, home furnishings, consumer electronics, lawn and garden, health and beauty aids, apparel,
and 2-Day Grocery Delivery. Costco Next, a Costco marketplace that offers an additional selection of products,
has over 60 suppliers and continues to grow.
We are dedicated more than ever to operate in a sustainable manner. Our merchandise teams concentrated on
decreasing packaging and plastic use, utilizing post-consumer recycled content, and finding ways to increase sell
units on pallets, trucks and containers, which maximizes space and therefore reduces emissions and costs. We
also continue to focus on diversity through inclusion, employee development, community involvement and
supplier diversity. Embracing differences is important to the growth of our company, as it leads to opportunities,
innovation and employee satisfaction.
The coming months will see changes at the executive level. After nearly two years as Costco's President and
COO, Ron Vachris will transition to the role of CEO, with Craig Jelinek retiring from the CEO role after serving in
that capacity for more than twelve years. As has been the case since Ron became President and COO, we expect
a smooth and seamless transition, maintaining the culture and operational excellence that Costco has been
known for throughout many years.
As this letter was being finalized, we were saddened to learn that Charlie Munger had peacefully passed away,
just five weeks shy of his hundredth birthday. Charlie was a long-time fan of Costco, serving on our Board for
more than 26 years. No one loved Costco more than Charlie and our company benefited greatly from his wisdom,
his business acumen, his passion for our business, his strong moral ethos and his common sense. We will miss
Charlie dearly and will take with us the many fond memories that he bestowed on us, personally, and on our
company.
We extend our deepest gratitude and compliments to our more than 316,000 employees. Their exemplary service
to our members, dedication to maintaining our core values and culture, and support of one another is why our
employees are our greatest competitive advantage.
Finally, we would like to thank Costco members around the world. Thank you for your loyal support and trust in
Costco. May the year ahead bring you and your families good health, happiness, peace and prosperity.
COSTCO.CA
Sincerely,
CANADA
YUCATÁN - 1
TABASCO-1
VERACRUZ-2
THAO
COSTCO
FISCAL YEAR ENDED SEPTEMBER 3, 2023
ANNUAL REPORT
1599.99
CLE
SONY
X80CK
85-214.8 c
OLG
QUALITY FRE
ANIC BANAN
CONSUMER PACK
680
SONORA - 1
KIRKLA
CO
GRIPON
WARCREE
COSTCO
JULIE
KING
COSTCO
WHOLESALE
2023
COSTCO
NUEVO LEÓN - 3
PUEBLA - 1
QUERÉTARO-1
QUINTANA ROO - 1
SAN LUIS POTOSÍ -1
SINALOA - 1
Donovan
JALISCO - 3
MÉXICO - 5
HAWAII - 7
IDAHO - 7
ILLINOIS-23
INDIANA - 9
GEORGIA - 17
FLORIDA - 31
ALASKA - 4
ARIZONA - 20
ARKANSAS-1
CALIFORNIA - 135
COLORADO-16
CONNECTICUT - 8
DELAWARE -1
COSTCO.COM
ALABAMA - 4
UNITED
STATES
600
Puerto Rico
United States and
IOWA 4
KANSAS-3
108
40
México
S
COSTCO 871 locations as of December 31, 2023
EWHOLESALE
Ron Vachris
President & COO
In Valen
Chief Executive Officer
MICHOACÁN - 1
MORELOS-1
Canada
KENTUCKY-4
Craig Jelinek
MAINE -1
BAJA CALIFORNIA - 4
BAJA CALIFORNIA SUR - 1
CHIHUAHUA - 2
CIUDAD DE MÉXICO - 5
COAHUILA -1
GUANAJUATO - 3
LOUISIANA - 3
COSTCO.COM.MX
AGUASCALIENTES - 1
MÉXICO
VERMONT -1
UTAH-14
TEXAS-38
TENNESSEE - 7
SOUTH CAROLINA - 6
SOUTH DAKOTA - 1
PENNSYLVANIA - 11
VIRGINIA - 17
WASHINGTON - 33
WISCONSIN - 11
WASHINGTON, D.C. - 1
PUERTO RICO - 4
OKLAHOMA - 4
OHIO - 13
NEW HAMPSHIRE - 1
NEW JERSEY - 21
NEW MEXICO - 3
NEW YORK - 19
NORTH CAROLINA - 10
NORTH DAKOTA - 2
MONTANA -5
NEBRASKA-3
NEVADA - 8
MISSOURI -9
MARYLAND - 11
MISSISSIPPI-1
MINNESOTA - 13
OREGON - 13
MASSACHUSETTS - 6
MICHIGAN - 16
12,200
Our member renewal rate was 92.7% in the U.S. and Canada and 90.4% worldwide at the end of 2023.
The majority of members renew within six months following their renewal date. Our renewal rate, which
excludes affiliates of Business members, is a trailing calculation that captures renewals during the period
seven to eighteen months prior to the reporting date. Our membership counts include active memberships
as well as memberships that have not renewed within the 12 months prior to the reporting date.
Our membership was made up of the following (in thousands):
Gold Star
Business, including affiliates
Total paid members
Household cards
2021
2023
2022
58,800
54,000
50,200
Our members may utilize their memberships at all of our warehouses and websites. Gold Star
memberships are available to individuals; Business memberships are limited to businesses, including
individuals with a business license, retail sales license, or comparable document. Business members may
add additional cardholders (affiliates), to which the same annual fee applies. Affiliates are not available for
Gold Star members. Our annual fee for these memberships is $60 in the U.S. and varies in other
countries. All paid memberships include a free household card.
Total cardholders
Membership
Foods and Sundries (including sundries, dry grocery, candy, cooler, freezer, deli, liquor, and
tobacco)
We have direct buying relationships with many producers of brand-name merchandise. We do not obtain
a significant portion of merchandise from any one supplier. When sources of supply become unavailable,
we seek alternatives. We also purchase and manufacture private-label merchandise, as long as quality
and member demand are high and the value to our members is significant.
Our average warehouse space is approximately 147,000 square feet, with newer units being slightly
larger. Floor plans are designed for economy and efficiency in the use of selling space, the handling of
merchandise, and the control of inventory. Because shoppers are attracted principally by the quality of
merchandise and low prices, our warehouses are not elaborate. By strictly controlling the entrances and
exits and using a membership format, we believe our inventory losses (shrinkage) are well below those of
typical retail operations.
Our warehouses on average operate on a seven-day, 70-hour week. Gasoline operations generally have
extended hours. Because the hours of operation are shorter than many other retailers, and due to other
efficiencies inherent in a warehouse-type operation, labor costs are lower relative to the volume of sales.
Merchandise is generally stored on racks above the sales floor and displayed on pallets containing large
quantities, reducing labor required. In general, with variations by country, our warehouses accept certain
credit cards, including Costco co-branded cards, debit cards, cash and checks, Executive member 2%
reward certificates, co-brand cardholder rebates, and our proprietary stored-value card (shop card).
Our strategy is to provide our members with a broad range of high-quality merchandise at prices we
believe are consistently lower than elsewhere. We seek to limit most items to fast-selling models, sizes,
and colors. We carry less than 4,000 active stock keeping units (SKUs) per warehouse in our core
warehouse business, significantly less than other broadline retailers. We average anywhere from 9,000 to
11,000 SKUs online, some of which are also available in our warehouses. Many consumable products are
offered for sale in case, carton, or multiple-pack quantities only.
In keeping with our policy of member satisfaction, we generally accept returns of merchandise. On certain
electronic items, we typically have a 90-day return policy and provide, free of charge, technical support
services, as well as an extended warranty. Additional third-party warranty coverage is sold on certain
electronic items.
We offer merchandise and services in the following categories:
Core Merchandise Categories (or core business):
•
11,800
Non-Foods (including major appliances, electronics, health and beauty aids, hardware, garden
and patio, sporting goods, tires, toys and seasonal, office supplies, automotive care, postage,
tickets, apparel, small appliances, furniture, domestics, housewares, special order kiosk, and
jewelry)
Fresh Foods (including meat, produce, service deli, and bakery)
Warehouse Ancillary (includes gasoline, pharmacy, optical, food court, hearing aids, and tire installation)
and Other Businesses (includes e-commerce¹, business centers¹, travel, and other)
Warehouse ancillary businesses operate primarily within or next to our warehouses, encouraging
members to shop more frequently. The number of warehouses with gas stations varies significantly by
country, and we have no gasoline business in Korea, China, or Sweden. We operated 692 gas stations at
the end of 2023. Our gasoline business represented approximately 13% of total net sales in 2023.
1 E-commerce and business centers are allocated to the appropriate merchandise categories in the Net Sales portion of Item 7.
5
Our other businesses sell products and services that complement our warehouse operations (core and
warehouse ancillary businesses). Our e-commerce operations give members convenience and a broader
selection of goods and services. Net sales for e-commerce represented approximately 6% of total net
sales in 2023. This figure does not include other services we offer online in certain countries such as
business delivery, travel, same-day grocery, and various other services. Our business centers carry items
tailored specifically for food services, convenience stores and offices, and offer walk-in shopping and
deliveries. Business centers are included in our total warehouse count. Costco Travel offers vacation
packages, car rentals, cruises, hotels, and other travel products exclusively for Costco members (offered
in the U.S., Canada, and the U.K.).
Certain financial information for our segments and geographic areas is included in Note 11 to the
consolidated financial statements included in Item 8 of this Report.
11,500
6
65,800
2021
208,000
202,000
192,000
51,000
50,000
2023
47,000
52,000
49,000
316,000
304,000
288,000
We buy most of our merchandise directly from suppliers and route it to cross-docking consolidation points
(depots) or directly to our warehouses. Our depots receive large shipments from suppliers and quickly
ship these goods to warehouses. This process creates freight volume and handling efficiencies, lowering
costs associated with traditional multiple-step distribution channels. Our e-commerce operations ship
merchandise through our depots and logistics operations, as well as through drop-ship and other delivery
arrangements with our suppliers.
57,000
Total employees
Other International
Canada
61,700
56,900
53,100
49,900
127,900
118,900
111,600
Paid cardholders (except affiliates) are eligible to upgrade to an Executive membership in the U.S., for an
additional annual fee of $60. Executive memberships are also available in Canada, Mexico, the U.K.,
Japan, Korea, Taiwan, and Australia, for which the additional fee varies. Executive members earn a 2%
reward on qualified purchases (generally up to a maximum reward of $1,000 per year), redeemable at
Costco warehouses. This program offers services that vary by state and country and provide access to
additional savings and benefits on various business and consumer services, such as auto and home
insurance, the Costco auto purchase program, and check printing. Executive members totaled 32.3
million and represented 45.4% of paid members. The sales penetration of Executive members
represented approximately 72.8% of worldwide net sales in 2023.
Human Capital
Our Code of Ethics requires that we "Take Care of Our Employees," which is fundamental to the
obligation to "Take Care of Our Members." We must also carefully control our selling, general and
administrative (SG&A) expenses, so that we can sell high quality goods and services at low prices.
Compensation and benefits for employees is our largest expense after the cost of merchandise and is
carefully monitored.
Employee Base
At the end of 2023, we employed 316,000 employees worldwide. Approximately 95% are employed in our
membership warehouses and distribution channels, and approximately 5% are represented by unions.
We also utilize seasonal employees.
Growth and Engagement
The total number of employees by segment was:
United States
71,000
2022
We believe that our warehouses are among the most productive in the retail industry, owing largely to the
commitment and efficiency of our employees. We seek to provide them not merely with employment but
careers. Many attributes of our business contribute to the objective. The more significant include:
competitive compensation and benefits for those working in our membership warehouses and
distributions channels; a commitment to promoting from within; and a target ratio of at least 50% of our
employee base being full-time employees. These attributes contribute to what we consider, especially for
the industry, a high retention rate. In 2023, in the U.S. that rate was approximately 90% for employees
who have been with us for at least one year.
Availability and performance of our information technology (IT) systems are vital to our business.
Failure to successfully execute IT projects and have IT systems available to our business would
adversely impact our operations.
The potential impacts of a cybersecurity attack include reputational damage, litigation, government
enforcement actions, penalties, disruption to systems and operations, unauthorized release of confidential
or otherwise protected information, corruption of data, diminution in the value of our investment in IT
systems and increased cybersecurity protection and remediation costs. This could adversely affect our
competitiveness, results of operations and financial condition and, critically in light of our business model,
loss of member confidence. Further, the insurance coverage we maintain and indemnification
arrangements with third parties may be inadequate to cover claims, costs, and liabilities relating to
cybersecurity incidents. In addition, data we collect, store and process is subject to a variety of U.S. and
international laws and regulations, such as the European Union's General Data Protection Regulation,
California Consumer Privacy Act, Health Insurance Portability and Accountability Act, and other privacy
and cybersecurity laws across the various states and around the globe, which may carry significant
potential penalties for noncompliance.
12
We are subject to payment-related risks.
We accept payments using a variety of methods, including select credit and debit cards, cash and checks,
co-brand cardholder rebates, Executive member 2% reward certificates, and our shop card. As we offer
new payment options to our members, we may be subject to additional rules, regulations, compliance
requirements, and higher fraud losses. For certain payment methods, we pay interchange and other
related acceptance fees, along with additional transaction processing fees. We rely on third parties to
provide payment transaction processing services for credit and debit cards and our shop card. It could
disrupt our business if these parties become unwilling or unable to provide these services to us. We are
also subject to fee increases by these service providers.
We must comply with evolving payment card association and network operating rules, including data
security rules, certification requirements and rules governing electronic funds transfers. For example, we
are subject to Payment Card Industry Data Security Standards, which contain compliance guidelines and
standards with regard to our security surrounding the physical and electronic storage, processing and
transmission of individual cardholder data. If our internal systems are breached or compromised, we may
be liable for card re-issuance costs, subject to fines and higher transaction fees and lose our ability to
accept card payments from our members, and our business and operating results could be adversely
affected. Our failure to offer payment methods desired by our members could create a competitive
disadvantage.
We might sell products that cause illness or injury to our members, harm to our reputation, and
expose us to litigation.
If our merchandise, including food and prepared food products for human consumption, drugs, children's
products, pet products and durable goods, do not meet or are perceived not to meet applicable safety or
labeling standards or our members' expectations, we could experience lost sales, increased costs,
litigation or reputational harm. The sale of these items involves the risk of illness or injury to our members.
Such illnesses or injuries could result from tampering by unauthorized third parties, product contamination
or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues
introduced during the growing, manufacturing, storage, handling and transportation phases, or faulty
design. Our suppliers are generally contractually required to comply with product safety laws, and we are
dependent on them to ensure that the products we buy comply with safety and other standards. While we
are subject to governmental inspection and regulations and work to comply in all material respects with
applicable laws and regulations, we cannot be sure that consumption or use of our products will not cause
illness or injury or that we will not be subject to claims, lawsuits, or government investigations relating to
such matters, resulting in costly product recalls and other liabilities that could adversely affect our
business and results of operations. Even if a product liability claim is unsuccessful or is not fully pursued,
negative publicity could adversely affect our reputation with existing and potential members and our
corporate and brand image, and these effects could be long-term.
If we do not successfully develop and maintain a relevant omnichannel experience for our
members, our results of operations could be adversely impacted.
Omnichannel retailing is rapidly evolving, and we must keep pace with changing member expectations
and new developments by our competitors. Our members are increasingly using mobile phones, tablets,
computers, and other devices to shop and to interact with us through social media. We are making
investments in our websites and mobile applications. If we are unable to make, improve, or develop
relevant member-facing technology in a timely manner, our ability to compete and our results of
operations could be adversely affected.
Inability to attract, train and retain highly qualified employees could adversely impact our
business, financial condition and results of operations.
Our success depends on the continued contributions of our employees, including members of our senior
management and other key operations, IT, merchandising and administrative personnel. Failure to identify
Increased security threats and more sophisticated cyber misconduct pose a risk to our systems,
networks, products and services. We rely upon IT systems and networks, some of which are managed by
or belong to third parties, including suppliers, partners, vendors, and service providers. Additionally, we
collect, store and process sensitive information relating to our business, members, employees, and other
third parties. Operating these IT systems and networks, and processing and maintaining this data, in a
secure manner, is critical to our business operations and strategy. Increased remote work has also
increased the possible attack surfaces. Attempts to gain unauthorized access to systems, networks and
data, both ours and third parties with whom we work, are increasing in frequency and sophistication, and
in some cases, these attempts are successful. Cybersecurity attacks may range from random attempts to
coordinated and targeted attacks, including sophisticated computer crimes and advanced persistent
threats. Phishing attacks have emerged as particularly prominent, including as vectors for ransomware
attacks, which have increased in breadth and frequency. While we train our employees as part of our
security efforts, that training cannot be completely effective. These threats pose a risk to the security of
our systems and networks and the confidentiality, integrity, and availability of our data. Our IT systems
and networks, or those managed by third parties such as cloud providers or suppliers that otherwise host
or have access to confidential information, periodically have vulnerabilities, which may go unnoticed for a
period of time. Our logging capabilities, or the logging capabilities of third parties, are also not always
complete or sufficiently detailed, affecting our ability to fully investigate and understand the scope of
security events. While our cybersecurity and compliance efforts seek to mitigate such risks, there can be
no guarantee that the actions and controls we and our third-party service providers have implemented
and are implementing, will be sufficient to protect our systems, information or other property.
13
We may incur property, casualty or other losses not covered by our insurance.
Claims for employee health care benefits, workers' compensation, general liability, property damage,
directors' and officers' liability, vehicle liability, inventory loss, and other exposures are funded
predominantly through self-insurance. Insurance coverage is maintained for certain risks to limit
exposures arising from very large losses. The types and amounts of insurance may vary from time to time
based on our decisions with respect to risk retention and regulatory requirements. Significant claims or
events, regulatory changes, a substantial rise in costs of health care or costs to maintain our insurance or
the failure to maintain adequate insurance coverage could have an adverse impact on our financial
condition and results of operations.
Although we maintain specific coverages for catastrophic property losses, we still bear a significant
portion of the risk of losses incurred as a result of any physical damage to, or the destruction of, any
warehouses, depots, manufacturing or home office facilities, loss or spoilage of inventory, and business
interruption. Such losses could materially impact our cash flows and results of operations.
Market and Other External Risks
We face strong competition from other retailers and warehouse club operators, which could
adversely affect our business, financial condition and results of operations.
The retail business is highly competitive. We compete for members, employees, sites, products and
services and in other important respects with a wide range of local, regional and national wholesalers and
retailers, both in the United States and in foreign countries, including other warehouse-club operators,
supermarkets, supercenters, online retailers, gasoline stations, hard discounters, department and
specialty stores and operators selling a single category or narrow range of merchandise. Such retailers
and warehouse club operators compete vigorously and in a variety of ways, including pricing, selection
and availability, services, location, convenience, store hours, and the attractiveness and ease of use of
websites and mobile applications. The evolution of retailing in online and mobile channels has improved
the ability of customers to comparison shop, which has enhanced competition. Some competitors have
greater financial resources and technology capabilities, better access to merchandise, and greater market
penetration than we do. Our inability to respond effectively to competitive pressures, changes in the retail
markets or customer expectations could result in lost market share and negatively affect our financial
results.
General economic factors, domestically and internationally, may adversely affect our business,
financial condition, and results of operations.
Higher energy and gasoline costs, inflation, levels of unemployment, healthcare costs, consumer debt
levels, foreign-currency exchange rates, unsettled financial markets, weaknesses in housing and real
estate markets, reduced consumer confidence, changes and uncertainties related to government fiscal,
monetary and tax policies including changes in interest rates, tax rates, duties, tariffs, or other restrictions,
sovereign debt crises, pandemics and other health crises, and other economic factors could adversely
affect demand for our products and services, require a change in product mix, or impact the cost of or
ability to purchase inventory. Additionally, trade-related actions in various countries, particularly China and
the United States, have affected the costs of some of our merchandise. The degree of our exposure is
dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs. The impact
14
53
2022
and implement a succession plan for senior management could negatively impact our business. We must
attract, train and retain a large and growing number of qualified employees, while controlling related labor
costs and maintaining our core values. Our ability to control labor and benefit costs is subject to
numerous internal and external factors, including regulatory changes, prevailing wage rates, union
relations and healthcare and other insurance costs. We compete with other retail and non-retail
businesses for these employees and invest significant resources in training and motivating them. There is
no assurance that we will be able to attract or retain highly qualified employees in the future, which could
have a material adverse effect on our business, financial condition and results of operations.
We are required to maintain the privacy and security of personal and business information amidst
multiplying threat landscapes and in compliance with privacy and data protection regulations
globally. Failure to do so could damage our business, including our reputation with members,
suppliers and employees, cause us to incur substantial additional costs, and become subject to
litigation and regulatory action.
failures, viruses, internal or external security breaches, errors by employees, and catastrophic events
such as fires, earthquakes, tornadoes and hurricanes. Any debilitating failure of our critical IT systems,
data centers and backup systems would require significant investments in resources to restore IT
services and may cause serious impairment in our business operations including loss of business
services, increased cost of moving merchandise and failure to provide service to our members. We are
currently making substantial investments in maintaining and enhancing our digital resiliency and failure or
delay in these projects could be costly and harmful to our business. Failure to deliver IT transformation
efforts efficiently and effectively could result in the loss of our competitive position and adversely impact
our financial condition and results of operations. Insufficient IT capacity could also impact our capacity for
timely, complete and accurate financial and non-financial reporting required by law.
11
Executive Vice President, Chief Operating Officer, International
Division. Mr. Riel was Senior Vice President, Country Manager,
Canada, from 2019 to March 2022, and Senior Vice President,
Eastern Canada Region, from 2001 to 2019.
2022
60
Item 1A-Risk Factors
The risks described below could materially and adversely affect our business, financial condition and
results of operations. We could also be affected by additional risks that apply to all companies operating
in the U.S. and globally, as well as other risks that are not presently known to us or that we currently
consider to be immaterial. These Risk Factors should be carefully reviewed in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and
our consolidated financial statements and related notes in Item 8 of this Report.
9
Business and Operating Risks
We are highly dependent on the financial performance of our U.S. and Canadian operations.
Our financial and operational performance is highly dependent on our U.S. and Canadian operations,
which comprised 87% and 84% of net sales and operating income in 2023. Within the U.S., we are highly
dependent on our California operations, which comprised 27% of U.S. net sales in 2023. Our California
market, in general, has a larger percentage of higher volume warehouses as compared to our other
domestic markets. Any substantial slowing or sustained decline in these operations could materially
adversely affect our business and financial results. Declines in financial performance of our U.S.
operations, particularly in California, and our Canadian operations could arise from, among other things:
slow growth or declines in comparable warehouse sales (comparable sales); negative trends in operating
expenses, including increased labor, healthcare and energy costs; failing to meet targets for warehouse
openings; cannibalizing existing locations with new warehouses; shifts in sales mix toward lower gross
margin products; changes or uncertainties in economic conditions in our markets, including higher levels
of unemployment and depressed home values; and failing to consistently provide high quality and
innovative new products.
We may be unsuccessful implementing our growth strategy, including expanding our business in
existing markets and new markets, and integrating acquisitions, which could have an adverse
impact on our business, financial condition and results of operations.
Our growth is dependent, in part, on our ability to acquire property and build or lease new warehouses
and depots. We compete with other retailers and businesses for suitable locations. Local land use and
other regulations restricting the construction and operation of our warehouses and depots, as well as local
community actions opposed to the location of our warehouses or depots at specific sites and the adoption
of local laws restricting our operations and environmental regulations, may impact our ability to find
suitable locations and increase the cost of sites and of constructing, leasing and operating warehouses
and depots. We also may have difficulty negotiating leases or purchase agreements on acceptable terms.
In addition, certain jurisdictions have enacted or proposed laws and regulations that would prevent or
restrict the operation or expansion plans of certain large retailers and warehouse clubs, including us.
Failure to effectively manage these and other similar factors may affect our ability to timely build or lease
and operate new warehouses and depots, which could have a material adverse effect on our future
growth and profitability.
We seek to expand in existing markets to attain a greater overall market share. A new warehouse may
draw members away from our existing warehouses and adversely affect their comparable sales
performance, member traffic, and profitability.
We intend to continue to open warehouses in new markets. Associated risks include difficulties in
attracting members due to a lack of familiarity with us, attracting members of other wholesale club
operators, our lesser familiarity with local member preferences, and seasonal differences in the market.
Entry into new markets may bring us into competition with new competitors or with existing competitors
with a large, established market presence. We cannot ensure that new warehouses and new e-commerce
websites will be profitable and future profitability could be delayed or otherwise materially adversely
affected.
We have made and may continue to make investments and acquisitions to improve the speed, accuracy
and efficiency of our supply chains and delivery channels. The effectiveness of these investments can be
less predictable than opening new locations and might not provide the anticipated benefits or desired
rates of return.
10
10
Our failure to maintain membership growth, loyalty and brand recognition could adversely affect
our results of operations.
Membership loyalty and growth are essential to our business. The extent to which we achieve growth in
our membership base, increase the penetration of Executive membership, and sustain high renewal rates
materially influences our profitability. Damage to our brands or reputation may negatively impact
comparable sales, diminish member trust, and reduce renewal rates and, accordingly, net sales and
membership fee revenue, negatively impacting our results of operations.
We sell many products under our Kirkland Signature brand. Maintaining consistent product quality,
competitive pricing, and availability of these products is essential to developing and maintaining member
loyalty. These products also generally carry higher margins than national brand products and represent a
growing portion of our overall sales. If the Kirkland Signature brand experiences a loss of member
acceptance or confidence, our sales and gross margin results could be adversely affected.
Disruptions in merchandise distribution or processing, packaging, manufacturing, and other
facilities could adversely affect sales and member satisfaction.
We depend on the orderly operation of the merchandise receiving and distribution process, primarily
through our depots. We also rely upon processing, packaging, manufacturing and other facilities to
support our business, which includes the production of certain private-label items. Although we believe
that our operations are efficient, disruptions due to fires, tornadoes, hurricanes, earthquakes, pandemics
or other extreme weather conditions or catastrophic events, labor issues or other shipping problems may
result in delays in the production and delivery of merchandise to our warehouses, which could adversely
affect sales and the satisfaction of our members. Our e-commerce operations depend heavily on third-
party and in-house logistics providers and is negatively affected when these providers are unable to
provide services in a timely fashion.
We may not timely identify or effectively respond to consumer trends, which could negatively
affect our relationship with our members, the demand for our products and services, and our
market share.
It is difficult to consistently and successfully predict the products and services that our members will
desire. Our success depends, in part, on our ability to identify and respond to trends in demographics and
consumer preferences. Failure to identify timely or effectively respond to changing consumer tastes,
preferences (including those relating to environmental, social and governance practices) and spending
patterns could negatively affect our relationship with our members, the demand for our products and
services, and our market share. If we are not successful at predicting our sales trends and adjusting our
purchases accordingly, we may have excess inventory, which could result in additional markdowns, or we
may experience out-of-stock positions and delivery delays, which could result in higher costs, both of
which would reduce our operating performance. This could have an adverse effect on net sales, gross
margin and operating income.
2022
IT systems play a crucial role in conducting our business. These systems are utilized to process a very
high volume of transactions, conduct payment transactions, track and value our inventory and produce
reports critical for making business decisions. Failure or disruption of these systems could have an
adverse impact on our ability to buy products and services from our suppliers, produce goods in our
manufacturing plants, move the products in an efficient manner to our warehouses and sell products to
our members. We are undertaking large technology and IT transformation projects. The failure of these
projects could adversely impact our business plans and potentially impair our day to day business
operations. Given the high volume of transactions we process, it is important that we build strong digital
resiliency to prevent disruption from events such as power outages, computer and telecommunications
80
Pierre Riel
63
59
Chief Executive Officer. Mr. Jelinek has been a director since
February 2010. Mr. Jelinek previously was President and CEO from
January 2012 to February 2022. He was President and Chief
Operating Officer from February 2010 to December 2011. Prior to
that he was Executive Vice President, Chief Operating Officer,
Merchandising since 2004.
Position
Jim C. Klauer
Richard A. Galanti
Ron M. Vachris
W. Craig Jelinek
Name
The executive officers of Costco, their position, and ages are listed below. All have over 25 years of
service with the Company, with the exception of Mr. Sullivan who has 22 years of service.
Information about our Executive Officers
8
We have a code of ethics for senior financial officers, pursuant to Section 406 of the Sarbanes-Oxley Act.
Copies of the code are available free of charge by writing to Secretary, Costco Wholesale Corporation,
999 Lake Drive, Issaquah, WA 98027. If the Company makes any amendments to this code (other than
technical, administrative, or non-substantive amendments) or grants any waivers, including implicit
waivers, to the Chief Executive Officer, Chief Financial Officer or principal accounting officer and
controller, we will disclose (on our website or in a Form 8-K report filed with the SEC) the nature of the
amendment or waiver, its effective date, and to whom it applies.
President and Chief Operating Officer. Mr. Vachris has been a
director since February 2022. Mr. Vachris previously served as
Executive Vice President of Merchandising from June 2016 to
January 2022, as Senior Vice President, Real Estate Development,
from August 2015 to June 2016, and Senior Vice President, General
Manager, Northwest Region, from 2010 to July 2015.
Our U.S. website is www.costco.com. We make available through the Investor Relations section of that
site, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, Proxy Statements and Forms 3, 4 and 5, and any amendments to those reports, as soon as
reasonably practicable after filing such materials with or furnishing such documents to the Securities and
Exchange Commission (SEC). The information found on our website is not part of this or any other report
filed with or furnished to the SEC. The SEC maintains a site that contains reports, proxy and information
statements, and other information regarding issuers, such as the Company, that file electronically with the
SEC at www.sec.gov.
We rely on trademark and copyright laws, trade-secret protection, and confidentiality, license and other
agreements with our suppliers, employees and others to protect our intellectual property. The availability
and duration of trademark registrations vary by country; however, trademarks are generally valid and may
be renewed indefinitely as long as they are in use and registrations are maintained.
We believe that, to varying degrees, our trademarks, trade names, copyrights, proprietary processes,
trade secrets, trade dress, domain names and similar intellectual property add significant value to our
business and are important to our success. We have invested significantly in the development and
protection of our well-recognized brands, including the Costco Wholesale trademarks and our private-
label brand, Kirkland Signature. We believe that Kirkland Signature products are high quality, offered at
prices that are generally lower than national brands, and help lower costs, differentiate our merchandise
offerings, and generally earn higher margins. We expect to continue to increase the sales penetration of
our private-label items.
Intellectual Property
Our industry is highly competitive, based on factors such as price, merchandise quality and selection,
location, convenience, distribution strategy, and customer service. We compete on a worldwide basis with
global, national, and regional wholesalers and retailers, including supermarkets, supercenters, online
retailers, gasoline stations, hard discounters, department and specialty stores, and operators selling a
single category or narrow range of merchandise. Walmart, Target, Kroger, and Amazon are among our
significant general merchandise retail competitors in the U.S. We also compete with other warehouse
clubs, including Walmart's Sam's Club and BJ's Wholesale Club in the U.S. Many of the major
metropolitan areas in the U.S. and certain of our Other International locations have multiple competing
clubs.
Competition
For more detailed information regarding our programs and initiatives, see “Employees" within our
Sustainability Commitment (located on our website). The Sustainability Commitment and other
information on our website are not incorporated by reference into and do not form any part of this Annual
Report.
7
Costco strives to provide our employees with competitive wages and excellent benefits. In March 2023,
we increased the top of the wage scales by 85 cents per hour in the U.S, Canada and Puerto Rico. In
September of 2023, we increased the starting wage to at least $18.50 for all entry-level positions in the
U.S. We have also expanded our benefits in the U.S. to include additional mental health support for
children and adults at little to no cost to our employees. Costco is firmly committed to protecting the health
and safety of our members and employees and to serving our communities.
Well Being
The commitment to "Take Care of Our Employees" is also the foundation of our approach to promoting
diversity, equity and inclusion and creating an inclusive and respectful workplace. We strive for an
environment where all employees feel that they belong, are accepted, included, respected and supported
because of who they are. We demonstrate leadership commitment to equity through consistent
communication, employee development and education, support of diversity and inclusion initiatives within
the organization, community involvement, and supplier diversity. Costco continues its efforts to develop
future leaders, including through the supervisor in training programs. In 2023, over 7,800 hourly
employees completed the 6-week course.
Diversity, Equity and Inclusion
Available Information
Executive
Officer
Since Age
71
1995
2021
61
2019
Executive Vice President, Chief Operating Officer, Southwest
Division. Mr. Frates was Senior Vice President, Los Angeles
Region, from 2015 to May 2022.
Executive Vice President, Merchandising. Ms. Adamo was Senior
Vice President, Non-Foods, from 2018 to February 2022, and Vice
President, Non-Foods, from 2013 to 2018.
Executive Vice President, General Counsel & Corporate Secretary.
Mr. Sullivan has been General Counsel since 2016 and Corporate
Secretary since 2010.
Executive Vice President, Chief Operating Officer, Eastern Division.
Mr. Rubanenko was Senior Vice President and General Manager,
Southeast Region, from 2013 to September 2021, and Vice
President, Regional Operations Manager for the Northeast Region,
from 1998 to 2013.
Executive Vice President, Administration. Mr. Callans was Senior
Vice President, Human Resources and Risk Management, from
2013 to December 2018.
Senior Executive Vice President, U.S. Operations. Mr. Miller was
Executive Vice President, Chief Operating Officer, Southwest
Division and Mexico, from January 2018 to May 2022. Mr. Miller
was Senior Vice President, Western Canada Region, from 2001 to
January 2018.
Caton Frates
Claudine E. Adamo
John Sullivan
Yoram B. Rubanenko
Patrick J. Callans
Russ D. Miller
66
2018
61
2018
Executive Vice President, Chief Operating Officer, Northern
Division. Mr. Klauer was Senior Vice President, Non-Foods and E-
commerce Merchandise, from 2013 to January 2018.
52
67
Executive Vice President and Chief Financial Officer. Mr. Galanti 1993
has been a director since January 1995.
58
2016
2021
55
119
19
2014 & Before
663
22222222215
$151
$150
158
$140
158
172
$132
152
184
193
$129
138
172
208
237
206
176
158
142
$121
216
202
172
141
2015
$116
2016
2018
Performance Graph
The following graph compares the cumulative total shareholder return assuming reinvestment of
dividends on an investment of $100 in Costco common stock, S&P 500 Index, S&P Retail Select Index,
and the previously selected S&P 500 Retail Index over the five years from September 2, 2018, through
September 3, 2023. The S&P Retail Select Index will prospectively replace in the graph the S&P 500
Retail Index to show a broader representation of industry performance and a broader index of peers.
Comparison of 5-Year Cumulative Total Returns
$300
$200
$100
$0
2018
2019
2020
2021
2022
2023
Costco
S&P 500
S&P 500 Retail
S&P Retail Select
The following graph provides information concerning average sales per warehouse over a 10-year period.
Average Sales Per Warehouse*
(Sales In Millions)
Year Opened
# of Whses
2023
2022
2021
2020
2019
2017
214
14 %
3,877
21
Our philosophy is to provide our members with quality goods and services at competitive prices. We do
not focus in the short-term on maximizing prices charged, but instead seek to maintain what we believe is
a perception among our members of our "pricing authority" - consistently providing the most competitive
values. Merchandise costs in 2023 continued to be impacted by inflation, however at a lower rate than
what we experienced in 2022. The impact to our net sales and gross margin is influenced in part by our
merchandising and pricing strategies in response to cost increases. Those strategies can include, but are
not limited to, working with our suppliers to share in absorbing cost increases, earlier-than-usual
purchasing and in greater volumes, as well as passing cost increases on to our members. Our
investments in merchandise pricing may include reducing prices on merchandise to drive sales or meet
competition and holding prices steady despite cost increases instead of passing the increases on to our
members, all negatively impacting gross margin and gross margin as a percentage of net sales (gross
margin percentage).
We believe that the most important driver of our profitability is increasing net sales, particularly
comparable sales. Net sales includes our core merchandise categories (foods and sundries, non-foods,
and fresh foods), warehouse ancillary (gasoline, pharmacy, optical, food court, hearing aids, and tire
installation) and other businesses (e-commerce, business centers, travel and other). Comparable sales is
defined as net sales from warehouses open for more than one year, including remodels, relocations and
expansions, and sales related to e-commerce websites operating for more than one year. The measure is
intended as supplemental information and is not a substitute for net sales presented in accordance with
U.S. generally accepted accounting principles (U.S. GAAP). Comparable sales growth is achieved
through increasing shopping frequency from new and existing members and the amount they spend on
each visit (average ticket). Sales comparisons can also be particularly influenced by certain factors that
are beyond our control: fluctuations in currency exchange rates (with respect to our international
operations); inflation or deflation and changes in the cost of gasoline and associated competitive
conditions. The higher our comparable sales exclusive of these items, the more we can leverage our
SG&A expenses, reducing them as a percentage of sales and enhancing profitability. Generating
comparable sales growth is foremost a question of making available to our members the right
merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long-
term. Another substantial factor in net sales growth is the health of the economies in which we do
business, including the effects of inflation or deflation, especially the United States. Net sales growth and
gross margins are also impacted by our competition, which is vigorous and widespread, across a wide
range of global, national and regional wholesalers and retailers, including those with e-commerce
operations. While we cannot control or reliably predict general economic health or changes in
competition, we believe that we have been successful historically in adapting our business to these
changes, such as through adjustments to our pricing and merchandise mix, including increasing the
penetration of our private-label items, and through online offerings.
Overview
The following Management's Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) is intended to promote understanding of the results of operations and financial condition. MD&A
is provided as a supplement to, and should be read in conjunction with, our consolidated financial
statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K). This
section generally discusses the results of operations for 2023 compared to 2022. For discussion related
to the results of operations and changes in financial condition for 2022 compared to 2021 refer to Part II,
Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our
fiscal year 2022 Form 10-K, which was filed with the United States Securities and Exchange Commission
(SEC) on October 5, 2022.
Item 7-Management's Discussion and Analysis of Financial Conditions and Results of
Operations (amounts in millions, except per share, share, membership fee, and warehouse count data)
20
20
21
Item 6-Reserved
*First year sales annualized.
Fiscal Year
2023
2022
2021
2020
2019
2018
2017 and 2023 were 53-week fiscal years but have been normalized for purposes of comparability
2017
We believe our gasoline business enhances traffic in our warehouses, but it generally has a lower gross
margin percentage and lower SG&A expense, relative to our non-gasoline businesses. A higher
penetration of gasoline sales will generally lower our gross margin percentage. Rapidly changing gasoline
prices may significantly impact our near-term net sales growth. Generally, rising gasoline prices benefit
net sales growth which, given the higher sales base, negatively impacts our gross margin percentage but
decreases our SG&A expenses as a percentage of net sales. A decline in gasoline prices has the inverse
effect.
We also achieve net sales growth by opening new warehouses. As our warehouse base grows, available
and desirable sites become more difficult to secure, and square footage growth becomes a comparatively
less substantial component of growth. The negative aspects of such growth, however, including lower
initial operating profitability relative to existing warehouses and cannibalization of sales at existing
warehouses when openings occur in existing markets, are continuing to decline in significance as they
relate to the results of our total operations. Our rate of square footage growth is generally higher in foreign
markets, due to the smaller base in those markets, and we expect that to continue. Our e-commerce
business, domestically and internationally, generally has a lower gross margin percentage than our
warehouse operations.
The effective tax rate in 2023 was 25.9%, compared to 24.6% in 2022;
SG&A expenses as a percentage of net sales increased 20 basis points, due to increased costs in
warehouse operations and other businesses, primarily wage increases effective in March and July
2022, and March 2023, as well as lower sales growth;
Gross margin percentage increased nine basis points, driven primarily by a smaller LIFO charge in
2023 compared to 2022 and our core merchandise categories. This was partially offset by charges of
$391, predominantly related to the discontinuation of our charter shipping activities;
Net sales increased 7% to $237,710, driven by a 3% increase in comparable sales, sales at new
warehouses opened in 2022 and 2023, and the benefit of one additional week of sales in 2023;
Membership fee revenue increased 8% to $4,580, driven by new member sign-ups, upgrades to
Executive membership, and one additional week of membership fees in 2023;
We opened 26 new warehouses, including three relocations: 13 net new in the U.S. and 10 new in
our Other International segment. We opened the same number of new warehouses, including
relocations, in 2022;
•
•
•
Government actions in various countries relating to tariffs, particularly China and the United States, have
affected the costs of some of our merchandise. The degree of our exposure is dependent on (among
other things) the type of goods, rates imposed, and timing of the tariffs. Higher tariffs could adversely
impact our results.
•
Highlights for 2023 versus 2022 include:
Our fiscal year ends on the Sunday closest to August 31. References to 2023 relate to the 53-week fiscal
year ended September 3, 2023. References to 2022 and 2021 relate to the 52-week fiscal years ended
August 28, 2022, and August 29, 2021. Certain percentages presented are calculated using actual results
prior to rounding. Unless otherwise noted, references to net income relate to net income attributable to
Costco.
222
22
In discussions of our consolidated operating results, we refer to the impact of changes in foreign
currencies relative to the U.S. dollar, which are differences between the foreign-exchange rates we use to
convert the financial results of our international operations from local currencies into U.S. dollars. This
impact of foreign-exchange rate changes is calculated based on the difference between the current and
prior period's currency exchange rates. The impact of changes in gasoline prices on net sales is
calculated based on the difference between the current and prior period's average price per gallon sold.
Results expressed excluding the impacts of foreign exchange and gasoline prices should be reviewed in
conjunction with results reported in accordance with U.S. GAAP.
Our operating model is generally the same across our U.S., Canadian, and Other International operating
segments (see Note 11 to the consolidated financial statements included in Item 8 of this Report). Certain
operations in the Other International segment have relatively higher rates of square footage growth, lower
wage and benefit costs as a percentage of sales, less or no direct membership warehouse competition, or
lack e-commerce or business delivery.
Our financial performance depends heavily on controlling costs. While we believe that we have achieved
successes in this area, some significant costs are partially outside our control, particularly health care and
utility expenses. With respect to the compensation of our employees, our philosophy is not to seek to
minimize their wages and benefits. Rather, we believe that achieving our longer-term objectives of
reducing employee turnover and enhancing employee satisfaction requires maintaining compensation
levels that are better than the industry average for much of our workforce. This may cause us, for
example, to absorb costs that other employers might seek to pass through to their workforces. Because
our business operates on very low margins, modest changes in various items in the consolidated
statements of income, particularly merchandise costs and SG&A expenses, can have substantial impacts
on net income.
The membership format is an integral part of our business and has a significant effect on our profitability.
This format is designed to reinforce member loyalty and provide continuing fee revenue. The extent to
which we achieve growth in our membership base, increase the penetration of our Executive members,
and sustain high renewal rates materially influences our profitability. Our paid-membership growth rate
may be adversely impacted when warehouse openings occur in existing markets as compared to new
markets.
•
Net income increased 8% to $6,292, or $14.16 per diluted share compared to $5,844, or $13.14 per
diluted share in 2022;
2016
2014
199
189
163
136
122
112
94
85
$164
$83
212
204
173
145
131
118
97
$87
23
2015
165
170
$252
$245
$217
$192
$182
$176
$163
$159
165
$162
861
Totals
268
259
228
201
191
184
$164
9%
In January 2023, the Board of Directors authorized a new share repurchase program in the amount
of $4,000; and
In April 2023, the Board of Directors approved a 13% increase in the quarterly cash dividend.
13 %
10%
8%
12%
12%
8%
(1) The repurchase program is conducted under a $4,000 authorization approved by our Board of Directors in January 2023,
which expires in January 2027. This authorization revoked previously authorized but unused amounts, totaling $2,568.
10 %
5 %
4 %
10 %
(6)%
16 %
14 %
3 %
19%
7 %
3 %
44 %
20%
11 %
(5)%
4,224 $
9%
8%
4,580 $
$
2021
2022
2023
24
13 %
24
Membership fees
Membership Fees
Comparable sales increased 3% during 2023 and were positively impacted by increases in shopping
frequency, partially offset by a decrease in average ticket.
During 2023, changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by
approximately $3,484, 156 basis points, compared to 2022, attributable to our Canadian and Other
International operations. The volume of gasoline sold increased approximately 7%, positively impacting
net sales by $2,148, or 96 basis points. Lower gasoline prices negatively impacted net sales by $1,592, or
71 basis points, compared to 2022, with a 6% decrease in the average price per gallon.
Comparable Sales
Net sales increased $14,980 or 7% during 2023. The improvement was attributable to an increase in
comparable sales of 3%, sales at new warehouses opened in 2022 and 2023, and one additional week of
sales in 2023. Sales increased $12,761, or 7% in core merchandise categories, led by foods and sundries
and fresh foods; while non-foods decreased. Sales increased $2,219, or 5% in warehouse ancillary and
other businesses, led by pharmacy, food court, and travel.
Net Sales
43 %
10 %
Membership fees increase
•
15 %
15%
U.S.
Changes in comparable sales excluding the impact of
changes in foreign-currency and gasoline prices:
E-commerce
Total Company
Other International
$ 237,710
2023
Canada
Canada
U.S.
Total Company
Other International
Canada
Changes in net sales:
U.S.
Net Sales
Net Sales
RESULTS OF OPERATIONS
23
Changes in comparable sales:
2%
Other International
E-commerce
16 %
3 %
18 %
16 %
7 %
23 %
10 %
9%
Total Company
22 %
4 %
16 %
17 %
7%
$ 192,052
$ 222,730
2021
2022
16 %
3,563
Total
3,687
16
regulations related to climate change, and evolving consumer preferences will affect our future operations
and will adversely impact certain elements of our profitability and require significant capital expenditures.
Failure to meet financial market expectations could adversely affect the market price and volatility
of our stock.
We believe that the price of our stock currently reflects high market expectations for our future operating
results. Any failure to meet or delay in meeting these expectations, including our warehouse and e-
commerce comparable sales growth rates, membership renewal rates, new member sign-ups, gross
margin, earnings, earnings per share, new warehouse openings, or dividend or stock repurchase policies
could cause the price of our stock to decline.
Legal and Regulatory Risks
We are subject to risks associated with the legislative, judicial, accounting, regulatory, political
and economic factors specific to the countries or regions in which we operate, which could
adversely affect our business, financial condition and results of operations.
At the end of 2023, we operated 270 warehouses outside of the U.S. (31% of all warehouse locations),
and we plan to continue expanding our international operations. Future operating results internationally
could be negatively affected by a variety of factors, many similar to those we face in the U.S., certain of
which are beyond our control. These factors include political and economic conditions, regulatory
constraints, currency regulations, policy changes, and other matters in any of the countries or regions in
which we operate, now or in the future. Other factors that may impact international operations include
foreign trade (including tariffs and trade sanctions), monetary and fiscal policies and the laws and
regulations of the U.S. and foreign governments, agencies and similar organizations, and risks associated
with having major facilities in locations which have been historically less stable than the U.S. Risks
inherent in international operations also include, among others, the costs and difficulties of managing
international operations, adverse tax consequences, and difficulty in enforcing intellectual property rights.
New reporting obligations globally are increasing the cost and complexity of doing business.
Changes in accounting standards and subjective assumptions, estimates and judgments by
management related to complex accounting matters could significantly affect our financial
condition and results of operations.
Accounting principles and related pronouncements, implementation guidelines, and interpretations we
apply to a wide range of matters that are relevant to our business, including self-insurance liabilities, are
highly complex and involve subjective assumptions, estimates and judgments by our management.
Changes in rules or interpretation or changes in underlying assumptions, estimates or judgments by our
management could significantly change our reported or expected financial performance and have a
material impact on our consolidated financial statements.
We are exposed to risks relating to evaluations of controls required by Section 404 of the
Sarbanes-Oxley Act and otherwise.
Section 404 of the Sarbanes-Oxley Act of 2002 requires management assessments of the effectiveness
of internal control over financial reporting and disclosure controls and procedures. If we are unable to
maintain effective internal control over financial reporting or disclosure controls and procedures, our ability
to record, process and report financial information accurately and to prepare financial statements within
required time periods could be adversely affected, which could subject us to litigation or investigations
requiring management resources and payment of legal and other expenses, negatively affect investor
confidence in our financial statements and adversely impact our stock price. Uncertainties around our
developing systems concerning controls for non-financial reporting also create risks.
17
Changes in tax rates, new U.S. or foreign tax legislation, and exposure to additional tax liabilities
could adversely affect our financial condition and results of operations.
We are subject to a variety of taxes and tax collection and remittance obligations in the U.S. and
numerous foreign jurisdictions. Additionally, at any point in time, we may be under examination for value
added, sales-based, payroll, product, import or other non-income taxes. We may recognize additional tax
expense, be subject to additional tax liabilities, or incur losses and penalties, due to changes in laws,
regulations, administrative practices, principles, assessments by authorities and interpretations related to
tax, including tax rules in various jurisdictions. We compute our income tax provision based on enacted
tax rates in the countries in which we operate. As tax rates vary among countries, a change in earnings
attributable to the various jurisdictions in which we operate could result in an unfavorable change in our
overall tax provision. Additionally, changes in the enacted tax rates or adverse outcomes in tax audits,
including transfer pricing disputes, could have a material adverse effect on our financial condition and
results of operations.
Changes in or failure to comply with regulations relating to the use, storage, discharge and
disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental
matters (such as recycling and extended producer responsibility requirements) could adversely
impact our business, financial condition and results of operations.
We are subject to a wide and increasingly broad array of federal, state, regional, local and international
laws and regulations relating to the use, storage, discharge and disposal of hazardous materials,
hazardous and non-hazardous wastes and other environmental matters. Failure to comply with these
laws could result in harm to our members, employees or others, significant costs to satisfy environmental
compliance, remediation or compensatory requirements, or the imposition of severe penalties or
restrictions on operations by governmental agencies or courts that could adversely affect our business,
financial condition and results of operations.
Operations at our facilities require the treatment and disposal of wastewater, stormwater and agricultural
and food processing wastes, the use and maintenance of refrigeration systems, including ammonia-based
chillers, noise, odor and dust management, the operation of mechanized processing equipment, and
other operations that potentially could affect the environment and public health and safety. Failure to
comply with current and future environmental, health and safety standards could result in the imposition of
fines and penalties, illness or injury of our employees, and claims or lawsuits related to such illnesses or
injuries, and temporary closures or limits on the operations of facilities.
We are involved in a number of legal proceedings and audits and some of these outcomes could
adversely affect our business, financial condition and results of operations.
Our business requires compliance with many laws and regulations. Failure to achieve compliance could
subject us to lawsuits and other proceedings and lead to damage awards, fines, penalties, and
remediation costs. We are or may become involved in a number of legal proceedings and audits,
including grand jury investigations, government and agency investigations, and consumer, employment,
tort, unclaimed property laws, and other litigation. We cannot predict with certainty the outcomes of these
proceedings and other contingencies, including environmental remediation and other proceedings
commenced by governmental authorities. The outcome of some of these proceedings, audits, unclaimed
property laws, and other contingencies could require us to take, or refrain from taking, actions which could
negatively affect our operations or could require us to pay substantial amounts of money, adversely
affecting our financial condition and results of operations. Additionally, defending against these lawsuits
and proceedings may involve significant expense and diversion of management's attention and
resources.
Item 1B-Unresolved Staff Comments
None.
18
Item 2-Properties
Warehouse Properties
At September 3, 2023, we operated 861 membership warehouses:
We also sell a substantial amount of gasoline, the demand for which could be impacted by concerns
about climate change and increased regulations. More stringent fuel economy standards, changing public
policies aimed at increasing the adoption of zero-emission and alternative fuel vehicles and other
We use natural gas, diesel fuel, gasoline, and electricity in our distribution and warehouse operations.
Government regulations limiting carbon dioxide and other greenhouse gas emissions and other
environmental restrictions may increase compliance and merchandise costs, and other regulation
affecting energy inputs could materially affect our profitability. As the economy transitions to lower carbon
intensity we cannot guarantee that we will make adequate investments or successfully implement
strategies that will effectively achieve our climate-related goals, which could lead to negative perceptions
among members and other stakeholders and result in reputational harm. Climate change, extreme
weather conditions, wildfires, droughts and rising sea levels could affect our ability to procure
commodities at costs and in quantities we currently experience.
Factors associated with climate change could adversely affect our business.
The long-term impact of the pandemic on our business, including consumer behaviors; and
Disruption and volatility within the financial and credit markets.
3,634
to our net sales and gross margin is influenced in part by our merchandising and pricing strategies in
response to potential cost increases. Higher tariffs could adversely impact our results.
Prices of certain commodities, including gasoline and consumable goods used in manufacturing and our
warehouse retail operations, are historically volatile and are subject to fluctuations arising from changes in
domestic and international supply and demand, inflationary pressures, labor costs, competition, market
speculation, government regulations, taxes and periodic delays in delivery. Rapid and significant changes
in commodity prices and our ability and desire to pass them through to our members may affect our sales
and profit margins. These factors could also increase our merchandise costs and selling, general and
administrative expenses, and otherwise adversely affect our operations and financial results. General
economic conditions can also be affected by events like the outbreak of hostilities, including but not
limited to the Ukraine conflict, or acts of terrorism.
Inflationary factors such as increases in merchandise costs may adversely affect our business, financial
condition and results of operations. We may not be able to adjust prices to sufficiently offset the effect of
cost increases without negatively impacting consumer demand.
Suppliers may be unable to timely supply us with quality merchandise at competitive prices or
may fail to adhere to our high standards, resulting in adverse effects on our business,
merchandise inventories, sales, and profit margins.
We depend heavily on our ability to purchase quality merchandise in sufficient quantities at competitive
prices. As the quantities we require continue to grow, we have no assurances of continued supply,
appropriate pricing or access to new products, and any supplier has the ability to change the terms upon
which they sell to us or discontinue selling to us. Member demands may lead to out-of-stock positions
causing a loss of sales and profits.
We buy from numerous domestic and foreign suppliers and importers. Our inability to acquire suitable
merchandise on acceptable terms or the loss of key suppliers could negatively affect us. We may not be
able to develop relationships with new suppliers, and products from alternative sources, if any, may be of
a lesser quality or more expensive. Because of our efforts to adhere to high-quality standards for which
available supply may be limited, particularly for certain food items, the large volumes we demand may not
be consistently available. Our efforts to secure supply could lead to commitments that prove to be
unsuccessful in the short and long-term.
Our suppliers (and those they depend upon for materials and services) are subject to risks, including
labor disputes, union organizing activities, financial liquidity, natural disasters, extreme weather
conditions, public health emergencies, supply constraints and general economic and political conditions
and other risks similar to those we face that could limit their ability to timely provide us with acceptable
merchandise. One or more of our suppliers might not adhere to our quality control, packaging, legal,
regulatory, labor, environmental or animal welfare standards. These deficiencies may delay or preclude
delivery of merchandise to us and might not be identified before we sell such merchandise to our
members. This failure could lead to recalls and litigation and otherwise damage our reputation and our
brands, increase costs, and otherwise adversely impact our business.
Fluctuations in foreign exchange rates may adversely affect our results of operations.
During 2023, our international operations, including Canada, generated 27% and 34% of our net sales
and operating income. Our international operations have accounted for an increasing portion of our
warehouses, and we plan to continue international growth. To prepare our consolidated financial
statements, we translate the financial statements of our international operations from local currencies into
U.S. dollars using current exchange rates. Future fluctuations exchange rates that are unfavorable to
us may adversely affect the financial performance of our Canadian and Other International operations and
have a corresponding adverse period-over-period effect on our results of operations. As we continue to
expand internationally, our exposure to fluctuations in foreign exchange rates may increase.
15
A portion of the products we purchase is paid for in a currency other than the local currency of the country
in which the goods are sold. Currency fluctuations may increase our merchandise costs and may not be
passed on to members and thus may adversely affect our results of operations.
United States and Puerto Rico
Natural disasters, extreme weather conditions, or other catastrophic events could negatively
affect our business, financial condition, and results of operations.
Pandemics and other health crises, including COVID-19, could affect our business, financial
condition and results of operations in many respects.
The emergence, severity, magnitude and duration of global or regional health crises are uncertain and
difficult to predict. A pandemic, such as COVID-19, could affect certain business operations, demand for
our products and services, in-stock positions, costs of doing business, availability of labor, access to
inventory, supply chain operations, our ability to predict future performance, exposure to litigation, and our
financial performance, among other things. Other factors and uncertainties include, but are not limited to:
•
The severity and duration of pandemics;
•
•
•
•
Evolving macroeconomic factors, including general economic uncertainty, unemployment rates,
and recessionary pressures;
Changes in labor markets affecting us and our suppliers;
Unknown consequences on our business performance and initiatives stemming from the
substantial investment of time and other resources to the pandemic response;
The pace of post-pandemic recovery;
Natural disasters and extreme weather conditions, including those impacted by climate change, such as
hurricanes, typhoons, floods, earthquakes, wildfires, droughts; acts of terrorism or violence, including
active shooter situations; and energy shortages; particularly in California or Washington state, where our
centralized operating systems and administrative personnel are located, could negatively affect our
operations and financial performance. Such events could result in physical damage to our properties,
limitations on store operating hours, less frequent visits by members to physical locations, the temporary
closure of warehouses, depots, manufacturing or home office facilities, the temporary lack of an adequate
work force, disruptions to our IT systems, the temporary or long-term disruption in the supply of products
from some local or overseas suppliers, the temporary disruption in the transport of goods to or from
overseas, delays in the delivery of goods to our warehouses or depots, and the temporary reduction in the
availability of products in our warehouses. These events could also reduce demand for our products or
make it difficult or impossible to procure products. We may be required to suspend operations in some or
all of our locations, which could have a material adverse effect on our business, financial condition and
results of operations.
Canada
247
29
May 8-June 4, 2023
of Shares
Purchased
107,000 $
102,000
Average Price
Paid per
Share
498.28
523.05
July 3-July 30, 2023
97,000
548.20
July 31-September 3, 2023
127,000
550.58
Total fourth quarter
433,000 $
530.67
Total Number of
Shares Purchased as
Part of Publicly
Announced
Program(1)
Maximum Dollar
Value of Shares
that May Yet be
Purchased under
the Program
107,000
$
102,000
127,000
433,000
Other International
3,740
Period
June 5-July 2, 2023
97,000
The following table sets forth information on our common stock repurchase activity for the fourth quarter
of 2023 (dollars in millions, except per share data):
(1)
Total Number
Own Land and Building
477
114
591
90
17
107
110
677
53
163
184
Lease Land and/or Building Total
(1) 132 of the 184 leases are land-only leases, where Costco owns the building.
861
Issuer Purchases of Equity Securities
Payment of dividends is subject to declaration by the Board of Directors. Factors considered in
determining dividends include our profitability and expected capital needs. Subject to these qualifications,
we presently expect to continue to pay dividends on a quarterly basis.
Market Information and Dividend Policy
Item 5-Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Our common stock is traded on the NASDAQ Global Select Market under the symbol "COST." On
October 3, 2023, we had 10,331 stockholders of record.
Not applicable.
Item 4-Mine Safety Disclosures
See discussion of Legal Proceedings in Note 10 to the consolidated financial statements included in
Item 8 of this Report.
Item 3-Legal Proceedings
At the end of 2023, our warehouses contained approximately 126.3 million square feet of operating floor
space: 87.6 million in the U.S.; 15.3 million in Canada; and 23.4 million in Other International. Total
square feet associated with distribution and logistics facilities were approximately 33.1 million.
Additionally, we operate various processing, packaging, manufacturing and other facilities to support our
business, which includes the production of certain private-label items.
PART II
2022
Effective tax rate
Provision for income taxes
Provision for Income Taxes
The increase in interest income in 2023 was due to higher global interest rates and higher average cash
and investment balances. Foreign-currency transaction gains, net include revaluation or settlement of
monetary assets and liabilities by our Canadian and Other International operations and mark-to-market
adjustments for forward foreign-exchange contracts. See Derivatives and Foreign Currency sections in
Note 1 to the consolidated financial statements included in Item 8 of this Report.
143
205 $
533 $
2023
$ 2,195
56
46
38
34
106
29
41
$
61
470 $
$
2021
$
1,925
26
24.6 %
2022
(2,614)
(3,535)
(3,915)
(4,972)
8,958
7,392 $
11,068 $
$
2021
25.9 %
2022
26
Net cash used in financing activities
Net cash provided by operating activities
Net cash used in investing activities
The following table summarizes our significant sources and uses of cash and cash equivalents:
LIQUIDITY AND CAPITAL RESOURCES
The effective tax rate for 2022 was impacted by net discrete tax benefits of $130, primarily due to excess
tax benefits related to stock compensation. Excluding discrete net tax benefits, the tax rate was 26.2%.
The effective tax rate for 2023 was impacted by net discrete tax benefits of $62, primarily due to excess
tax benefits related to stock compensation. Excluding discrete net tax benefits, the tax rate was 26.6%.
24.0 %
$ 1,601
2021
2023
2023
SG&A expenses as a percentage of net sales
Other, net
Gross margin on a segment basis, when expressed as a percentage of the segment's own sales and
excluding the impact of changes in gasoline prices on net sales (segment gross margin percentage),
increased in our U.S. segment, due to a smaller LIFO charge and increases in core merchandise
categories, primarily foods and sundries, partially offset by the charges related to the discontinuation of
our charter shipping activities discussed above and warehouse ancillary and other businesses. Gross
margin percentage increased in our Canada segment, attributable to increases in core merchandise
categories and warehouse ancillary and other businesses. Our Other International gross margin
percentage decreased, largely due to decreases in core merchandise categories, partially offset by
warehouse ancillary and other businesses. All segments were negatively impacted by increased 2%
rewards.
The gross margin in core merchandise categories, when expressed as a percentage of core merchandise
sales (rather than total net sales), increased two basis points, driven by foods and sundries and non-
foods, partially offset by fresh foods. This measure eliminates the impact of changes in sales penetration
and gross margins from our warehouse ancillary and other businesses.
Gross margin percentage increased nine basis points compared to 2022. Excluding the impact of
gasoline price deflation on net sales, gross margin was 10.50%, an increase of two basis points. This two
basis point increase was positively impacted by: 18 basis points due to a smaller LIFO charge in 2023
compared to 2022, and seven basis points due to core merchandise categories, predominantly foods and
sundries. These were offset by: 16 basis points due to the downsizing and then discontinuation of our
charter shipping activities; four basis points due to increased 2% rewards; and three basis points due to
warehouse ancillary and other businesses, predominantly e-commerce, partially offset by gasoline and
business centers. Changes in foreign currencies relative to the U.S. dollar negatively impacted gross
margin by approximately $349, compared to 2022, attributable to our Canadian and Other International
Operations.
11.13 %
$ 21,368
10.48 %
23,348
$
$ 25,124
10.57 %
$ 192,052
170,684
Selling, General and Administrative Expenses
199,382
2021
2022
2023
$ 237,710
212,586
Gross margin percentage
Gross margin
Less merchandise costs
Net sales
Gross Margin
We account for membership fee revenue on a deferred basis, recognized ratably over the one-year
membership period.
Membership fee revenue increased 8% in 2023, driven by new member sign-ups, upgrades to Executive
membership, and the benefit of an additional week. Changes in foreign currencies relative to the U.S.
dollar negatively impacted membership fees by $76 compared to 2022. At the end of 2023, our member
renewal rates were 92.7% in the U.S. and Canada and 90.4% worldwide. More members auto renewing
and higher penetration of Executive members benefit renewal rates. Our renewal rate, which excludes
affiliates of Business members, is a trailing calculation that captures renewals during the period seven to
eighteen months prior to the reporting date.
$ 222,730
SG&A expenses
(4,283)
25
Foreign-currency transaction gains, net
Interest income
Interest Income and Other, Net
Interest expense is primarily related to Senior Notes and financing leases. For more information on our
debt arrangements, refer to the consolidated financial statements included in Item 8 of this Report.
Interest expense
171
158 $
160 $
$
2021
2022
2023
Interest Expense
SG&A expenses as a percentage of net sales increased 20 basis points compared to 2022. SG&A
expenses as a percentage of net sales excluding the impact of gasoline price deflation was 9.02%, an
increase of 14 basis points. The comparison to last year was negatively impacted by 16 basis points in
warehouse operations and other businesses, largely driven by wage increases effective in March and July
2022, and March 2023, as well as lower sales growth. Central operating costs were also higher by six
basis points. SG&A was positively impacted by eight basis points due to the prior year's write-off of
information technology assets and a charge related to granting our employees additional vacation.
Changes in foreign currencies relative to the U.S. dollar decreased SG&A expenses by approximately
$281 compared to 2022, attributable to our Canadian and Other International Operations.
9.65 %
8.88 %
9.08 %
19,779 $ 18,537
$
$ 21,590
2021
2022
2023
Interest income and other, net
(6,488)
Bank Credit Facilities and Commercial Paper Programs
Material contractual obligations arising in the normal course of business primarily consist of purchase
obligations, long-term debt and related interest payments, leases, and construction and land purchase
obligations. See Notes 4 and 5 to the consolidated financial statements included in Item 8 of this Report
for amounts outstanding on September 3, 2023, related to debt and leases.
30
30
Foreign Currency Risk
Our foreign subsidiaries conduct certain transactions in non-functional currencies, which exposes us to
fluctuations in exchange rates. We manage these fluctuations, in part, through the use of forward foreign-
exchange contracts, seeking to economically hedge the impact of these fluctuations on known future
expenditures denominated in a non-functional foreign-currency. The contracts are intended primarily to
economically hedge exposure to U.S. dollar merchandise inventory expenditures made by our
international subsidiaries. We seek to mitigate risk with the use of these contracts and do not intend to
engage in speculative transactions. For additional information related to the Company's forward foreign-
exchange contracts, see Notes 1 and 3 to the consolidated financial statements included in Item 8 of this
Report. A hypothetical 10% strengthening of the functional currency compared to the non-functional
currency exchange rates at September 3, 2023, would have decreased the fair value of the contracts by
$109 and resulted in an unrealized loss in the consolidated statements of income for the same amount.
Commodity Price Risk
We are exposed to fluctuations in prices for energy, particularly electricity and natural gas, and other
commodities used in retail and manufacturing operations, which we seek to partially mitigate through
fixed-price contracts for certain of our warehouses and other facilities, predominantly in the U.S. and
Canada. We also enter into variable-priced contracts for some purchases of electricity and natural gas, in
addition to some of the fuel for our gas stations, on an index basis. These contracts meet the
characteristics of derivative instruments, but generally qualify for the "normal purchases and normal
sales" exception under authoritative guidance and require no mark-to-market adjustment.
Item 8-Financial Statements and Supplementary Data
COSTCO WHOLESALE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
31
40
+ W W W W & w
29
38
29
A 100 basis point change in interest rates as of the end of 2023 would have had an immaterial
incremental change in fair market value. For those investments that are classified as available-for-sale,
the unrealized gains or losses related to fluctuations in market volatility and interest rates are reflected
within stockholders' equity in accumulated other comprehensive income in the consolidated balance
sheets.
Dividends
Cash dividends declared in 2023 totaled $3.84 per share, as compared to $3.38 per share in 2022. In
April 2023, the Board of Directors increased our quarterly cash dividend from $0.90 to $1.02 per share.
We maintain bank credit facilities for working capital and general corporate purposes. At September 3,
2023, we had borrowing capacity under these facilities of $1,234. Our international operations maintain
$756 of this capacity under bank credit facilities, of which $167 is guaranteed by the Company. Short-term
borrowings outstanding under the bank credit facilities, which are included in other current liabilities on the
consolidated balance sheets, were immaterial at the end of 2023 and 2022.
The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $217. The
outstanding commitments under these facilities at the end of 2023 totaled $182, most of which were
standby letters of credit that do not expire or have expiration dates within one year. The bank credit
facilities have various expiration dates, most within one year, and we generally intend to renew these
facilities. The amount of borrowings available at any time under our bank credit facilities is reduced by the
amount of standby and commercial letters of credit outstanding.
Off-Balance Sheet Arrangements
In the opinion of management, we have no off-balance sheet arrangements that have had or are
reasonably likely to have a material current or future effect on our financial condition or financial
statements.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with U.S. GAAP requires that we
make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. We base our estimates on historical
experience and on assumptions that we believe to be reasonable, and we continue to review and
evaluate these estimates. For further information on significant accounting policies, see discussion in
Note 1 to the consolidated financial statements included in Item 8 of this Report.
28
20
Insurance/Self-insurance Liabilities
Claims for employee health-care benefits, workers' compensation, general liability, property damage,
directors' and officers' liability, vehicle liability, inventory loss, and other exposures are funded
predominantly through self-insurance. Insurance coverage is maintained for certain risks to seek to limit
exposures arising from very large losses. We use various risk management mechanisms, including a
wholly-owned captive insurance subsidiary, and participate in a reinsurance program. Liabilities
associated with the risks that we retain are not discounted and are estimated using historical claims
experience, demographic factors, severity factors, and other actuarial assumptions. The costs of claims
are highly unpredictable and can fluctuate as a result of inflation rates, regulatory or legal changes, and
unforeseen developments in claims. While we believe our estimates are reasonable, actual claims and
costs could differ significantly from recorded liabilities. Historically, adjustments to our estimates have not
been material.
Recent Accounting Pronouncements
We do not expect that any recently issued accounting pronouncements will have a material effect on our
financial statements.
Item 7A-Quantitative and Qualitative Disclosures About Market Risk (amounts in millions)
Our exposure to financial market risk results from fluctuations in interest rates and foreign currency
exchange rates. We do not engage in speculative or leveraged transactions or hold or issue financial
instruments for trading purposes.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our investment holdings that
are diversified among various instruments considered to be cash equivalents, as defined in Note 1 to the
consolidated financial statements included in Item 8 of this Report, as well as short-term investments in
government and agency securities with effective maturities of generally three months to five years at the
date of purchase. The primary objective of our investment activities is to preserve principal and
secondarily to generate yields. The majority of our short-term investments are in fixed interest-rate
securities. These securities are subject to changes in fair value due to interest rate fluctuations.
Our policy limits investments in the U.S. to direct U.S. government and government agency obligations,
repurchase agreements collateralized by U.S. government and government agency obligations, U.S.
government and government agency money market funds, and insured bank balances. Our wholly-owned
captive insurance subsidiary invests in U.S. government and government agency obligations and U.S.
government and government agency money market funds. Our Canadian and Other International
subsidiaries' investments are primarily in money market funds, bankers' acceptances, and bank
certificates of deposit, generally denominated in local currencies.
The nature and amount of our long-term debt may vary as a result of business requirements, market
conditions, and other factors. As of the end of 2023, long-term debt with fixed interest rates was $6,484.
Fluctuations in interest rates may affect the fair value of the fixed-rate debt. See Note 4 to the
consolidated financial statements included in Item 8 of this Report for more information on our long-term
debt.
On January 19, 2023, the Board of Directors authorized a new share repurchase program in the amount
of $4,000, which expires in January 2027. During 2023 and 2022, we repurchased 1,341,000 and
863,000 shares of common stock, at average prices of $504.68 and $511.46, totaling approximately $677
and $442. These amounts may differ from the accompanying consolidated statements of cash flows due
to changes in unsettled repurchases at the end of each fiscal year. Purchases are made from time to
time, as conditions warrant, in the open market or in block purchases, pursuant to plans under SEC Rule
10b5-1. Repurchased shares are retired, in accordance with the Washington Business Corporation Act.
The remaining amount available to be purchased under our approved plan was $3,563 at the end of
2023.
39
36
October 10, 2023
33
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Costco Wholesale Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Costco Wholesale Corporation and subsidiaries' (the Company) internal control over financial
reporting as of September 3, 2023, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of September
3, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets of the Company as of September 3, 2023, and
August 28, 2022, the related consolidated statements of income, comprehensive income, equity, and cash
flows for the 53-week period ended September 3, 2023, and the 52-week periods ended August 28, 2022,
and August 29, 2021, and the related notes (collectively, the consolidated financial statements), and our report
dated October 10, 2023, expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on the Company's internal control over financial reporting based on our audit. We are a
public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ KPMG LLP
Seattle, Washington
October 10, 2023
34
Seattle, Washington
37
We have served as the Company's auditor since 2002.
Assessing the actuarial models used by the Company for consistency with generally
accepted actuarial standards
35
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Costco Wholesale Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation and
subsidiaries (the Company) as of September 3, 2023, and August 28, 2022, the related consolidated
statements of income, comprehensive income, equity, and cash flows for the 53-week period ended
September 3, 2023, and the 52-week periods ended August 28, 2022, and August 29, 2021, and the
related notes (collectively, the consolidated financial statements). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company as of
September 3, 2023, and August 28, 2022, and the results of its operations and its cash flows for each of
the 53-week period ended September 3, 2023, and the 52-week periods ended August 28, 2022, and
August 29, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (PCAOB), the Company's internal control over financial reporting as of September
3, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report dated October 10,
2023, expressed an unqualified opinion on the effectiveness of the Company's internal control over
financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits. We
are a public accounting firm registered with the PCAOB and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the
consolidated financial statements that was communicated or required to be communicated to the audit
committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial
statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of a critical audit matter does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing
a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
32
32
Evaluation of workers' compensation self-insurance liabilities
As discussed in Note 1 to the consolidated financial statements, the Company estimates its self-insurance
liabilities by considering historical claims experience, demographic factors, severity factors, and other
actuarial assumptions. The estimated self-insurance liabilities as of September 3, 2023, were $1,513
million, a portion of which related to workers' compensation self-insurance liabilities for the United States
operations.
We identified the evaluation of the Company's workers' compensation self-insurance liabilities for the
United States operations as a critical audit matter because of the extent of specialized skill and
knowledge needed to evaluate the underlying assumptions and judgments made by the Company in the
actuarial models. Specifically, subjective auditor judgment was required to evaluate the Company's
selected loss rates and initial expected losses used in the actuarial models.
The following are the primary procedures we performed to address this critical audit matter. We evaluated
the design and tested the operating effectiveness of certain internal controls over the Company's self-
insurance workers' compensation process. This included controls related to the development and
selection of the assumptions listed above used in the actuarial calculation and review of the actuarial
report. We involved actuarial professionals with specialized skills and knowledge who assisted in:
/s/ KPMG LLP
Evaluating the Company's ability to estimate self-insurance workers' compensation
liabilities by comparing its historical estimates with actual incurred losses and paid losses
Evaluating the above listed assumptions underlying the Company's actuarial estimates by
developing an independent expectation of the self-insurance workers' compensation
liabilities and comparing them to the amounts recorded by the Company.
Our primary sources of liquidity are cash flows from operations, cash and cash equivalents, and short-
term investments. Cash and cash equivalents and short-term investments were $15,234 and $11,049 at
September 3, 2023, and August 28, 2022. Of these balances, unsettled credit and debit card receivables
represented $2,282 and $2,010. These receivables generally settle within four days. Changes in foreign
exchange rates impacted cash and cash equivalents positively by $15 and $46 in 2023 and 2021, and
negatively by $249 in 2022.
Stock Repurchase Programs
Our primary requirements for capital are acquiring land, buildings, and equipment for new and remodeled
warehouses. Capital is also required for information systems, manufacturing and distribution facilities,
initial warehouse operations, and working capital. In 2023, we spent $4,323 on capital expenditures, and
it is our current intention to spend approximately $4,400 to $4,600 during fiscal 2024. These expenditures
are expected to be financed with cash from operations, existing cash and cash equivalents, and short-
term investments. We opened 26 new warehouses, including three relocations, in 2023, and plan to open
up to 28 additional new warehouses, including one relocation, in 2024. There can be no assurance that
current expectations will be realized, and plans are subject to change upon further review of our capital
expenditure needs and the economic environment.
Purchase obligations consist of contracts primarily related to merchandise, equipment, and third-party
services, the majority of which are due in the next 12 months. Construction and land-purchase obligations
consist of contracts primarily related to the development and opening of new and relocated warehouses,
the majority of which (other than leases) are due in the next 12 months.
Management believes that our cash and investment position and operating cash flows, with capacity
under existing and available credit agreements, will be sufficient to meet our liquidity and capital
requirements for the foreseeable future. We believe that our U.S. current and projected asset position is
sufficient to meet our U.S. liquidity requirements.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $11,068 in 2023, compared to $7,392 in 2022. Our cash
flow provided by operations is primarily from net sales and membership fees. Cash flow used in
operations generally consists of payments to merchandise suppliers, warehouse operating costs,
including payroll and employee benefits, utilities, and credit and debit card processing fees. Cash used in
operations also includes payments for income taxes. Changes in our net investment in merchandise
inventories (the difference between merchandise inventories and accounts payable) is impacted by
several factors, including inventory levels and turnover, the forward deployment of inventory to accelerate
delivery times, payment terms with suppliers, and early payments to obtain discounts.
Cash Flows from Investing Activities
Net cash used in investing activities totaled $4,972 in 2023, compared to $3,915 in 2022, and is primarily
related to capital expenditures. Net cash flows from investing activities also includes purchases and
maturities of short-term investments.
Capital Expenditures
27
Cash Flows from Financing Activities
Net cash used in financing activities totaled $2,614 in 2023, compared to $4,283 in 2022. Cash flows
used in financing activities primarily related to the payment of dividends, repurchases of common stock,
and withholding taxes on stock-based awards. In 2022, cash flow used in financing activities included
payments to our former joint-venture partner for a dividend and the purchase of their equity interest in
Taiwan, totaling $1,050 in the aggregate, and repayments of our 2.300% Senior Notes.
6,292 $
5,844
Net sales
5,007
$
$
NET INCOME ATTRIBUTABLE TO COSTCO
6,292
(71)
Net income attributable to noncontrolling
interests
5,079
5,915
NET INCOME PER COMMON SHARE
Net income including noncontrolling interests
(72)
ATTRIBUTABLE TO COSTCO:
$
Diluted
443,651
443,854
11.27
$
13.14
$
Basic
14.16
13.17 $
14.18 $
1,601
Diluted
Basic
Shares used in calculation (000's)
11.30
REVENUE
1,925
Provision for income taxes
212,586
Merchandise costs
195,929
226,954
242,290
3,877
4,224
4,580
192,052
222,730 $
237,710 $
August 29,
2021
August 28,
2022
52 Weeks Ended
53 Weeks Ended 52 Weeks Ended
September 3,
2023
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(amounts in millions, except per share data)
OPERATING EXPENSES
Total revenue
Membership fees
199,382
2,195
170,684
21,590
6,680
7,840
8,487
INCOME BEFORE INCOME TAXES
143
205
533
Interest income and other, net
(171)
(158)
(160)
Interest expense
OTHER INCOME (EXPENSE)
6,708
7,793
8,114
Operating income
18,537
19,779
Selling, general and administrative
443,089
444,452
Claims for employee health-care benefits, workers' compensation, general liability, property damage,
directors' and officers' liability, vehicle liability, inventory loss, and other exposures are funded
predominantly through self-insurance. Insurance coverage is maintained for certain risks to limit
exposures arising from very large losses. The Company uses various risk management mechanisms,
including a wholly-owned captive insurance subsidiary (the captive) and participates in a reinsurance
program. Liabilities associated with the risks that are retained by the Company are not discounted and are
estimated using historical claims experience, demographic factors, severity factors, and other actuarial
18,078
1,702
Net income
Foreign-currency translation
adjustment and other, net
Stock-based compensation
Release of vested RSUs,
514
including tax effects
.---- 5,844 5,8
:- - 728 --
5,844
71
5,915
ཚེ |
Dividend to noncontrolling
(686)
17,564
(1,137)
(1,358)
(312)
(23)
(312)
(312)
(472)
(495)
11,666
(495)
(5,748)
(5,748)
AUGUST 29, 2021
441,825
4
7,031
(5,748)
1,928
(686)
(721)
Cash dividends declared and
(863)
(15)
(427)
(442)
(442)
Repurchases of common stock
other
AUGUST 28, 2022
Net income
(1,498)
(1,498)
(1,498)
442,664
BALANCE AT
(35)
(842)
(505)
7
728
728
(363)
(363)
(363)
(337)
interest
interest
|
(208)
(208)
-
(499)
Acquisition of noncontrolling
: 668 160
668
668
68,994 $
64,166
The accompanying notes are an integral part of these consolidated financial statements.
37
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
TOTAL LIABILITIES AND EQUITY
(amounts in millions)
Other
BALANCE AT
AUGUST 30, 2020
Net income
Foreign-currency translation
adjustment and other, net
Stock-based compensation
Accumulated
Release of vested restricted
stock units (RSUs),
including tax effects
20,647
TOTAL EQUITY
Additional paid-in capital
7,340
2
6,884
Accumulated other comprehensive loss
(1,805)
(1,829)
25,058
Retained earnings
15,585
Total Costco stockholders' equity
25,058
20,642
Noncontrolling interests
5
19,521
Repurchases of common stock
Cash dividends declared
BALANCE AT
$
(1,297) $
12,879
$
18,284 $
421
6,698
$ 18,705
5,007
72
5,079
160
21
181
5,007
$
4
$
Common Stock
Additional
Shares
(000's)
Paid-in
Amount
Capital
Comprehensive
Income (Loss)
Retained
Earnings
Total Costco
Stockholders'
Noncontrolling
Total
Equity
Interests
Equity
441,255
2
2
6,884
15,585
8,958
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments
(1,622)
(1,121)
(1,331)
Maturities and sales of short-term investments
7,392
937
1,446
Additions to property and equipment
(4,323)
(3,891)
(3,588)
Other investing activities, net
1,145
36
11,068
549
39
144
Changes in operating assets and liabilities:
Merchandise inventories
Accounts payable
1,228
1,057
(4,003)
(382)
1,891
1,838
Other operating assets and liabilities, net
Net cash provided by operating activities
172
(1,892)
495
(48)
(4,972)
(800)
(94)
(303)
(363)
(312)
(676)
(75)
(439)
(1,251)
(1,498)
(5,748)
(291)
(176)
44
(496)
Net cash used in investing activities
Other financing activities, net
Dividend to noncontrolling interest
(3,915)
(62)
(3,535)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of short-term borrowings
(935)
(6)
Acquisition of noncontrolling interest
Proceeds from short-term borrowings
53
41
Repayments of long-term debt
Tax withholdings on stock-based awards
Repurchases of common stock
Cash dividend payments
Financing lease payments
917
Impairment of assets and other non-cash operating activities, net
665
724
24
24
778
778
1,470
(1,341)
(303)
SEPTEMBER 3, 2023
(303)
(24)
(653)
(677)
(677)
5
(1,703)
(303)
(1,698)
BALANCE AT
Cash dividends declared and
20,642
5
20,647
6,292
6,292
6,292
other
Foreign-currency translation
Stock-based compensation
24
778
Release of vested RSUs,
including tax effects
Repurchases of common stock
adjustment and other, net
(1,703)
442,793 $
2
$
5,079
Adjustments to reconcile net income including noncontrolling interests
to net cash provided by operating activities:
Depreciation and amortization
2,077
5,915
1,900
Non-cash lease expense
412
377
286
Stock-based compensation
774
1,781
$
6,292
$
(67)
$
7,340 $
(1,805) $ 19,521 $
25,058 $
$ 25,058
The accompanying notes are an integral part of these consolidated financial statements.
38
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in millions)
53 Weeks
Ended
September 3,
2023
52 Weeks
Ended
August 28,
2022
52 Weeks
Ended
August 29,
2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income including noncontrolling interests
(1,829)
Common stock $0.005 par value; 900,000,000 shares authorized;
442,793,000 and 442,664,000 shares issued and outstanding
2
EQUITY
Canada
United States
Merchandise inventories consist of the following:
Merchandise Inventories
The valuation allowance related to receivables was not material to our consolidated financial statements
at the end of 2023 and 2022.
Receivables consist primarily of vendor, reinsurance, credit card incentive, third-party pharmacy and other
receivables. Vendor receivables include discounts and volume rebates. Balances are generally presented
on a gross basis, separate from any related payable due. In certain circumstances, these receivables may
be settled against the related payable to that vendor, in which case the receivables are presented on a
net basis. Reinsurance receivables are held by the Company's wholly-owned captive insurance
subsidiary and primarily represent amounts ceded through reinsurance arrangements gross of the
amounts assumed under reinsurance, which are presented within other current liabilities in the
consolidated balance sheets. Credit card incentive receivables primarily represent amounts earned under
co-branded credit card arrangements. Third-party pharmacy receivables generally relate to amounts due
from members' insurers. Other receivables primarily consist of amounts due from governmental entities,
mostly tax-related items.
Other International
Receivables, Net
41
Current financial liabilities have fair values that approximate their carrying values. Long-term financial
liabilities include the Company's long-term debt, which are recorded on the balance sheet at issuance
price and adjusted for unamortized discounts or premiums and debt issuance costs. Discounts, premiums
and debt issuance costs are amortized to interest expense over the term of the loan. The estimated fair
value of the Company's long-term debt is based primarily on reported market values, recently completed
market transactions, and estimates based upon interest rates, maturities, and credit.
The Company's valuation techniques used to measure the fair value of money market mutual funds are
based on quoted market prices, such as quoted net asset values published by the fund as supported in
an active market. Valuation methodologies used to measure the fair value of all other non-derivative
financial instruments are based on independent external valuation information. The pricing process uses
data from a variety of independent external valuation information providers, including trades, bid price or
spread, two-sided markets, quotes, benchmark curves including but not limited to treasury benchmarks,
Secured Overnight Financing Rate and swap curves, discount rates, and market data feeds. All are
observable in the market or can be derived principally from or corroborated by observable market data.
The Company reports transfers in and out of Levels 1, 2, and 3, as applicable, using the fair value of the
individual securities as of the beginning of the reporting period in which the transfer(s) occurred.
Level 3: Significant unobservable inputs that are not corroborated by market data.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market
data.
Level 1: Quoted market prices in active markets for identical assets or liabilities.
11
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Fair value is estimated by
applying a fair value hierarchy, which requires maximizing the use of observable inputs when measuring
fair value. The three levels of inputs are:
Merchandise inventories
2023
42
The Company capitalizes certain computer software and costs incurred in developing or obtaining
software for internal use. During development, these costs are included in construction in progress. To the
extent that the assets become ready for their intended use, these costs are included in equipment and
fixtures and amortized on a straight-line basis over their estimated useful lives.
Property and equipment are stated at cost. Depreciation and amortization expense is computed primarily
using the straight-line method over estimated useful lives. Leasehold improvements made after the
beginning of the initial lease term are depreciated over the shorter of the estimated useful life of the asset
or the remaining term of the initial lease plus any renewals that are reasonably certain at the date the
leasehold improvements are made.
Property and Equipment, Net
The Company provides for estimated inventory losses between physical inventory counts using estimates
based on experience. The provision is adjusted periodically to reflect physical inventory counts, which
generally occur in the second and fourth fiscal quarters. Inventory cost, where appropriate, is reduced by
estimates of vendor rebates when earned or as the Company progresses towards earning those rebates,
provided that they are probable and reasonably estimable.
Merchandise inventories are stated at the lower of cost or market. U.S. merchandise inventories are
valued by the cost method of accounting, using the last-in, first-out (LIFO) basis. The Company believes
the LIFO method more fairly presents the results of operations by more closely matching current costs
with current revenues. The Company records an adjustment each quarter, if necessary, for the projected
annual effect of inflation or deflation, and these estimates are adjusted to actual results determined at
year-end, after actual inflation or deflation rates and inventory levels have been determined. An
immaterial LIFO charge was recorded in 2023. Due to inflation in 2022, a $438 charge was recorded to
merchandise costs to increase the cumulative LIFO valuation on merchandise inventories at August 28,
2022. Canadian and Other International merchandise inventories are predominantly valued using the cost
and retail inventory methods, respectively, using the first-in, first-out (FIFO) basis.
$
17,907
2,919
16,651 $
1,966
1,579
13,160
12,153 $
2022
2,781
The Company accounts for certain assets and liabilities at fair value. The carrying value of the Company's
financial instruments, including cash and cash equivalents, receivables and accounts payable,
approximate fair value due to their short-term nature or variable interest rates. See Notes 2, 3, and 4 for
the carrying value and fair value of the Company's investments, derivative instruments, and fixed-rate
debt.
Fair Value of Financial Instruments
The Company periodically evaluates unrealized losses in its investment securities for credit impairment,
using both qualitative and quantitative criteria. In the event a security deemed to be impaired as the
result of a credit loss, the Company recognizes the loss in interest income and other, net in the
consolidated statements of income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COSTCO WHOLESALE CORPORATION
39
The accompanying notes are an integral part of these consolidated financial statements.
888
184
(amounts in millions, except share, per share, and warehouse count data)
EA SA
156
$
170
$
452 $ - $ -
SA SA
$
Note 1-Summary of Significant Accounting Policies
Description of Business
Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries
operate membership warehouses based on the concept that offering members low prices on a limited
selection of nationally-branded and private-label products in a wide range of merchandise categories will
produce high sales volumes and rapid inventory turnover. At September 3, 2023, Costco operated 861
warehouses worldwide: 591 in the United States (U.S.) located in 46 states, Washington, D.C., and
Puerto Rico, 107 in Canada, 40 in Mexico, 33 in Japan, 29 in the United Kingdom (U.K.), 18 in Korea, 15
in Australia, 14 in Taiwan, five in China, four in Spain, two in France, and one each in Iceland, New
Zealand, and Sweden. The Company operates e-commerce websites in the U.S., Canada, the U.K.,
Mexico, Korea, Taiwan, Japan, and Australia.
years may be classified, based on the Company's determination, as short-term based on their highly
liquid nature and because they represent the investment of cash that is available for current operations.
Short-term investments classified as available-for-sale are recorded at fair value using the specific
identification method with the unrealized gains and losses reflected in accumulated other comprehensive
income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities, if any,
are determined on a specific identification basis and are recorded in interest income and other, net in the
consolidated statements of income. These available-for-sale investments have a low level of inherent
credit risk given they are issued by the U.S. Government and Agencies. Changes in their fair value are
primarily attributable to changes in interest rates and market liquidity. Short-term investments classified as
held-to-maturity are financial instruments that the Company has the intent and ability to hold to maturity
and are reported net of any related amortization and are not remeasured to fair value on a recurring
basis.
40
40
Short-term investments generally consist of debt securities (U.S. Government and Agency Notes), with
maturities at the date of purchase of three months to five years. Investments with maturities beyond five
Short-Term Investments
The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with
a maturity of three months or less at the date of purchase, and proceeds due from credit and debit card
transactions with settlement terms of up to four days. Credit and debit card receivables were $2,282 and
$2,010 at the end of 2023 and 2022.
Cash and Cash Equivalents
Reclassifications were made to the 2022 and 2021 consolidated statements of cash flows to conform with
current year presentation.
Reclassification
The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. These estimates and assumptions take into account
historical and forward-looking factors that the Company believes are reasonable. Actual results could
differ from those estimates and assumptions.
Use of Estimates
The Company operates on a 52/53-week fiscal year basis with the year ending on the Sunday closest to
August 31. References to 2023 relate to the 53-week fiscal year ended September 3, 2023. References to
2022 and 2021 relate to the 52-week fiscal years ended August 28, 2022, and August 29, 2021.
Fiscal Year End
The consolidated financial statements include the accounts of Costco and its subsidiaries. The Company
reports noncontrolling interests in consolidated entities as a component of equity separate from the
Company's equity. All material inter-company transactions between and among the Company and its
consolidated subsidiaries have been eliminated in consolidation. Unless otherwise noted, references to
net income relate to net income attributable to Costco.
Basis of Presentation
42
Capital expenditures included in liabilities
Repair and maintenance costs are expensed when incurred. Expenditures for remodels, refurbishments
and improvements that add to or change asset function or useful life are capitalized. Assets removed
during the remodel, refurbishment or improvement are retired. Assets classified as held-for-sale at the
end of 2023 and 2022 were immaterial.
Land
(2)
(1)
-
Changes in currency translation
996
15 $
(3)
28 $
$
Balance at August 29, 2021
Total
Other
International
Canada
United
States
953 $
Goodwill represents the excess of acquisition cost over the fair value of the net assets acquired and is not
subject to amortization. The Company reviews goodwill annually in the fourth quarter for impairment or
when circumstances indicate carrying value may exceed the fair value. This evaluation is performed at
the reporting unit level. If a qualitative assessment indicates that it is more likely than not that the fair
value is less than carrying value, a quantitative analysis is completed using either the income or market
approach, or a combination of both. The income approach estimates fair value based on expected
discounted future cash flows, while the market approach uses comparable public companies and
transactions to develop metrics to be applied to historical and expected future operating results.
Goodwill is included in other long-term assets in the consolidated balance sheets. The following table
summarizes goodwill by reportable segment:
Balance at August 28, 2022
27 $
Insurance/Self-insurance Liabilities
Definite-lived intangible assets, which are not material, are included in other long-term assets on the
consolidated balance sheets and are amortized on a straight-line basis over their estimated lives, which
approximates the pattern of expected economic benefit.
994
15 $
Preferred stock $0.005 par value; 100,000,000 shares authorized;
no shares issued and outstanding
953 $
953 $
$
1
2
(1)
Changes in currency translation
993
13 $
Balance at September 3, 2023
Goodwill and Acquired Intangible Assets
The Company's asset retirement obligations (ARO) primarily relate to leasehold improvements that must
be removed at the end of a lease. These obligations are generally recorded as a discounted liability, with
an offsetting asset at the inception of the lease term, based upon the estimated fair value of the costs to
remove the improvements. These liabilities are accreted over time to the projected future value of the
obligation. The ARO assets are depreciated using the same depreciation method as the leasehold
improvement assets and are included with buildings and improvements. Estimated ARO liabilities
associated with these leases are included in other liabilities in the accompanying consolidated balance
sheet.
reasonably certain that the Company will exercise the option. As the rate implicit in the Company's leases
is not easily determinable, the present value of the sum of the lease payments is calculated using the
Company's incremental borrowing rate. The rate is determined using a portfolio approach based on the
rate of interest the Company would pay to borrow an amount equal to the lease payments on a
collateralized basis over a similar term. The Company uses quoted interest rates from financial institutions
to derive the incremental borrowing rate. Impairment of ROU assets is evaluated in a similar manner as
described in Property and Equipment, Net above. During 2023, the Company recognized charges totaling
$391, primarily related to the impairment of certain leased assets associated with charter shipping
activities. This charge is included in merchandise costs.
20,120
22,001
5-50 years
7,955
8,590 $
N/A
3-20 years
2022
Estimated Useful
Lives
Property and equipment, net
Accumulated depreciation and amortization
Construction in progress
Equipment and fixtures
Buildings and improvements
2023
11,512
10,275
N/A
43
The Company determines at inception whether a contract is or contains a lease. Non-lease components
and the lease components to which they relate are accounted for together as a single lease component
for all asset classes. The Company initially records right-of-use (ROU) assets and lease obligations for its
finance and operating leases based on the discounted future minimum lease payments over the term.
The lease term is defined as the noncancelable period of the lease plus any options to extend when it is
Some leases include free-rent periods and step-rent provisions, which are recognized on a straight-line
basis over the original term of the lease and any extension options that the Company is reasonably
certain to exercise from the date the Company has control of the property. Certain leases provide for
periodic rent increases based on price indices or the greater of minimum guaranteed amounts or sales
volume, which are recognized as variable lease payments. Our leases do not contain any material
residual value guarantees or material restrictive covenants.
The Company leases land, buildings, and/or equipment at warehouses and certain other office and
distribution facilities. Leases generally contain one or more of the following options, which the Company
can exercise at the end of the initial term: (a) renew the lease for a defined number of years at the then-
fair market rental rate or rate stipulated in the lease agreement; (b) purchase the property at the then-fair
market value or purchase price stated in the agreement; or (c) a right of first refusal in the event of a third-
party offer.
Leases
The Company evaluates long-lived assets for impairment on an annual basis, when relocating or closing
a facility, or when events or changes in circumstances may indicate the carrying amount of the asset
group, generally an individual warehouse, may not be fully recoverable. For asset groups held and used,
including warehouses to be relocated, the carrying value of the asset group is considered recoverable
when the estimated future undiscounted cash flows generated from the use and eventual disposition of
the asset group exceed the respective carrying value. In the event that the carrying value is not
considered recoverable, an impairment loss is recognized for the asset group to be held and used equal
to the excess of the carrying value above the estimated fair value of the asset group. For asset groups
classified as held-for-sale (disposal group), the carrying value is compared to the disposal group's fair
value less costs to sell. The Company estimates fair value by obtaining market appraisals from third party
brokers or using other valuation techniques. Impairment charges recognized in 2023 were immaterial. In
2022 and 2021, the Company recognized write-offs of $118 and $84 for information technology assets
which are reflected in SG&A.
24,646
26,684 $
$
(15,286)
(16,685)
39,932
43,369
1,582
1,266
The following table summarizes the Company's property and equipment balances at the end of 2023 and
2022:
Cash dividend declared, but not yet paid
26 $
1,527
17,907
1,709
1,499
35,879
32,696
26,684
16,651
24,646
2,774
3,718
4,050
68,994 $
64,166
LIABILITIES AND EQUITY
2,713
CURRENT LIABILITIES
2,241
846
Receivables, net
Merchandise inventories
Other current assets
Total current assets
OTHER ASSETS
Property and equipment, net
2,285
Operating lease right-of-use assets
TOTAL ASSETS
September 3,
2023
August 28,
2022
13,700 $
10,203
1,534
Other long-term assets
Accounts payable
$
17,483 $
1,081
73
6,254
5,611
33,583
31,998
2,174
5,377
2,426
2,482
2,550
43,936
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
43,519
6,484
2,337
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES
17,848
Accrued salaries and benefits
4,278
4,381
Accrued member rewards
2,150
1,911
OTHER LIABILITIES
Deferred membership fees
Current portion of long-term debt
Other current liabilities
Total current liabilities
Long-term debt, excluding current portion
Long-term operating lease liabilities
Other long-term liabilities
Short-term investments
Cash and cash equivalents
2,555
(amounts in millions, except par value and share data)
444,757
(208)
(842)
(4)
Net cash used in financing activities
(2,614)
(4,283)
188
(6,488)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS
15
Net change in cash and cash equivalents
3,497
(249)
(1,055)
46
(1,019)
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR
10,203
149
ASSETS
$
Income taxes, net
$
Interest
444,346
Cash paid during the year for:
11,258
12,277
11,258
10,203 $
13,700 $
$
CASH AND CASH EQUIVALENTS END OF YEAR
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
The accompanying notes are an integral part of these consolidated financial statements.
125 $
2,234 $
COSTCO WHOLESALE CORPORATION
181
5,260
93
36
6,316
$
5,079
5,158 $
The accompanying notes are an integral part of these consolidated financial statements.
36
CURRENT ASSETS
35
COSTCO WHOLESALE CORPORATION
CONSOLIDATED BALANCE SHEETS
5,167
5,194
145 $
1,940 $
(721)
NET INCOME INCLUDING NONCONTROLLING
INTERESTS
6,316
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Foreign-currency translation adjustment and
other, net
Comprehensive income
Less: Comprehensive income attributable to
noncontrolling interests
COMPREHENSIVE INCOME ATTRIBUTABLE
TO COSTCO
(amounts in millions)
53 Weeks Ended
September 3,
2023
52 Weeks Ended
August 28,
2022
6,292
5,915
24
$
52 Weeks Ended
August 29,
2021
Operating lease right-of-use assets
Assets
The tables below present information regarding the Company's lease assets and liabilities.
Note 5-Leases
6,484
2,250
2,974
76
103
1,081
Finance lease assets (1)
$
Total lease assets
Total lease liabilities
Current
4,394
4,038 $
$
1,620
2,774
2,713 $
1,325
Liabilities
$
2023
$
Finance lease liabilities (3)
Operating lease liabilities
Long-term
Operating lease liabilities (2)
Finance lease liabilities (2)
2022
50
2024
Total
590
484
Other long-term debt
1,000
1,000
1.750% Senior Notes due April 2032
Total long-term debt
1,750
1.600% Senior Notes due April 2030
1,250
1,250
Weighted-average remaining lease term (years)
1,000
1,000
1,750
50
6,484
Less unamortized debt discounts and issuance costs
Thereafter
2028
2027
2026
2025
Maturities of long-term debt during the next five fiscal years and thereafter are as follows:
6,590
(1) Net of unamortized debt discounts and issuance costs.
5,377 $
Long-term debt, excluding current portion
73
1,081
Less current portion (1)
26
6,484
33
Operating lease costs (1
Finance leases
$
Total lease costs
151
157
160
Variable lease costs (1)
692 $
37
54
Interest on lease liabilities (2)
50
128
169
Amortization of lease assets (1)
45
Finance lease costs:
627 $
(1) Included in selling, general and administrative expenses and merchandise costs in the consolidated statements of income.
(2) Included in interest expense and merchandise costs in the consolidated statements of income.
282
1,000
277 $
287 $
$
operating leases
534
Operating cash flows
2021
2022
2023
Cash paid for amounts included in the measurement
Supplemental cash flow information related to leases was as follows:
51
of lease liabilities:
Operating leases
296
309 $
2023
4,349
4,078 $
$
1,383
1,303
20
2,482
245
129
239
220 $
EA
Weighted-average discount rate
2,426
297 $
222
2022
$
2021
2022
2023
The components of lease expense, excluding short-term lease costs and sublease income (which were
not material), were as follows:
3.97 %
24
2.26%
2.47 %
Finance leases
Operating leases
17
270
20
4.47 %
1,000 $
Basis
2022
The computation of basic net income per share uses the weighted average number of shares that were
outstanding during the period. The computation of diluted net income per share uses the weighted
average number of shares in the basic net income per share calculation plus the number of common
shares that would be issued assuming vesting of all potentially dilutive common shares outstanding using
the treasury stock method for shares subject to RSUs.
Stock Repurchase Programs
Repurchased shares of common stock are retired, in accordance with the Washington Business
Corporation Act. The par value of repurchased shares is deducted from common stock and the excess
repurchase price over par value is deducted by allocation to additional paid-in capital and retained
earnings. The amount allocated to additional paid-in capital is the current value of additional paid-in
capital per share outstanding and is applied to the number of shares repurchased. Any remaining amount
is allocated to retained earnings. See Note 6 for additional information.
Note 2-Investments
The Company's investments were as follows:
2023:
Available-for-sale:
Cost
Basis
Unrealized
Losses, Net
Recorded
Basis
Government and agency securities
$
650 $
(17) $
633
Basis
Cost
2022:
48
48
1,534
Net Income per Common Share Attributable to Costco
(17) $
$
Total short-term investments
901
901
Certificates of deposit
Held-to-maturity:
1,551 $
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributed to differences between the financial
statement carrying amounts of existing assets and liabilities and their tax bases, credits and loss carry-
forwards. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable
income in the years in which those temporary differences and carry-forwards are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. A valuation allowance is established when
necessary to reduce deferred tax assets to amounts that are more likely than not expected to be realized.
The timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax
positions requires significant judgment. The benefits of uncertain tax positions are recorded in the
Company's consolidated financial statements only after determining a more-likely-than-not probability that
the uncertain tax positions will withstand challenge from tax authorities. When facts and circumstances
change, the Company reassesses these probabilities and records changes as appropriate.
Income Taxes
Stock-based compensation expense is predominantly included in SG&A expenses in the consolidated
statements of income. Certain stock-based compensation costs are capitalized or included in the cost of
merchandise. See Note 7 for additional information on the Company's stock-based compensation plans.
The Company offers merchandise in the following core merchandise categories: foods and sundries, non-
foods, and fresh foods. The Company also provides expanded products and services through warehouse
ancillary and other businesses. The majority of revenue from merchandise sales is recognized at the point
of sale. Revenue generated through e-commerce or special orders is generally recognized upon shipment
to the member. For merchandise shipped directly to the member, shipping and handling costs are
expensed as incurred as fulfillment costs and included in merchandise costs in the consolidated
statements of income. In certain ancillary businesses, revenue is deferred until the member picks up
merchandise at the warehouse. Deferred sales are included in other current liabilities in the consolidated
balance sheets.
The Company recognizes sales for the amount of consideration collected from the member, which
includes gross shipping fees where applicable, and is net of sales taxes collected and remitted to
government agencies and member returns. The Company reserves for estimated returns based on
historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The
Company records, on a gross basis, a refund liability and an asset for recovery, which are included in
other current liabilities and other current assets, respectively, in the consolidated balance sheets.
Revenue Recognition
forward foreign-exchange contracts. These items were $46 and $84 in 2023 and 2022 and immaterial in
2021.
45
The Company recognizes foreign-currency transaction gains and losses related to revaluing or settling
monetary assets and liabilities denominated in currencies other than the functional currency in interest
income and other, net in the consolidated statements of income. Generally, these include the U.S. dollar
cash and cash equivalents and the U.S. dollar payables of consolidated subsidiaries revalued to their
functional currency. Also included are realized foreign-currency gains or losses from settlements of
The Company is the principal for the majority of its transactions and recognizes revenue on a gross basis.
The Company is the principal when it has control of the merchandise or service before it is transferred to
the member, which generally is established when Costco is primarily responsible for merchandising
decisions, pricing discretion, and maintains the relationship with the member, including assurance of
member service and satisfaction.
The functional currencies of the Company's international subsidiaries are their local currencies. Assets
and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet
date. Translation adjustments are recorded in accumulated other comprehensive loss. Revenues and
expenses of the Company's consolidated foreign operations are translated at average exchange rates
prevailing during the year.
The Company is exposed to fluctuations in prices for energy, particularly electricity and natural gas, and
other commodity products used in retail and manufacturing operations, which it seeks to partially mitigate
through the use of fixed-price contracts for certain of its warehouses and other facilities, primarily in the
U.S. and Canada. The Company also enters into variable-priced contracts for some purchases of natural
gas, in addition to fuel for its gas stations, on an index basis. These contracts meet the characteristics of
derivative instruments, but generally qualify for the “normal purchases and normal sales" exception under
authoritative guidance and require no mark-to-market adjustment.
The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of
business. It manages these fluctuations, in part, through the use of forward foreign-exchange contracts,
seeking to economically hedge the impact of fluctuations of foreign exchange on known future
expenditures denominated in a non-functional foreign-currency. The contracts relate primarily to U.S.
dollar merchandise inventory expenditures made by the Company's international subsidiaries with
functional currencies other than the U.S. dollar. Currently, these contracts do not qualify for derivative
hedge accounting. The Company seeks to mitigate risk with the use of these contracts and does not
intend to engage in speculative transactions. Some of these contracts contain credit-risk-related
contingent features that require settlement of outstanding contracts upon certain triggering events. The
aggregate fair value amounts of derivative instruments in a net liability position and the amount needed to
settle the instruments immediately if the credit-risk-related contingent features were triggered were
immaterial at the end of 2023 and 2022. The aggregate notional amounts of open, unsettled forward
foreign-exchange contracts were $1,068 and $1,242 at the end of 2023 and 2022. See Note 3 for
information on the fair value of unsettled forward foreign-exchange contracts at the end of 2023 and 2022.
The unrealized gains or losses recognized in interest income and other, net in the accompanying
consolidated statements of income relating to the net changes in the fair value of unsettled forward
foreign-exchange contracts were immaterial in 2023, 2022 and 2021.
Derivatives
The captive receives direct premiums, which are netted against the Company's premium costs in SG&A
expenses in the consolidated statements of income. The captive participates in a reinsurance program
that includes third-party participants. The participant agreements and practices of the reinsurance
program are designed to limit a participating members' individual risk. Income statement adjustments
related to the reinsurance program and related impacts to the consolidated balance sheets are
recognized as information becomes known. In the event the Company leaves the reinsurance program,
the Company retains its primary obligation to the policyholders for prior activity.
assumptions. The estimated accruals for these liabilities could be significantly affected if future
occurrences, claims, or expenses differ from these assumptions and historical trends. At the end of 2023
and 2022, these insurance liabilities were $1,513 and $1,364 in the aggregate, and were included in
accrued salaries and benefits and other current liabilities in the consolidated balance sheets, classified
based on their nature.
Operating cash flows — finance leases
Foreign Currency
Unrealized
The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the
one-year membership period. Deferred membership fees at the end of 2023 and 2022 were $2,337 and
$2,174.
The Company sells and otherwise provides proprietary shop cards that do not expire and are redeemable
at the warehouse or online for merchandise or membership. Revenue from shop cards is recognized
upon redemption, and estimated breakage is recognized based on redemption data. The Company
accounts for outstanding shop card balances as a shop card liability, net of estimated breakage. Shop
card liabilities are included in other current liabilities in the consolidated balance sheets.
Citibank, N.A. is the exclusive issuer of co-branded credit cards to U.S. members. The Company receives
various forms of consideration from Citibank, including a royalty on purchases made on the card outside
of Costco. A portion of the royalty is used to fund the rebate that cardholders receive, after taking into
consideration breakage, which is calculated based on rebate redemption data. The rebates are issued in
February and expire on December 31. The Company also maintains co-branded credit card
arrangements in Canada and certain other International subsidiaries.
common stock on the measurement date less the present value of the expected dividends forgone during
the vesting period.
47
The Company grants stock-based compensation, primarily to employees and non-employee directors.
Grants to executive officers are generally performance-based. Through a series of shareholder approvals,
there have been amended and restated plans and new provisions implemented by the Company.
Restricted Stock Units (RSUs) granted to employees and to non-employee directors generally vest over
five years and three years and are subject to quarterly vesting in the event of retirement or voluntary
termination. Employees who attain at least 25 years of service with the Company receive shares under
accelerated vesting provisions on the annual vesting date. Forfeitures are recognized as they occur.
Compensation expense for awards is predominantly recognized using the straight-line method over the
requisite service period for the entire award. The terms of the RSUs, including performance-based
awards, provide for accelerated vesting for employees and non-employee directors who have attained 25
or more and five or more years of service with the Company, respectively. Recipients are not entitled to
vote or receive dividends on unvested and undelivered shares. Compensation expense for the
accelerated shares is recognized upon achievement of the long-service term. The cumulative amount of
compensation cost recognized at any point in time equals at least the portion of the grant-date fair value
of the award that is vested at that date. The fair value of RSUs is calculated as the market value of the
Stock-Based Compensation
The Company's 401(k) retirement plan is available to all U.S. employees over the age of 18 who have
completed 90 days of employment. The plan allows participants to make wage deferral contributions, a
portion of which the Company matches. In addition, the Company provides each eligible participant an
annual discretionary contribution. The Company also has a defined contribution plan for employees in
Canada and contributes a percentage of each employee's wages. Certain subsidiaries in the Company's
Other International operations have defined benefit and defined contribution plans, which are not material.
Amounts expensed under all plans were $914, $824, and $748 for 2023, 2022, and 2021, and are
predominantly included in SG&A expenses in the consolidated statements of income.
Retirement Plans
In most countries, the Company's Executive members qualify for a 2% reward on qualified purchases,
subject to an annual maximum value, which does not expire and is redeemable at Costco warehouses.
The Company accounts for this reward as a reduction in sales, net of the estimated impact of non-
redemptions (breakage), with the corresponding liability classified as accrued member rewards in the
consolidated balance sheets. Estimated breakage is computed based on redemption data. For 2023,
2022, and 2021, the net reduction in sales was $2,576, $2,307, and $2,047.
Selling, general and administrative expenses consist primarily of salaries, benefits and workers'
compensation costs for warehouse employees (other than fresh foods departments and certain ancillary
businesses which are reflected in merchandise costs) as well as all regional and home office employees,
including buying personnel. Selling, general and administrative expenses also include substantially all
building and equipment depreciation, stock compensation expense, credit and debit card processing fees,
utilities, preopening, as well as other operating costs incurred to support warehouse and e-commerce
website operations.
The Company receives funds from vendors for discounts and a variety of other programs. These
programs are evidenced by agreements that are reflected in the carrying value of the inventory when
earned or as the Company progresses towards earning the rebate or discount, and as a component of
merchandise costs as the merchandise sold. Other vendor consideration is generally recorded as a
reduction of merchandise costs upon completion of contractual milestones, terms of the related
agreement, or by another systematic approach.
Vendor Consideration
Merchandise costs consist of the purchase price or manufacturing costs of inventory sold, inbound and
outbound shipping charges and all costs related to the Company's depot, fulfillment and manufacturing
operations, and are reduced by vendor consideration. Merchandise costs also include salaries, benefits,
depreciation, and utilities in fresh foods departments and certain ancillary businesses.
Merchandise Costs
46
46
Selling, General and Administrative Expenses
2.750% Senior Notes due May 2024
3.000% Senior Notes due May 2027
1.375% Senior Notes due June 2027
Recorded
Available-for-sale:
901
Note 3-Fair Value Measurement
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The table below presents information regarding the Company's financial assets and financial liabilities
that are measured at fair value on a recurring basis and indicate the level within the hierarchy reflecting
the valuation techniques utilized to determine such fair value.
Investment in government and agency securities
Forward foreign-exchange contracts, in asset position"
Forward foreign-exchange contracts, in (liability) position (1)
Total
$
Level 2
2023
2022
633 $
18
529
34
(7)
(2)
644 $
561
2023
At the end of 2023 and 2022, the fair value of the Company's long-term debt, including the current portion,
was approximately $5,738 and $6,033. The carrying value of long-term debt consisted of the following:
Other long-term debt consists of Guaranteed Senior Notes issued by the Company's Japanese
subsidiary, valued using Level 3 inputs. In May 2023, the Japanese subsidiary repaid $75 of its
Guaranteed Senior Notes.
The Company's long-term debt consists primarily of Senior Notes, described below. The Company at its
option may redeem the Senior Notes at any time, in whole or in part, at a redemption price plus accrued
interest. The redemption price is equal to the greater of 100% of the principal amount or the sum of the
present value of the remaining scheduled payments of principal and interest to maturity. Additionally, upon
certain events, a holder has the right to require a repurchase at a price of 101% of the principal amount
plus accrued and unpaid interest. Interest on all outstanding long-term debt is payable semi-annually. The
estimated fair value of Senior Notes is valued using Level 2 inputs.
Long-Term Debt
The Company maintains various short-term bank credit facilities, with a borrowing capacity of $1,234 and
$1,257, in 2023 and 2022. Short-term borrowings outstanding were immaterial at the end of 2023 and
2022.
633 $
Short-Term Borrowings
49
449
Assets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as
financial assets measured at amortized cost and long-lived nonfinancial assets. These assets are
measured at fair value if determined to be impaired. Please see Note 1 for additional information.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
At September 3, 2023, and August 28, 2022, the Company did not hold any Level 1 or 3 financial assets
or liabilities that were measured at fair value on a recurring basis. There were no transfers between levels
during 2023 or 2022.
(1) The asset and the liability values are included in other current assets and other current liabilities, respectively, in the
consolidated balance sheets.
Note 4-Debt
650 $
$
Total
(5) $
317
$
851
$
317
846
Total short-term investments
Held-to-maturity:
529
(5) $
534 $
$
Government and agency securities
Certificates of deposit
Losses, Net
Gross unrecognized holding gains and losses on available-for-sale securities were not material for the
years ended September 3, 2023, and August 28, 2022. At those dates, there were no available-for-sale
securities in a material continuous unrealized-loss position. There were no sales of available-for-sale
securities during 2023 or 2022.
Available-For-Sale
193
202
Due after five years
330
337
Due after one year through five years
The maturities of available-for-sale and held-to-maturity securities at the end of 2023 are as follows:
901
111 $
$
Due in one year or less
Held-To-Maturity
Fair Value
Cost Basis
110
54
(1) Included in other long-term assets in the consolidated balance sheets.
(2) Included in other current liabilities in the consolidated balance sheets.
(3) Included in other long-term liabilities in the consolidated balance sheets.
37
6,680
2023
2022
2021
$
1,056 $
33
798 $
718
(35)
84
1,089
7,840 $
763
374
333
265
10
(5)
11
384
328
276
732
851
802
557
8,487 $
1,749
Foreign
Total
The provisions for income taxes are as follows:
Federal:
Current
Deferred
Total federal
State:
Current
Deferred
Total state
$
Foreign:
Deferred
Total foreign
Total provision for income taxes
2023
2022
2021
6,264 $
5,759 $
4,931
2,223
2,081
Current
(10)
(17)
(34)
92
1.4
Employee stock ownership plan (ESOP)
(25)
(0.3)
(23)
(0.3)
(91)
(1.3)
(24)
(0.3)
3.0
(196)
(46)
(0.7)
Total
$2,195
25.9 % $ 1,925
24.6 % $ 1,601
24.0%
The Company recognized total net tax benefits of $62, $130 and $163 in 2023, 2022 and 2021. These
include benefits of $54, $94 and $75, related to stock-based compensation. During 2021, there was a net
tax benefit of $70 related to the portion of the special dividend paid through the Company's 401(k) plan.
54
54
45
(2.5)
231
1.9
160
722
834
523
$
2,195 $
1,925 $
1,601
The reconciliation between the statutory tax rate and the effective rate for 2023, 2022, and 2021 is as
follows:
2023
2022
2021
Federal taxes at statutory rate
$ 1,782
21.0 % $ 1,646
21.0 % $ 1,403
21.0 %
State taxes, net
302
3.6
267
3.4
243
3.6
Foreign taxes, net
Domestic
Income before income taxes is comprised of the following:
Other
Note 8-Taxes
230
175
226
100
206
91
191
92
2,271
1,579
3,401
180
2,217
785
2,646 $
1,432
(1) Operating lease payments have not been reduced by future sublease income of $83.
(2) Excludes $843 of lease payments for leases that have been signed but not commenced.
Note 6-Equity
Dividends
Cash dividends declared in 2023 totaled $3.84 per share, as compared to $3.38 in 2022. The Company's
current quarterly dividend rate is $1.02 per share.
Stock Repurchase Programs
The Company's stock repurchase program is conducted under a $4,000 authorization by the Board of
Directors, which expires in January 2027. As of the end of 2023, the remaining amount available under
the authorization was $3,563. The following table summarizes the Company's stock repurchase activity:
2023
2022
2021
755
Shares
Repurchased
(000's)
1,341 $
863
1,358
277 $
Finance Leases
Financing cash flows finance leases
Income Taxes
291
176
67
Operating lease assets obtained in exchange for new
or modified leases
202
231
Financing lease assets obtained in exchange for new
or modified leases
100
$
794
As of September 3, 2023, future minimum payments during the next five fiscal years and thereafter are as
follows:
2024
2025
2026
2027
2028
Thereafter
Total (2)
Less amount representing interest
Present value of lease liabilities
Operating Leases (1)
399
Average
Price per
Share
350
504.68 $
511.46
471.47
352.53
398.31
405.63
The weighted-average grant date fair value of RSUs granted was $471.47, $476.06, and $369.15 in 2023,
2022, and 2021. The remaining unrecognized compensation cost related to non-vested RSUs at the end
of 2023 was $790 and the weighted-average period of time over which this cost will be recognized is 1.6
years. Included in the outstanding balance at the end of 2023 were approximately 1,050,000 RSUs
vested but not yet delivered.
Summary of Stock-Based Compensation
The following table summarizes stock-based compensation expense and the related tax benefits:
2023
2022
2021
Stock-based compensation expense
338.41
$
774 $
163
724 $
154
665
140
Stock-based compensation expense, net
611 $
570 $
525
53
Total Cost
53
Less recognized income tax benefit
(116)
3,045 $
$
Forfeited
Outstanding at the end of 2023
495
364.39
These amounts may differ from repurchases of common stock in the consolidated statements of cash
flows due to changes in unsettled stock repurchases at the end of each fiscal year. Purchases are made
442
677
62
from time to time, as conditions warrant, in the open market or in block purchases and pursuant to plans
under SEC Rule 10b5-1.
Note 7-Stock-Based Compensation
The 2019 Incentive Plan authorized the issuance of 17,500,000 shares (10,000,000 RSUs) of common
stock for future grants, plus the remaining shares that were available for grant and the future forfeited
shares from grants under the previous plan, up to a maximum aggregate of 27,800,000 shares
(15,885,000 RSUs). The Company issues new shares of common stock upon vesting of RSUs. Shares
for vested RSUs are generally delivered to participants annually, net of shares withheld for taxes.
Summary of Restricted Stock Unit Activity
At the end of 2023, 8,747,000 shares were available to be granted as RSUs, and the following awards
were outstanding:
•
52
2,869,000 time-based RSUs, which vest upon continued employment or service over specified
periods of time; and
•
Weighted-Average
Grant Date Fair
Value
1,814
3,449 $
Number of
Units
(in 000's)
(2,102)
Outstanding at the end of 2022
The following table summarizes RSU transactions during 2023:
176,000 performance-based RSUs, of which 135,000 were granted to executive officers subject to
the determination of the attainment of performance targets for 2023. This determination occurred
in September 2023, at which time at least 33% of the units vested, as a result of the long service
of all executive officers, with the exception of one executive officer who has less than 25 years of
service. The remaining awards vest upon continued employment over specified periods of time.
Please refer to Note 1 for accelerated vesting requirements.
Granted
Vested and delivered
2,459
4,982
24,646
44,904
6,558
12,704
17,205
64,166
$ 141,398 $
1,093
27,233 $ 195,929
4,470
1,145
6,708
1,339
177
265
1,781
2,612
27,298 $
3,891
29,985 $ 226,954
388
4,323
18,760
272
2,443
5,481
26,684
49,189
6,420
13,385
68,994
$ 165,294 $
31,675 $
5,268
1,346
1,179
7,793
1,436
180
284
1,900
2,795
708
704
27,183
15,993
46,474
31,626
Total net sales
$
237,710 $
222,730 $
192,052
60
60
48,693
Item 9-Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed in
the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the rules and forms of the SEC and to ensure that information
required to be disclosed is accumulated and communicated to management, including our principal
executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive
Officer and the Chief Financial Officer, with assistance from other members of management, have
reviewed the effectiveness of our disclosure controls and procedures as of September 3, 2023, and,
based on their evaluation, have concluded that the disclosure controls and procedures were effective as
of such date.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes
those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable
assurance that our transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles and that our receipts and expenditures are
being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that
I could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Under the supervision of and with the participation of our management, we assessed the effectiveness of
our internal control over financial reporting as of September 3, 2023, using the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated
Framework (2013).
Based on its assessment, management has concluded that our internal control over financial reporting
was effective as of September 3, 2023. The attestation of KPMG LLP, our independent registered public
accounting firm, on the effectiveness of our internal control over financial reporting is included with the
consolidated financial statements in Item 8 of this Report.
754
Changes in Internal Control Over Financial Reporting
Item 9A-Controls and Procedures
Warehouse Ancillary and Other Businesses
29,527
31,977
2,317
5,182
23,492
39,589
5,962
13,717
59,268
The following table summarizes net sales by merchandise category; sales from e-commerce websites
and business centers have been allocated to the applicable merchandise categories:
2023
2022
2021
Foods and Sundries
$
96,175 $
85,629 $
77,277
Non-Foods
60,865
61,100
55,966
Fresh Foods
3,588
281
57
2,077
Legal Proceedings
2023
2022
2021
$
6,292 $
443,854
598
444,452
5,844 $
443,651
1,106
444,757
5,007
443,089
1,257
444,346
Note 10-Commitments and Contingencies
The Company is involved in many claims, proceedings and litigations arising from its business and
property ownership. In accordance with applicable accounting guidance, the Company establishes an
accrual for legal proceedings if and when those matters present loss contingencies that are both probable
and reasonably estimable. There may be losses in excess of amounts accrued. The Company monitors
those matters for developments that would affect the likelihood of a loss (taking into account where
applicable indemnification arrangements concerning suppliers and insurers) and the accrued amount, if
any, thereof, and adjusts the amount as appropriate. The Company has recorded immaterial accruals with
56
respect to certain matters described below, in addition to other immaterial accruals for matters not
described below. If the loss contingency at issue is not both probable and reasonably estimable, the
Company does not establish an accrual, but monitors for developments that make the contingency both
probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be
incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been
recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot, in the
Company's view, be reasonably estimated because, among other things: the remedies or penalties
sought are indeterminate or unspecified; the legal and/or factual theories are not well developed; and/or
the matters involve complex or novel legal theories or a large number of parties.
The Company is a defendant in an action commenced in July 2013 under the California Labor Code
Private Attorneys General Act (PAGA) alleging violation of California Wage Order 7-2001 for failing to
provide seating to employees who work at entrance and exit doors in California warehouses. Canela v.
Costco Wholesale Corp. (Case No. 2013-1-CV-248813; Santa Clara Superior Court). The complaint
sought relief under the California Labor Code, including civil penalties and attorneys' fees. On April 26,
2023, the court entered a final judgment in favor of the Company. The plaintiff appealed the judgment in
June 2023.
In June 2022, a business center employee raised similar claims, alleging failure to provide seating to
employees who work at membership refund desks in California warehouses and business centers.
Rodriguez v. Costco Wholesale Corp. (Case No. 22CV012847; Alameda Superior Court). The complaint
seeks relief under the California Labor Code, including civil penalties and attorneys' fees. The Company
filed an answer denying the material allegations of the complaint.
In March 2019, employees filed a class action against the Company alleging claims under California law
for failure to pay overtime, to provide meal and rest periods and itemized wage statements, to timely pay
wages due to terminating employees, to pay minimum wages, and for unfair business practices. Relief
was sought under the California Labor Code, including civil penalties and attorneys' fees. Nevarez v.
Costco Wholesale Corp. (Case No. 2:19-cv-03454; C.D. Cal.). The Company filed an answer denying the
material allegations of the complaint. In December 2019, the court issued an order denying class
certification. In January 2020, the plaintiffs dismissed their Labor Code claims without prejudice, and the
court remanded the action to state court. Settlement for an immaterial amount was agreed upon in
February 2021. Final court approval of the settlement was granted on May 3, 2022. A proposed intervenor
appealed the denial of her motion to intervene, and the appeal was dismissed on February 15, 2023.
In May 2019, an employee filed a class action against the Company alleging claims under California law
for failure to pay overtime, to provide itemized wage statements, to timely pay wages due to terminating
employees, to pay minimum wages, and for unfair business practices. Rough v. Costco Wholesale Corp.
(Case No. 2:19-cv-01340; E.D. Cal.). Relief is sought under the California Labor Code, including civil
penalties and attorneys' fees. In September 2021, the court granted the Company's motion for partial
summary judgment and denied class certification. In August 2019, the plaintiff filed a companion case in
state court seeking penalties under PAGA. Rough v. Costco Wholesale Corp. (Case No. FCS053454;
Sonoma County Superior Court). Relief is sought under the California Labor Code, including civil
penalties and attorneys' fees. The state court action has been stayed pending resolution of the federal
action. In September 2023 the parties reached an agreement in principle on a settlement for an
immaterial amount.
In December 2020, a former employee filed suit against the Company asserting collective and class
claims on behalf of non-exempt employees under the Fair Labor Standards Act and New York Labor Law
for failure to pay for all hours worked, failure to pay certain non-exempt employees on a weekly basis, and
failure to provide proper wage statements and notices. The plaintiff also asserted individual retaliation
claims. Cappadora v. Costco Wholesale Corp. (Case No. 1:20-cv-06067; E.D.N.Y.). Based on an
agreement in principle concerning settlement of the matter, involving a proposed payment by the
Company of an immaterial amount, the federal action has been dismissed. In April 2022, Cappadora and
a second plaintiff filed an action against the Company in New York state court, asserting the same class
claims asserted in the federal action under the New York Labor Law and seeking preliminary approval of
the class settlement. Cappadora and Sancho v. Costco Wholesale Corp. (Index No. 604757/2022;
Nassau County Supreme Court). Following final approval of the settlement, the case was dismissed on
April 14, 2023.
In August 2021, a former employee filed a similar suit, asserting class claims on behalf of certain non-
exempt employees under New York Labor Law for failure to pay on a weekly basis. Umadat v. Costco
Wholesale Corp. (Case No. 2:21-cv-4814; E.D.N.Y.). The Company filed an answer, denying the material
allegations of the complaint. In August 2023, the parties reached an agreement in principle on a
settlement for an immaterial amount. In April 2022, a former employee filed a similar suit, asserting class
claims on behalf of certain non-exempt employees under New York Labor Law, as well as under the Fair
Labor Standards Act, for failure to pay on a weekly basis and failure to pay overtime. Burian v. Costco
Wholesale Corp. (Case No. 2:22-cv-02108; E.D.N.Y.). The case was settled for an immaterial amount and
was dismissed with prejudice in May 2023.
50
Weighted average diluted shares
RSUs
Weighted average basic shares
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f)
or 15d-15(f) of the Exchange Act) that occurred during the fourth quarter of 2023 that have materially
affected, or are reasonably likely to materially affect, the Company's internal control over financial
reporting.
Gross decreases-settlements
(12)
Lapse of statute of limitations
(1)
(6)
Gross unrecognized tax benefit at end of year
$
16 $
16
55
55
The gross unrecognized tax benefit includes tax positions for which the ultimate deductibility is highly
certain but there is uncertainty about the timing of such deductibility. At the end of 2023 and 2022, these
amounts were immaterial. Because of the impact of deferred tax accounting, other than interest and
penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would
accelerate the payment of cash to the taxing authority. The total amount of such unrecognized tax
benefits that if recognized would favorably affect the effective income tax rate in future periods is $14 and
$15 at the end of 2023 and 2022.
Accrued interest and penalties related to income tax matters are classified as a component of income tax
expense. Accrued interest and penalties recognized during 2023 and 2022, and accrued at the end of
each respective period were not material.
The Company is currently under audit by several jurisdictions in the United States and abroad. Some
audits may conclude in the next 12 months, and the unrecognized tax benefits recorded in relation to the
audits may differ from actual settlement amounts. It is not practical to estimate the effect, any, of any
amount of such change during the next 12 months to previously recorded uncertain tax positions in
connection with the audits. The Company does not anticipate that there will be a material increase or
decrease in the total amount of unrecognized tax benefits in the next 12 months.
The Company files income tax returns in the United States, various state and local jurisdictions, in
Canada, and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject
to U.S. federal, state or local examination for years before fiscal 2018. The Company is currently subject
to examination in California for fiscal years 2013 to present.
Other Taxes
The Company is subject to multiple examinations for value added, sales-based, payroll, product, import or
other non-income taxes in various jurisdictions. In certain cases, the Company has received assessments
from the authorities. Possible losses or range of possible losses associated with these matters are either
immaterial or an estimate of the possible loss or range of loss cannot be made at this time. If certain
matters or a group of matters were to be decided adversely to the Company, it could result in a charge
that might be material to the results of an individual fiscal quarter or year.
Note 9-Net Income per Common and Common Equivalent Share
The following table shows the amounts used in computing net income per share and the weighted
average number of shares of basic and of potentially dilutive common shares outstanding (shares in
000's):
Net income attributable to Costco
In February 2021, a former employee filed a class action against the Company alleging violations of
California Labor Code regarding payment of wages, meal and rest periods, wage statements,
reimbursement of expenses, payment of final wages to terminated employees, and for unfair business
practices. Edwards v. Costco Wholesale Corp. (Case No. 5:21-cv-00716: C.D. Cal.). On September 27,
2022, the parties reached a settlement for an immaterial amount, which is subject to court approval.
In July 2021, a former temporary staffing employee filed a class action against the Company and a
staffing company alleging violations of the California Labor Code regarding payment of wages, meal and
rest periods, wage statements, the timeliness of wages and final wages, and for unfair business practices.
Dimas v. Costco Wholesale Corp. (Case No. STK-CV-UOE-2021-0006024; San Joaquin Superior Court).
The Company has moved to compel arbitration of the plaintiff's individual claims and to dismiss the class
action complaint. On September 7, 2021, the same plaintiff filed a separate representative action under
PAGA, asserting the same Labor Code violations and seeking civil penalties and attorneys' fees. The
case has been stayed pending arbitration of the plaintiff's individual claims.
In September 2021, an employee filed a class action against the Company alleging violations of the
California Labor Code regarding failure to provide sick pay, failure to timely pay wages due at separation
from employment, and for violations of California's unfair competition law. De Benning v. Costco
Wholesale Corp. (Case No. 34-2021-00309030-CU-OE-GDS; Sacramento Superior Court). In April 2022,
a settlement for an immaterial amount was agreed upon, subject to court approval. Final approval of the
settlement was granted on February 10, 2023.
In March 2022, an employee filed a class action against the Company alleging violations of the California
Labor Code regarding the failure to: pay wages, provide meal and rest periods, provide accurate wage
statements, timely pay final wages, and reimburse business expenses. Diaz v. Costco Wholesale Corp.
(Case No. 22STCV09513; Los Angeles Superior Court). In December 2022, the case was settled for an
immaterial amount, and the case was dismissed.
Total assets
2021
Total revenue
Operating income
Depreciation and amortization
Additions to property and equipment
Property and equipment, net
Total assets
Disaggregated Revenue
United States
Canada
Other
International
Total
$ 176,630 $
33,056 $ 32,604 $ 242,290
5,392
1,448
1,274
8,114
183
295
Property and equipment, net
3,288
Additions to property and equipment
Operating income
In May 2022, an employee filed a PAGA action against the Company alleging claims under the California
Labor Code regarding the payment of wages, meal and rest periods, the timeliness of wages and final
wages, wage statements, accurate records and business expenses. Gonzalez v. Costco Wholesale Corp.
(Case No. 22AHCV00255; Los Angeles Superior Court). The Company filed an answer denying the
allegations.
Beginning in December 2017, the United States Judicial Panel on Multidistrict Litigation consolidated
numerous cases concerning the impacts of opioid abuses filed against various defendants by counties,
cities, hospitals, Native American tribes, third-party payors, and others. In re National Prescription Opiate
Litigation (MDL No. 2804) (N.D. Ohio). Included are cases filed against the Company by counties and
cities in Michigan, New Jersey, Oregon, Virginia and South Carolina, a third-party payor in Ohio, and a
hospital in Texas, class actions filed on behalf of infants born with opioid-related medical conditions in 40
states, and class actions and individual actions filed on behalf of individuals seeking to recover alleged
58
increased insurance costs associated with opioid abuse in 43 states and American Samoa. Claims
against the Company filed in federal court outside the MDL have been asserted by certain counties and
cities in Florida and Georgia; claims filed by certain cities and counties in New York are pending in state
court. Claims against the Company in state courts in New Jersey, Oklahoma, Utah, and Arizona have
been dismissed. The Company is defending all of the pending matters.
Members of the Board of Directors, six corporate officers and the Company were defendants in a
shareholder derivative action filed in June 2022 related to chicken welfare and alleged breaches of
fiduciary duties. Smith, et ano. v. Vachris, et al., Superior Court of the State of Washington, County of
King, No, 22-2-08937-7SEA. The complaint sought from the individual defendants' damages, injunctive
relief, costs, and attorneys' fees. On March 28, 2023, the court granted the defendants' motion to dismiss
the action. The plaintiffs subsequently made a demand that the Board of Directors take various actions,
including among other things, pursuing claims against directors and officers of the type asserted in the
litigation. A demand review committee of the Board has been appointed to make a recommendation to the
Board as to the demand.
In February 2023, Go Green Norcal, LLC filed an arbitration demand against the Company. The demand
alleged a breach of a supply agreement and sought unspecified damages and cancellation of a loan from
the Company. In March 2023, the Company filed its answer, denying any breach by the Company, along
with counterclaims against Go Green and an affiliate for breach of contract, negligent misrepresentation,
and an accounting. In August 2023 the plaintiff asserted that its damages exceed $70 million.
In January 2023 the Company received a Civil Investigative Demand from the U.S. Attorney's Office,
Western District of Washington, requesting documents. The government is conducting a False Claims Act
investigation concerning whether the Company presented or caused to be presented to the federal
government for payment false claims relating to prescription medications.
The Company does not believe that any pending claim, proceeding or litigation, either alone or in the
aggregate, will have a material adverse effect on the Company's financial position, results of operations or
cash flows; it is possible that an unfavorable outcome of some or all of the matters, however unlikely,
could result in a charge that might be material to the results of an individual fiscal quarter or year.
59
Note 11-Segment Reporting
The Company is principally engaged in the operation of membership warehouses through wholly owned
subsidiaries in the U.S., Canada, Mexico, Japan, the U.K., Korea, Australia, Taiwan, China, Spain,
France, Iceland, New Zealand, and Sweden. Reportable segments are largely based on management's
organization of the operating segments for operational decisions and assessments of financial
performance, which considers geographic locations. The material accounting policies of the segments are
as described in Note 1. Inter-segment net sales and expenses have been eliminated in computing total
revenue and operating income.
The following table provides information for the Company's reportable segments:
2023
Total revenue
Operating income
Depreciation and amortization
Additions to property and equipment
Property and equipment, net
Total assets
2022
Total revenue
Depreciation and amortization
61
12/19/2014
Disclosure pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 and
Section 13(r) of the Securities Exchange Act of 1934, as amended.
10-Q
11/24/2019 12/23/2019
Restricted Stock Unit Award
Agreement-Non-Executive
Director
10.3.4*
2019 Stock Incentive Plan Letter
10-Q
11/24/2019
2019 Stock Incentive Plan
12/23/2019
10.4*
Fiscal 2023 Executive Bonus Plan
8-K
11/9/2022
10.5*
Executive Employment
10-Q
11/20/2016
12/16/2016
Agreement for 2020 Performance-
Based Restricted Stock Units-
Executive
10.3.3*
Agreement - Non-U.S. Employee
Restricted Stock Unit Award
Number
Exhibit Description
Filed
Herewith
Form
Period Ended
Filing Date
10.3*
Seventh Restated 2002 Stock
Incentive Plan
DEF 14A
(12)
10.3.1*
2019 Stock Incentive Plan
10-Q
11/24/2019
12/23/2019
Restricted Stock Unit Award
Agreement-Employee
10.3.2*
2019 Stock Incentive Plan
10-Q
11/24/2019 12/23/2019
Agreement, effective January 1,
Exhibit
2017, between W. Craig Jelinek
Corporation
2021, between W. Craig Jelinek
and Costco Wholesale
Corporation
10.5.4*
Extension of the Term of the
10-Q
11/21/2021 12/22/2021
Executive Employment
Agreement, effective January 1,
Agreement, effective January 1,
2022, between W. Craig Jelinek
Corporation
10.5.5*
Extension of the Term of the
10-Q
11/20/2022 12/29/2022
Executive Employment
Agreement, effective January 1,
2023, between W. Craig Jelinek
and Costco Wholesale
Corporation
64
and Costco Wholesale
Executive Employment
11/22/2020 12/16/2020
10-Q
10.5.1*
Extension of the Term of the
10-Q
11/25/2018
12/20/2018
Executive Employment
Agreement, effective January 1,
2019, between W. Craig Jelinek
and Costco Wholesale
Corporation
10.5.2*
Extension of the Term of the
10-Q
11/24/2019 12/23/2019
Executive Employment
Agreement, effective January 1,
2020, between W. Craig Jelinek
and Costco Wholesale
Corporation
10.5.3*
Extension of the Term of the
and Costco Wholesale
Incorporated by Reference
63
12/17/2019
Financial Statement Schedules:
(b)
All schedules have been omitted because the required information is not present or is not
present in amounts sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial statements, including the
notes thereto.
Exhibits: The required exhibits are filed as part of this Annual Report on Form 10-K or are
incorporated herein by reference.
Exhibit
Number
3.1
Exhibit Description
Articles of Incorporation as
Incorporated by Reference
2.
Filed
Herewith
10-K
Period Ended
8/28/2022
Filing Date
10/5/2022
amended of Costco Wholesale
Corporation
3.2
Bylaws as amended of Costco
Wholesale Corporation
8-K
Form
See the listing of Financial Statements included as a part of this Form 10-K in Item 8 of
Part II.
Financial Statements:
1.
During 2023 we had three individual cardholders under a business membership in the name of the
Embassy of the Islamic Republic of Iran at our subsidiary in Mexico. Gross revenue during 2023
attributable to the membership was approximately $1,276, and our estimated profit on these transactions
was approximately $100. The membership was canceled during the second quarter of 2023. The
Company does not intend to continue these activities.
During the fiscal quarter ended September 3, 2023, no director or officer of the Company adopted or
terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, as each term is
defined in Item 408(a) of Regulation S-K.
Item 9C-Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not Applicable.
PART III
Item 10-Directors, Executive Officers and Corporate Governance
Information relating to the availability of our code of ethics for senior financial officers and a list of our
executive officers appear in Part I, Item 1 of this Report. The information required by this Item concerning
our directors and nominees for director is incorporated herein by reference to the sections entitled
"Proposal 1: Election of Directors," "Directors" and "Committees of the Board" in Costco's Proxy
Statement for its 2024 annual meeting of shareholders, which will be filed with the SEC within 120 days of
the end of our fiscal year ("Proxy Statement").
Item 11-Executive Compensation
The information required by this Item is incorporated herein by reference to the sections entitled
"Compensation of Directors,” “Executive Compensation," and "Compensation Discussion and Analysis" in
Costco's Proxy Statement.
Item 12-Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information required by this Item is incorporated herein by reference to the section entitled "Principal
Shareholders" and "Equity Compensation Plan Information” in Costco's Proxy Statement.
Item 13-Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to the sections entitled “Proposal
1: Election of Directors," "Directors," "Committees of the Board," "Shareholder Communications to the
Board," "Meeting Attendance," "Report of the Compensation Committee of the Board of Directors,"
"Certain Relationships and Transactions" and "Report of the Audit Committee” in Costco's Proxy
Statement.
Item 14-Principal Accounting Fees and Services
Our independent registered public accounting firm is KPMG LLP, Seattle, WA, Auditor Firm ID: 185.
The information required by this Item is incorporated herein by reference to the sections entitled
"Independent Public Accountants" in Costco's Proxy Statement.
62
PART IV
Item 15-Exhibits, Financial Statement Schedules
(a)
Documents filed as part of this report are as follows:
4.1
First Supplemental Indenture
8-K
between Costco Wholesale
4.6
Form of 2.750% Senior Notes due
8-K
5/16/2017
May 18, 2024
4.7
Form of 3.000% Senior Notes due
May 18, 2027
8-K
5/16/2017
4.8
Description of Common Stock
10-K
8/28/2022
10/5/2022
10.1*
Costco Wholesale Executive
Health Plan
10-K
9/2/2012 10/19/2012
10.2*
2019 Incentive Plan
DEF 14
5/16/2017
Item 9B-Other Information (amounts in whole dollars)
8-K
4.5
Corporation and U.S. Bank
National Association, as Trustee,
dated as of March 20, 2002
(incorporated by reference to
Exhibits 4.1 and 4.2 to the
Company's Current Report on the
8/10/2023
3/25/2002
Form 8-K filed on March 25, 2002)
4.2
Form of 1.375% Senior Notes due
8-K
4/17/2020
June 20, 2027
4.3
Form of 1.600% Senior Notes due
8-K
4/17/2020
April 20, 2030
4.4
Form of 1.750% Senior Notes due
8-K
4/17/2020
April 20, 2032
Form of 2.300% Senior Notes due
May 18, 2022
(11)
1,599
12
694
20
5
2,107
2,013
(422)
(313)
1,685
1,700
(867)
(962)
(380)
(231)
(655)
761
(701)
(85)
(1,989)
(1,979)
$
(304) $
(279)
The deferred tax accounts at the end of 2023 and 2022 include deferred income tax assets of $491 and
$445, included in other long-term assets; and deferred income tax liabilities of $795 and $724, included in
other long-term liabilities.
In 2023 and 2022, the Company had valuation allowances of $422 and $313, primarily related to foreign
tax credits that the Company believes will not be realized due to carry forward limitations. The foreign tax
credit carry forwards are set to expire beginning in fiscal 2030.
The Company generally no longer considers fiscal year earnings of non-U.S. consolidated subsidiaries
after 2017 to be indefinitely reinvested (other than China and Taiwan) and has recorded the estimated
incremental foreign withholding taxes (net of available foreign tax credits) and state income taxes payable
assuming a hypothetical repatriation to the U.S. The Company considers undistributed earnings of certain
non-U.S. consolidated subsidiaries, which totaled $3,225, to be indefinitely reinvested and has not
provided for withholding or state taxes.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2023 and
2022 is as follows:
2023
2022
Gross unrecognized tax benefit at beginning of year
Gross decreases-tax positions in prior years
(87)
727
16 $
201
11
Gross increases-tax positions in prior years
1
1
Gross increases-current year tax positions
33
The components of the deferred tax assets (liabilities) are as follows:
Deferred tax assets:
678
Deferred income/membership fees
Foreign tax credit carry forward
Operating lease liabilities
Accrued liabilities and reserves
Other
Total deferred tax assets
Equity compensation
Total net deferred tax assets
250
Valuation allowance
302
309
84
2022
2023
89 $
Total deferred tax liabilities
Foreign branch deferreds
Operating lease right-of-use assets
Merchandise inventories
Property and equipment
Deferred tax liabilities:
Net deferred tax liabilities
Executive Vice President and Chief Financial Officer
Sarah George
Service Centers
Senior Vice President, Membership, Marketing and Member
Senior Vice President, General Manager - Texas Region
Peter Gruening
Senior Vice President, Merchandising - Foods and Sundries
Darby Greek
Executive Vice President, COO - Southwest Division
Richard A. Galanti**
Angelina Chaparro
Senior Vice President, Country Manager - Canada
Sheri Flies
Senior Vice President, General Manager - Southeast Region
Gino Dorico
Wendy Davis
Senior Vice President, Costco Wholesale Industries and
Business Development
Senior Vice President, General Manager - Bay Area Region
Jeffrey Cole
Senior Vice President, Global Sustainability and Compliance
Caton Frates**
Daniel M. Hines
Ali Moayeri
W. Craig Jelinek**
Chief Executive Officer
Teresa Jones
Senior Vice President, Depots and Traffic
Yoon Kim
Senior Vice President, Merchandising - Non-Foods
James Klauer**
Executive Vice President, COO - Northern Division
Bill Koza
Senior Vice President, General Manager - Midwest Region
David Messner
Senior Vice President, Real Estate Development
Russ Miller**
Senior Executive Vice President, COO - Warehouse Operations,
U.S. and Mexico
Senior Vice President, General Manager - Asia
Senior Vice President, Corporate Controller
Senior Vice President, General Manager - Los Angeles Region
Richard Chang
Co-Founder, The Raikes Foundation; Former Chief
Executive Officer, Bill and Melinda Gates Foundation
John W. Stanton(b)*
Executive Vice President, Administration
Senior Vice President, Construction and Purchasing
Richard A. Galanti
Executive Vice President and
Chief Financial Officer, Costco Wholesale
Hamilton E. James
Chairman of the Board, Costco Wholesale;
Chairman, Jefferson River Capital;
Former Executive Vice Chairman, The Blackstone Group
W. Craig Jelinek
Chief Executive Officer, Costco Wholesale
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Sally Jewell(a)(b)
Global Board Treasurer, The Nature Conservancy;
Former U.S. Secretary of the Interior; Former Chief Executive
Officer and Director, Recreational Equipment Inc.
Jeffrey S. Raikes(c)*
Chairman, First Avenue Entertainment LLLP; Trilogy
International Partners, Inc.; and Trilogy Equity Partners
Ron M. Vachris
President and Chief Operating Officer, Costco Wholesale
Maggie A. Wilderotter(b)(c)
Former Chief Executive Officer and Chairman, Grand Reserve Inn;
Former Chief Executive Officer and Executive Chairman, Frontier
Communications
Board Committees
(a) Audit Committee
(b) Compensation Committee
(c) Nominating and Governance Committee
*2023 Committee Chair
Claudine Adamo**
Executive Vice President, COO - Merchandising
Marc-Andre Bally
EXECUTIVE AND SENIOR OFFICERS
Senior Vice President, General Manager - Eastern Canada Region
Patrick J. Callans**
Greg Carter II
Pietro Nenci
Terry Williams
Non-Foods and Ecommerce, Canada
Shareholder Information
Copies of Costco's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q will be provided to any
shareholder upon written request to Investor Relations, Costco Wholesale Corporation, 999 Lake Drive, Issaquah,
Washington 98027. Internet users can access recent sales and earnings releases, the annual report and SEC filings,
as well as our Costco website, at www.costco.com. E-mail users can direct investor relations questions
to investor@costco.com. The SEC maintains a site that contains reports, proxy and information statements, and
other information regarding issuers, such as the Company, that file electronically with the SEC, at www.sec.gov.
Annual Meeting
Thursday, January 18, 2024 at 2:00 PM Pacific
www.virtualshareholdermeeting.com/COST2024
Independent Public Accountants
KPMG LLP
401 Union Street, Suite 2800
Seattle, WA 98101
Stock Exchange Listing
The Nasdaq Global Select Market
Stock Symbol: COST
Transfer Agent
Computershare
Costco Shareholder Relations
Correspondence should be mailed to:
P.O. Box 43006
Providence RI 02940
ADDITIONAL INFORMATION
Overnight correspondence should be sent to:
150 Royall St., Suite 101
Canton, MA 02021
TDD for Hearing Impaired: (800) 490-1493
Outside U.S.: (201) 680-6578
Website: https://www.computershare.com/investor
FSC
www.fsc.org
MIX
Paper from
responsible sources
FSC® C132107
COSTCO
WHOLESALE
COSTCO
WHOLESALE
A commitment to quality and value at
871 locations and on Costco.com
COR000075 0623
Telephone: (800) 249-8982
Senior Vice President, Merchandising - Corporate Foods,
** Executive Committee Member
Executive Chair, Follett Higher Education Group;
Former President, CVS Pharmacy; Former Chief
Executive Officer, Hudson's Bay Company
Scott O'Brien
Senior Vice President, Merchandising - Fresh Foods
Mario Omoss
Senior Vice President, General Manager - Northwest Region
Rob Parker
Senior Vice President, Business Centers
Mike Parrott
Senior Vice President, Ecommerce
Pierre Riel**
Executive Vice President, COO - International Division
Yoram B. Rubanenko**
Executive Vice President, COO - Eastern Division
Adam Self
Senior Vice President, General Manager - Northeast Region
Walt Shafer
Senior Vice President, Lincoln Premium Poultry
Geoff Shavey
Senior Vice President, CIO - Information Systems
Senior Vice President, Merchandising - Non-Foods
Senior Vice President, General Manager - Europe
Richard Stephens
Senior Vice President, Pharmacy
John Sullivan**
Executive Vice President, General Counsel and Corporate Secretary
Sandy Torrey
Senior Vice President, Membership, Marketing, Member Service
Centers and Travel
Ron M. Vachris**
President and Chief Operating Officer
Azmina Virani
Senior Vice President, General Manager - Western Canada Region
Brenda Weber
Senior Vice President, Human Resources
W. Richard Wilcox
Senior Vice President, General Manager - San Diego Region
Louie Silveira
General Venture Partner, Sway Ventures; Former
President and Chief Executive Officer, Emotient, Inc.
Helena B. Foulkes
Susan L. Decker(a)
Former President, Yahoo! Inc.
Ninth Amendment to Citi, N.A. Co-
Branded Credit Card Agreement
10.8.9
Agreement
Co-Branded Credit Card
3/10/2022
2/13/2022
10-Q
Eighth Amendment to Citi, N.A.
10.8.8
10-Q
Agreement
3/10/2021
2/14/2021
10-Q
Seventh Amendment to Citi, N.A.
10.8.7
Branded Credit Card Agreement
9/1/2019 10/11/2019
10-K
Sixth Amendment to Citi, N.A. Co-
Co-Branded Credit Card
10.8.6#
11/20/2022 12/29/2022
Tenth Amendment to Citi, N.A. Co-
Branded Credit Card Agreement
X
Rule 13a - 14(a) Certifications
31.1
Registered Public Accounting Firm
X
Consent of Independent
23.1
Subsidiaries of the Company
21.1
10.8.10
Agreement
Twelfth Amendment to Citi, N.A.
10.8.12#
3/9/2023
2/12/2023
10-Q
Eleventh Amendment to Citi, N.A.
Co-Branded Credit Card
Agreement
10.8.11
11/20/2022 12/29/2022
10-Q
Co-Branded Credit Card
32.1
Branded Credit Card Agreement
2/17/2019
9/1/2013 10/16/2013
8/31/2015
5/10/2015
10-Q/A
Citibank, N.A. Co-Branded Credit
Card Agreement
10.8**
10-K
Deferred Compensation Plan
10.7*
Agreement
10.8.1**
Filing Date
12/13/1999
Period Ended
Form
Herewith
Exhibit Description
Form of Indemnification
10.6
Number
Filed
Exhibit
Incorporated by Reference
14A
3/13/2019
First Amendment to Citi, N.A. Co-
Branded Credit Card Agreement
11/22/2015 12/17/2015
10-Q
Fifth Amendment to Citi, N.A. Co-
10.8.5**
Agreement
Co-Branded Credit Card
3/15/2018
2/18/2018
10-Q
Fourth Amendment to Citi, N.A.
10-Q
10.8.4**
10-K
Third Amendment to Citi, N.A. Co-
Branded Credit Card Agreement
10.8.3**
Agreement
3/9/2016
2/14/2016
10-Q
Second Amendment to Citi, N.A.
Co-Branded Credit Card
10.8.2**
8/28/2016 10/12/2016
Section 1350 Certifications
✗
101.INS
/s/ HAMILTON E. JAMES
By
Charles T. Munger
Director
/s/ CHARLES T. MUNGER
Kenneth D. Denman
Director
/s/ KENNETH D. DENMAN
Director
President, Chief Operating Officer and
Ron M. Vachris
By
/s/ RON M. VACHRIS
Officer and Director
Executive Vice President, Chief Financial
Richard A. Galanti
/s/ RICHARD A. GALANTI
Chief Executive Officer and Director
W. Craig Jelinek
/s/ W. CRAIG JELINEK
By
By
(Principal Financial Officer)
By
By
By
Chief Executive Officer and Founder, Raftr;
Mary (Maggie) A. Wilderotter
Director
/s/ MARY (MAGGIE) A. WILDEROTTER
Jeffrey S. Raikes
Director
/s/ JEFFREY S. RAIKES
/s/ SALLY JEWELL
Sally Jewell
Director
Susan L. Decker
Director
/s/ SUSAN L. DECKER
(Principal Accounting Officer)
By
Controller
Daniel M. Hines
/s/ DANIEL M. HINES
Hamilton E. James
Chairman of the Board
67
Director
John W. Stanton
/s/ JOHN W. STANTON
By
By
Senior Vice President and Corporate
By
By
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
October 10, 2023
104
101.PRE Inline XBRL Taxonomy Extension
Presentation Linkbase Document
X
Inline XBRL Taxonomy Extension
Label Linkbase Document
101.LAB
X
101.DEF Inline XBRL Taxonomy Extension
Definition Linkbase Document
X
Inline XBRL Taxonomy Extension
Calculation Linkbase Document
Cover Page Interactive Data File
(formatted as inline XBRL and
contained in Exhibit 101)
101.CAL
Filed
Herewith
Exhibit Description
X
65
99
Schema Document
101.SCH Inline XBRL Taxonomy Extension
X
Inline XBRL Instance Document
Form
X
X
Incorporated by Reference
and Director
Executive Vice President, Chief Financial Officer
/s/ RICHARD A. GALANTI
Richard A. Galanti
By
COSTCO WHOLESALE CORPORATION
(Registrant)
October 10, 2023
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
60
66
None.
Item 16-Form 10-K Summary
Financial Statement Schedules―None.
(c)
# Certain information in this exhibit has been omitted because it is both (i) not material and (ii) customarily and actually treated by
the registrant as private or confidential.
Portions of this exhibit have been omitted under a confidential treatment order issued by the Securities and Exchange
Commission.
Management contract, compensatory plan or arrangement.
**
*
Filing Date
Period Ended
Kenneth D. Denman(a)*(c)
Exhibit
Number