UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 3, 2017August 28, 2022
or
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-20355
Costco Wholesale Corporation
(Exact name of registrant as specified in its charter)
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| Washington | | 91-1223280 |
(State or other jurisdiction of
incorporation or organization)
| | (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:
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| Title of each class | | Trading Symbol | | Name of each exchange on
which registered
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Common Stock, $.01$.005 Par Value | | COST | | 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. YESYes ☒ NO 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 Yes ☐ NO 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. YESYes ☒ NO No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). YESYes ☒ NO No ☐
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, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer☒ | ☒ | Accelerated filer | ☐ |
Non-accelerated filer☐ (Do not check if a smaller company) | ☐ | 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 Yes ☐ NO No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 12, 201713, 2022 was $74,963,307,820.$225,434,477,639.
The number of shares outstanding of the registrant’s common stock as of October 10, 2017September 27, 2022, was 436,989,606.442,604,145.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on January 30, 2018,19, 2023, are incorporated by reference into Part III of this Form 10-K.
COSTCO WHOLESALE CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 3, 2017AUGUST 28, 2022
TABLE OF CONTENTS
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INFORMATION RELATING TO FORWARD LOOKING STATEMENTS
Certain statements contained in this Reportdocument 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 include1995. For these purposes, forward-looking statements are statements that address activities, events, conditions or developments that we expectthe Company expects or anticipateanticipates 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, modernization of information systems, and the demand for our products and services. Forward-lookingIn some cases, forward-looking statements may alsocan be identified by thebecause they contain words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,“seek,” “should,” “target,” “will,” “would,” “will be,” “will continue,” “will likely result,”or similar expressions and similar expressions.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“Item 1A-Risk Factors”Factors”, and other factors noted in the section titled “Item“Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations”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 them,these statements, except as required by law. PART I
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, Mexico, Japan, United Kingdom (U.K.), Mexico, Japan,Korea, Taiwan, Australia, Spain, France, IcelandChina, and through majority-owned subsidiaries in Taiwan and Korea.Iceland. Costco operated 741, 715,838, 815, and 686795 warehouses worldwide at September 3, 2017, August 28, 2016,2022, August 29, 2021, and August 30, 2015,2020, 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 2017 relate to the 53-week fiscal year ended September 3, 2017. References to 20162022, 2021, and 20152020 relate to the 52-week fiscal years ended August 28, 2016,2022, August 29, 2021, and August 30, 2015,2020, 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 brandednationally-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 generallyoften sell inventory before we are required to pay for it, even while taking advantage of early payment discounts when available.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 individual warehouses. This process creates freight volume and handling efficiencies, eliminating manylowering costs associated with traditional multiple-step distribution channels. For our e-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.
Item 1—Business (Continued)
Our average warehouse space is approximately 145,000146,000 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 of our warehouses and using a membership format, we havebelieve 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 the Costco co-branded card, andcards, debit cards, cash and checks.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 an average of approximately 3,800less 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 10,000 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):
•Foods and Sundries (including sundries, dry foods, packaged foods,grocery, candy, cooler, freezer, deli, liquor, and groceries)
tobacco)Sundries (including snack foods, candy, alcoholic and nonalcoholic beverages, and cleaning supplies)
Hardlines•Non-Foods (including major appliances, electronics, health and beauty aids, hardware, and garden and patio)
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)
Softlines (including apparelWarehouse Ancillary (includes gasoline, pharmacy, optical, food court, hearing aids, and small appliances)
tire installation) and Other Businesses (includes e-commerce, business centers, travel, and other)Ancillary (including gas stations and pharmacy)
AncillaryWarehouse ancillary businesses operate primarily within or next to our warehouses, provide expanded products and services, encouraging members to shop more frequently. These businesses include our gas stations, pharmacy, optical dispensing centers, food courts, and hearing-aid centers. We sell gasoline in all countries except Korea and France, with theThe number of warehouses with gas stations varyingvaries significantly by country.country, and we have no gasoline business in Korea or China. We operated 536, 508, and 472668 gas stations at the end of 2017, 2016, and 2015, respectively.
Our online businesses, which include e-commerce, business delivery, and travel, vary by country. In the U.S. and Canada, we offer all of our online businesses. We operate e-commerce websites in all countries except Japan, Australia, Spain, Iceland, and France. Online businesses provide our members additional products and services, many not found in our warehouses.2022. Net sales for our onlinegasoline business wereincreased to approximately 4%14% of our total net sales in 2017and2016, respectively,2022.
Our other businesses sell products and 3%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 2015.2022. 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, hotels, cruises, and other travel products exclusively for Costco members (offered in the U.S., Canada, and the U.K.).
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 generallyThe COVID-19 pandemic created unprecedented supply constraints, including disruptions and delays that have not experienced difficulty in obtaining sufficient quantitiesimpacted and could continue to impact the flow and availability of merchandise and believe that if one or more of our currentcertain products. When sources of supply becamebecome unavailable, we would be able to obtain alternative sources without substantial disruption of our business.seek alternatives. We also purchase and manufacture private-label merchandise, as long as quality and member demand are comparablehigh and the value to our members is significant.
Item 1—Business (Continued)
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. Membership
Our members may utilize their memberships at anyall of our warehouses worldwide.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 evidence.document. Business members have the ability tomay add additional cardholders (add-ons). Add-ons(affiliates), to which the same annual fee applies. Affiliates are not available for Gold Star members. Effective June 1, 2017, we increased ourOur annual membership feesfee for these memberships is $60 in the U.S. and Canada for Gold Star (individual), Business and Business add-on by $5 to $60 per year. The Executive membership fee increased from $110 to $120 (annual membership fee of $60, plus Executive upgrade of $60), and the maximum annual 2% reward, which is earned on qualified purchases and can be redeemed only at Costco warehouses, increased from $750 to $1,000. Our annual membership feesvaries in our Other International operations vary by country.other countries. All paid memberships include a free household card.
Our member renewal rate was 90%93% in the U.S. and Canada and 87% on a90% worldwide basis in 2017.at the end of 2022. The majority of members renew within six months following their renewal date. Therefore, ourOur 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. 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. Membership fee income and the renewal rate calculations were not affected. Our membership was made up of the following (in thousands):
| | | | 2017 | | 2016 | | 2015 | | 2022 | | 2021 | | 2020 |
| Gold Star | 38,600 |
| | 36,800 |
| | 34,000 |
| Gold Star | 54,000 | | | 50,200 | | | 46,800 | |
| Business, including add-ons | 10,800 |
| | 10,800 |
| | 10,600 |
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| Business, including affiliates | | Business, including affiliates | 11,800 | | | 11,500 | | | 11,300 | |
| Total paid members | 49,400 |
| | 47,600 |
| | 44,600 |
| Total paid members | 65,800 | | | 61,700 | | | 58,100 | |
| Household cards | 40,900 |
| | 39,100 |
| | 36,700 |
| Household cards | 53,100 | | | 49,900 | | | 47,400 | |
| Total cardholders | 90,300 |
| | 86,700 |
| | 81,300 |
| Total cardholders | 118,900 | | | 111,600 | | | 105,500 | |
Paid cardholders (except Business add-ons)affiliates) are eligible to upgrade to an Executive membership in the U.S., Canada, Mexico and the U.K. for an additional annual fee of $60. Executive memberships are also available in Canada, Mexico, the U.K., Japan, Korea, and Taiwan, for which varies by country.the additional fee varies. Executive members haveearn a 2% reward on qualified purchases (generally up to a maximum reward of $1,000 per year), redeemable at Costco warehouses. This program also offers (except in Mexico and Korea) access to additional savings and benefits on various business and consumer services, (except in Mexico), such as auto and home insurance, the Costco auto purchase program, and check printing services. Theprinting. These services are generally provided by third-partiesthird parties and vary by state and country. Executive members totaled 29.1 million and represented 38%57% of paid members (excluding affiliates) in the U.S. and Canada, and 22% of paid members (excluding affiliates) in our Other International operations. The sales penetration of Executive members represented approximately 71% of worldwide net sales in 2022.
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 2017. Executive members generally spend2022, we employed 304,000 employees worldwide. The large majority (approximately 95%) is employed in our membership warehouses and distribution channels, and less than 10% are represented by unions. We also utilize seasonal employees during peak periods. The total number of employees by segment is:
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| Number of Employees |
| 2022 | | 2021 | | 2020 |
| United States | 202,000 | | | 192,000 | | | 181,000 | |
| Canada | 50,000 | | | 47,000 | | | 46,000 | |
| Other International | 52,000 | | | 49,000 | | | 46,000 | |
| Total employees | 304,000 | | | 288,000 | | | 273,000 | |
Growth and Engagement
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 than othersignificant 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 2022, in the U.S. that rate was approximately 90% for employees who have been with us for at least one year.
Diversity, Equity and Inclusion
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 2022, we appointed a new Chief Diversity and Inclusion Officer. 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.
Well Being
In October 2021, we provided an increase of a minimum of $0.50 per hour for U.S. and Canada wage scales. In March 2022, we provided certain compensation increases, including a $0.75 per hour increase to the top of the U.S. wage scales, increased the starting wage to $17.50, and granted our employees one additional day of paid time off. In July 2022, we provided an additional increase to the top of the U.S. wage scales of $0.50 per hour. Costco is firmly committed to helping protect the health and safety of our members and employees and to serving our communities. As the percentageglobal effect of our net sales attributable to these membersCOVID-19 continues to increase.evolve, we are closely monitoring the changing situation and complying with public health guidance.
Labor
Our employee count was as follows: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.
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| | 2017 | | 2016 | | 2015 |
| Full-time employees | 133,000 |
| | 126,000 |
| | 117,000 |
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| Part-time employees | 98,000 |
| | 92,000 |
| | 88,000 |
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| Total employees | 231,000 |
| | 218,000 |
| | 205,000 |
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Approximately 15,600 employees are union employees. We consider our employee relations to be very good.
Item 1—Business (Continued)
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. Wal-Mart,Walmart, Target, Kroger, and Amazon.comAmazon are among our significant general merchandise retail competitors.competitors in the U.S. We also compete with other warehouse club operations (primarily Wal-Mart’s,clubs, including Walmart’s Sam’s Club and BJ’s Wholesale Club), and nearly everyClub. Many of the major metropolitan areas in the U.S. and Mexico metropolitan area hascertain of our Other International locations have multiple club operations.competing clubs.
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®.Signature. We believe that Kirkland Signature products are high quality, products, offered to our members at prices that are generally lower than those for similar national brand productsbrands, 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 labelprivate-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.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 their registrations are properly maintained.
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 interneta 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 officerChief 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.
Item 1—Business (Continued)
Information about our Executive Officers of the Registrant
The executive officers of Costco, their position, and ages are listed below. All executive officers have over 25 or more years of service with the Company.Company, with the exception of Mr. Sullivan who has 21 years of service.
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| Name | | Position | | Executive
Officer
Since | | Age |
| W. Craig Jelinek | | 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. | | 1995 | | 70 |
| Ron M. Vachris | | 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. | | 2016 | | 57 |
| Richard A. Galanti | | Executive Vice President and Chief Financial Officer. Mr. Galanti has been a director since January 1995. | | 1993 | | 66 |
| Jim C. Klauer | | 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. | | 2018 | | 60 |
| Patrick J. Callans | | Executive Vice President, Administration. Mr. Callans was Senior Vice President, Human Resources and Risk Management, from 2013 to December 2018. | | 2019 | | 60 |
| Russ D. Miller | | Senior Executive Vice President, U.S. Operations. Mr. Miller was Executive Vice President, Chief Operating Officer, Southern Division and Mexico, from January 2018 to May 2022. Mr. Miller was Senior Vice President, Western Canada Region, from 2001 to January 2018. | | 2018 | | 65 |
| James P. Murphy | | Executive Vice President, Chief Operating Officer, International Division. Mr. Murphy was Senior Vice President, International, from 2004 to October 2010. Mr. Murphy is retiring from the Company at the end of calendar year 2022. | | 2011 | | 69 |
| Timothy L. Rose | | 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. Mr. Rose is retiring from the Company effective November, 2022. | | 2013 | | 70 |
| Yoram B. Rubanenko | | 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. | | 2021 | | 58 |
| John Sullivan | | Executive Vice President, General Counsel & Corporate Secretary. Mr. Sullivan has been General Counsel since 2016 and Corporate Secretary since 2010. | | 2021 | | 62 |
| Claudine E. Adamo | | 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. | | 2022 | | 52 |
| Caton Frates | | Executive Vice President, Chief Operating Officer, Southwest Division. Mr. Frates was Senior Vice President, Los Angeles Division, from 2015 to May 2022. | | 2022 | | 54 |
| Pierre Riel | | 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 | | 59 |
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| Name | Position | Executive Officer Since | Age |
| W. Craig Jelinek | 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. | 1995 | 65 |
| Richard A. Galanti | Executive Vice President and Chief Financial Officer. Mr. Galanti has been a director since January 1995. | 1993 | 61 |
| Franz E. Lazarus | Executive Vice President, Administration. Mr. Lazarus was Senior Vice President, Administration-Global Operations from 2006 to September 2012. | 2012 | 70 |
| John D. McKay | Executive Vice President, Chief Operating Officer, Northern Division. Mr. McKay was Senior Vice President, General Manager, Northwest Region from 2000 to March 2010. | 2010 | 60 |
| Paul G. Moulton | Executive Vice President, Chief Information Officer. Mr. Moulton was Executive Vice President, Real Estate Development from 2001 until March 2010. | 2001 | 66 |
| James P. Murphy | Executive Vice President, Chief Operating Officer, International. Mr. Murphy was Senior Vice President, International, from 2004 to October 2010. | 2011 | 64 |
| 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 | 65 |
| Timothy L. Rose | 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. | 2013 | 65 |
| Ron M. Vachris | 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. | 2016 | 52 |
| Dennis R. Zook | Executive Vice President, Chief Operating Officer, Southwest Division and Mexico. | 1993 | 68 |
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 Item7 and our consolidated financial statements and related notes in Item8 of 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 85% of net sales and operating income in 2017,2022, respectively. Within the U.S., we are highly dependent on our California operations, which comprised 30%28% of U.S. net sales in 2017.2022. 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 to retain our existing member base and attract new members.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 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.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 member traffic.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 lack oflesser 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 profitably deployedprofitable and as a result, future profitability could be delayed or otherwise materially adversely affected.
Item 1A—Risk Factors (Continued)
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.
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 model.business. The extent to which we achieve growth in our membership base, increase the penetration of our Executive members,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 member 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 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 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 receiving and distribution process isoperations are efficient, unforeseen disruptions in operations due to fires, tornadoes, and 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.
We rely extensively Our e-commerce operations depend heavily on information technology to process transactions, compile results,third-party and manage our businesses. Failure or disruption of our primaryin-house logistics providers 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.
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,negatively affected when these providers 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, significant technology investments to improve or replace 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 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. Additionally, 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.
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.
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
Item 1A—Risk Factors (Continued)
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.
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.
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.
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 might sell products that cause unexpected illness or injury to our members, harm to our reputation, and expose us to litigation.
If our merchandise offerings, 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
Item 1A—Risk Factors (Continued)
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, 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.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 sustainability of product sourcesenvironmental, social and animal welfare)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
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.
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.
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 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.
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 privacy and cybersecurity laws across the various states and around the globe, which may carry significant potential penalties for noncompliance.
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.
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 multichannelomnichannel experience for our members, our results of operations could be adversely impacted.
MultichannelOmnichannel 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.
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 and implement a succession plan for key senior management could negatively impact theour 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, 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 may incur property, casualty or other losses not covered by our insurance.
We are predominantly self-insured, with insurance coverage for certain catastrophic risks,Claims for employee health care benefits, workers’ compensation, general liability, property damage, directors’ and officers’ liability, vehicle liability, inventory loss, and inventory loss.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. The occurrence of significantSignificant 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.
Item 1A—Risk Factors (Continued)
We are primarily self-insured as it relates to property damage, due to the substantial premiums required for insurance coverage over physical losses caused by certain natural disasters, as well as the limitations on available coverage for such losses. Although we maintain specific coverages for losses from physical damages in excess of certain amounts to guard against 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 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.interruption. Such losses could materially impact our cash flowflows 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 clubwarehouse-club operators, supermarkets, supercenters, internet retailers, gasoline stations, hard discounters, and department and specialty stores.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 memberor 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
and tax policies including increasedchanges 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 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 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 commodity products,commodities, including gasoline and other food products,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 significant events like the outbreak of warhostilities, including but not limited to the Ukraine conflict, or acts of terrorism.
VendorsInflationary 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 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.
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 vendorsupplier 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 tocausing a loss of sales and profits.
Item 1A—Risk Factors (Continued)
We buy from numerous domestic and foreign manufacturers and importers. Our inability to acquire suitable merchandise on acceptable terms or the loss of key vendorssuppliers could negatively affect us. We may not be able to develop relationships with new vendors,suppliers, and products from alternative sources, if any, may be of a lesser quality or more expensive than those from existing vendors.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 volumevolumes 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, inclementnatural disasters, extreme weather natural disasters,conditions, public health emergencies, 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, oneOne 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 our costs, and otherwise adversely impact our business.
Fluctuations in foreign exchange rates may adversely affect our results of operations.
During 2017,2022, our international operations, including Canada, generated 27% and 36%32% 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 must translate the financial statements of our international operations from local currencies into U.S. dollars using current exchange rates for the current period.rates. 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 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.
We may pay forA portion of the products we purchase is paid for sale in our warehouses around the world with a currency other than the local currency of the country in which the goods will beare sold. Currency fluctuations may increase our cost of goodsmerchandise costs and may not be passed on to members. Consequently, fluctuations in currency exchange rates may adversely affect our results of operations.
Natural disasters, extreme weather conditions, public health emergencies or other catastrophescatastrophic events could negatively affect our business, financial condition, and results of operations.
Natural disasters and extreme weather conditions, including those impacted by climate change, such as hurricanes, typhoons, floods, earthquakes, wildfires, droughts; acts of terrorism or earthquakes,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 one or more of our properties, limitations on store operating hours, less frequent visits by members to physical locations, 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,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, 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.
The COVID-19 pandemic continues to affect our business, financial condition and results of operations in many respects.
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.
Other factors and uncertainties include, but are not limited to:
•The severity and duration of the pandemic, including future mutations or related variants of the virus in areas in which we operate;
•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 recovery when the pandemic subsides;
•The long-term impact of the pandemic on our business, including consumer behaviors; and
•Disruption and volatility within the financial and credit markets.
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.
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. U.S. and foreign governmentGovernment regulations limiting carbon dioxide and other greenhouse gas emissions may result in increasedincrease compliance and merchandise costs, and legislation orother regulation affecting energy inputs that could materially affect
Item 1A—Risk Factors (Continued)
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 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. Climateregulations. More stringent fuel economy standards and public policies aimed at increasing the adoption of zero-emission and alternative fuel vehicles and other regulations related to climate change will affect our future operations and may be associated with extreme weather conditions, such as more intense hurricanes, thunderstorms, tornadoes,adversely impact our profitability, and snow or ice storms, as well as rising sea levels.require significant capital expenditures.
Failure to meet financial market expectations for our financial performance 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
Our international operationsWe are 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 2017,At the end of 2022, we operated 227260 warehouses in 10 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 and economic conditions, regulatory constraints, currency regulations,
policy changes such as the withdrawal of 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 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 located in countrieslocations 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, self-insurance liabilities, and income taxes are highly complex and involve 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 trendsperformance 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 materiallymaterial 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.
TableSection 404 of Contentsthe 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.
Item 1A—Risk Factors (Continued)
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 couldare 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 income tax liabilities.
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, 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 varietyand 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.
Warehouse Properties
At September 3, 2017August 28, 2022, we operated 741838 membership warehouses:
|
| | | | | | | | |
| | Own Land and Building | | Lease Land and/or Building(1) | | Total |
| United States and Puerto Rico | 416 |
| | 98 |
| | 514 |
|
| Canada | 85 |
| | 12 |
| | 97 |
|
| Mexico | 37 |
| | — |
| | 37 |
|
| United Kingdom | 22 |
| | 6 |
| | 28 |
|
| Japan | 12 |
| | 14 |
| | 26 |
|
| Korea | 6 |
| | 7 |
| | 13 |
|
| Taiwan | — |
| | 13 |
| | 13 |
|
| Australia | 6 |
| | 3 |
| | 9 |
|
| Spain | 2 |
| | — |
| | 2 |
|
| Iceland | — |
| | 1 |
| | 1 |
|
| France | 1 |
| | — |
| | 1 |
|
| Total | 587 |
| | 154 |
| | 741 |
|
| | | | | | | | | | | | | | | | | |
| Own Land
and Building | | Lease Land and/or Building(1) | | Total |
| United States and Puerto Rico | 466 | | | 112 | | | 578 | |
| Canada | 90 | | | 17 | | | 107 | |
| Other International | 105 | | | 48 | | | 153 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Total | 661 | | | 177 | | | 838 | |
_______________
| |
(1) | 102 of the 154 leases are land-only leases, where Costco owns the building. |
The following schedule shows warehouse openings, net(1)126 of closings and relocations, and expected openings through December 31, 2017:
|
| | | | | | | | | | | | | | |
| | United States | | Canada | | Other International | | Total | | Total Warehouses in Operation |
| 2013 and prior | 451 |
| | 85 |
| | 98 |
| | 634 |
| | 634 |
|
| 2014 | 17 |
| | 3 |
| | 9 |
| | 29 |
| | 663 |
|
| 2015 | 12 |
| | 1 |
| | 10 |
| | 23 |
| | 686 |
|
| 2016 | 21 |
| | 2 |
| | 6 |
| | 29 |
| | 715 |
|
| 2017 | 13 |
| | 6 |
| | 7 |
| | 26 |
| | 741 |
|
| 2018 (expected through 12/31/2017) | 4 |
| | 1 |
| | — |
| | 5 |
| | 746 |
|
| Total | 518 |
| | 98 |
| | 130 |
| | 746 |
| | |
At the end of fiscal 2017,2022, our warehouses contained approximately 107.3122.5 million square feet of operating floor space: 75.485.4 million in the U.S.; 13.515.2 million in Canada; and 18.421.9 million in Other International. WeTotal square feet associated with distribution and logistics facilities were approximately 31.0 million. Additionally, we operate depots for the consolidation and distribution of most merchandise shipments to the warehouses, and various processing, packaging, manufacturing and other facilities to support ancillary and other businesses, including our online business. We operate 24 depots, consistingbusiness, which includes the production of approximately 11.0 million square feet. Our executive offices are located in Issaquah, Washington, and we maintain 18 regional offices in the U.S., Canada and Other International locations.certain private-label items.
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
Not applicable.
PART II
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 10, 2017,September 27, 2022, we had 8,62910,279 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.
|
| | | | | | | | | | | | |
| | Price Range | | Cash Dividends Declared | |
| | High | | Low | |
| 2017: | | | | | | |
| Fourth Quarter | $ | 182.20 |
| | $ | 150.44 |
| | $ | 0.500 |
| |
| Third Quarter | 182.45 |
| | 164.55 |
| | 7.500 |
| (1) |
| Second Quarter | 172.00 |
| | 150.11 |
| | 0.450 |
| |
| First Quarter | 163.98 |
| | 142.24 |
| | 0.450 |
| |
| 2016: | | | | | | |
| Fourth Quarter | 169.04 |
| | 141.29 |
| | 0.450 |
| |
| Third Quarter | 158.25 |
| | 146.44 |
| | 0.450 |
| |
| Second Quarter | 168.87 |
| | 143.28 |
| | 0.400 |
| |
| First Quarter | 163.10 |
| | 138.30 |
| | 0.400 |
| |
_______________
| |
(1) | Includes a special cash dividend of $7.00 per share. |
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 20172022 (dollars in millions, except per share data): |
| | | | | | | | | | | | |
| Period | | | Total Number of Shares Purchased | | Average Price Paid per Share | | 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 |
| May 8—June 4, 2017 | | 92,000 |
| | $171.87 | | 92,000 |
| | $2,973 |
| June 5—July 2, 2017 | | 573,000 |
| | 162.00 |
| | 573,000 |
| | $2,881 |
| July 3—July 30, 2017 | | 451,000 |
| | 155.06 |
| | 451,000 |
| | $2,811 |
| July 31—September 3, 2017 | | 396,000 |
| | 156.95 |
| | 396,000 |
| | $2,749 |
| Total fourth quarter | | 1,512,000 |
| | $159.21 | | 1,512,000 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | | Total Number of Shares Purchased | | Average Price Paid per Share | | 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 |
| May 9—June 5, 2022 | | 98,000 | | | $ | 463.77 | | | 98,000 | | | $ | 2,947 | |
| June 6—July 3, 2022 | | 98,000 | | | 467.53 | | | 98,000 | | | 2,901 | |
| July 4—July 31, 2022 | | 89,000 | | | 512.08 | | | 89,000 | | | 2,856 | |
| August 1—August 28, 2022 | | 88,000 | | | 545.08 | | | 88,000 | | | 2,808 | |
| Total fourth quarter | | 373,000 | | | $ | 495.49 | | | 373,000 | | | |
_______________
| |
(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. |
(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.
Item 6—Selected Financial Data
Performance Graph
The following table sets forthgraph compares the cumulative total shareholder return assuming 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 September 3, 2017, through August 28, 2022.
The following graph provides information concerning our consolidated financial condition, operating results, and key operating metrics. This information should be read in conjunction with Management’saverage sales per warehouse over a 10-year period.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | Average Sales Per Warehouse* |
| | (Sales In Millions) |
| Year Opened | # of Whses | | | | | | | | | | |
| 2022 | 23 | | | | | | | | | | $ | 150 | |
| 2021 | 20 | | | | | | | | | $ | 140 | | 158 | |
| 2020 | 13 | | | | | | | | $ | 132 | | 152 | | 184 | |
| 2019 | 20 | | | | | | | $ | 129 | | 138 | | 172 | | 208 | |
| 2018 | 21 | | | | | | $ | 116 | | 119 | | 141 | | 172 | | 202 | |
| 2017 | 26 | | | | | $ | 121 | | 142 | | 158 | | 176 | | 206 | | 237 | |
| 2016 | 29 | | | | $ | 87 | | 97 | | 118 | | 131 | | 145 | | 173 | | 204 | |
| 2015 | 23 | | | $ | 83 | | 85 | | 94 | | 112 | | 122 | | 136 | | 163 | | 189 | |
| 2014 | 30 | | $ | 108 | | 109 | | 115 | | 125 | | 140 | | 144 | | 155 | | 182 | | 208 | |
| 2013 & Before | 633 | $ | 160 | | 167 | | 168 | | 167 | | 173 | | 186 | | 193 | | 203 | | 230 | | 261 | |
| Totals | 838 | 160 | | 164 | | 162 | | 159 | | 163 | | 176 | | 182 | | 192 | | 217 | | 245 | |
| | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
| | Fiscal Year |
| *First year sales annualized. |
| 2017 was a 53-week fiscal year but it has been normalized for purposes of comparability |
Item 6—Reserved
Item 7—Management's Discussion and Analysis of Financial ConditionConditions 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)
|
| | | | | | | | | | | | | | | | | | | |
| | Sept. 3, 2017 | | Aug. 28, 2016 | | Aug. 30, 2015 | | Aug. 31, 2014 | | Sept. 1, 2013 |
| As of and for the year ended | (53 weeks) | | (52 weeks) | | (52 weeks) | | (52 weeks) | | (52 weeks) |
| RESULTS OF OPERATIONS | | | | | | | | | |
| Net sales | $ | 126,172 |
| | $ | 116,073 |
| | $ | 113,666 |
| | $ | 110,212 |
| | $ | 102,870 |
|
| Membership fees | 2,853 |
| | 2,646 |
| | 2,533 |
| | 2,428 |
| | 2,286 |
|
Gross margin(1) as a percentage of net sales | 11.33 | % | | 11.35 | % | | 11.09 | % | | 10.66 | % | | 10.62 | % |
| Selling, general and administrative expenses as a percentage of net sales | 10.26 | % | | 10.40 | % | | 10.07 | % | | 9.89 | % | | 9.82 | % |
| Operating income | $ | 4,111 |
| | $ | 3,672 |
| | $ | 3,624 |
| | $ | 3,220 |
| | $ | 3,053 |
|
| Net income attributable to Costco | 2,679 |
| | 2,350 |
| | 2,377 |
| | 2,058 |
| | 2,039 |
|
| Net income per diluted common share attributable to Costco | 6.08 |
| | 5.33 |
| | 5.37 |
| | 4.65 |
| | 4.63 |
|
| Cash dividends declared per common share | 8.90 |
| | 1.70 |
| | 6.51 |
| | 1.33 |
| | 8.17 |
|
Changes in comparable sales(2) | | | | | | | | | |
| United States | 4 | % | | 1 | % | | 3 | % | | 5 | % | | 6 | % |
| Canada | 5 | % | | (3 | )% | | (5 | )% | | 2 | % | | 9 | % |
| Other International | 2 | % | | (3 | )% | | (3 | )% | | 3 | % | | 1 | % |
| Total Company | 4 | % | | 0 | % | | 1 | % | | 4 | % | | 6 | % |
| Increase in Total Company comparable sales excluding the impact of changes in foreign currency and gasoline prices | 4 | % | | 4 | % | | 7 | % | | 6 | % | | 6 | % |
| BALANCE SHEET DATA | | | | | | | | | |
| Net property and equipment | $ | 18,161 |
| | $ | 17,043 |
| | $ | 15,401 |
| | $ | 14,830 |
| | $ | 13,881 |
|
| Total assets | 36,347 |
| | 33,163 |
| | 33,017 |
| | 32,662 |
| | 29,936 |
|
| Long-term debt, excluding current portion | 6,573 |
| | 4,061 |
| | 4,852 |
| | 5,084 |
| | 4,986 |
|
| Costco stockholders’ equity | $ | 10,778 |
| | $ | 12,079 |
| | $ | 10,617 |
| | $ | 12,303 |
| | $ | 10,833 |
|
| WAREHOUSE INFORMATION | | | | | | | | | |
| Warehouses in Operation | | | | | | | | | |
| Beginning of year | 715 |
| | 686 |
| | 663 |
| | 634 |
| | 608 |
|
| Opened | 28 |
| | 33 |
| | 26 |
| | 30 |
| | 26 |
|
| Closed due to relocation | (2 | ) | | (4 | ) | | (3 | ) | | (1 | ) | | 0 |
|
| End of year | 741 |
| | 715 |
| | 686 |
| | 663 |
| | 634 |
|
| MEMBERSHIP INFORMATION | | | | | | | | | |
| Total paid members (000's) | 49,400 |
| | 47,600 |
| | 44,600 |
| | 42,000 |
| | 39,000 |
|
_______________ | |
(1) | Net sales less merchandise costs. |
| |
(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. |
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amountsamounts in millions, except per share, share, membership fee, and warehouse count data)
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 2022 compared to 2021. For discussion related to the results of operations and changes in financial condition for 2021 compared to 2020 refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2021 Form 10-K, which was filed with the United States Securities and Exchange Commission (SEC) on October 6, 2021.
OVERVIEWOverview
We believe that the most important driver of our profitability is increasing net sales, growth, particularly comparable sales. Net sales growth.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). We define comparable sales as net sales from warehouses open for more than one year, including remodels, relocations and expansions, as well as onlineand 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); inflation and changes in the cost of gasoline and associated competitive conditions (primarily impacting our U.S. and Canadian operations).conditions. The higher our comparable sales exclusive of these items, the more we can leverage certain of our selling, general and administrativeSG&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.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. SalesNet 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.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.private-label items, and through online offerings.
Our philosophy is to provide our members with quality goods and services at the most competitive prices. We do not focus in the short termshort-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 2022 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. 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, offering seasonal merchandise outside its season, as well as passing cost increases on to our members. Our investments in merchandise pricing can, from time to time,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 near-termgross margin and gross margin as a percentage of net sales (gross margin percentage).
We believe that our gasoline business draws membersenhances traffic in our warehouses, but it generally has a significantly 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-termnear-
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)SG&A expenses as a percentage of net sales. A decline in gasoline prices has the inverse effect. We operateAdditionally, actions in various countries, particularly China and the United States, have affected the costs of some of our lower-margin gasoline business in all countries except Koreamerchandise. The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and France.timing of the tariffs. Higher tariffs could adversely impact our results.
We also achieve net 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 relativecontinuing 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, both domestically and internationally, has also increased our sales.sales but it generally has a lower gross margin percentage relative to our warehouse operations. E-commerce sales growth slowed in 2022 compared to 2021 and 2020.
OurThe 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 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.
Our financial performance depends heavily on our ability to controlcontrolling costs. While we believe that we have achieved successes in this area, historically, some significant costs are partially outside our control, most
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data) (Continued)
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 operatedoperates on very low gross margins, modest changes in various items in the consolidated statements of income, statement, particularly merchandise costs and SG&A expenses, can have substantial impacts on net income.
Our operating model is generally the same across our U.S., Canada,Canadian, and Other International operating segments (see Note 11 to the consolidated financial statements included in Item 8 of this Report). Certain countriesoperations in the Other International segment have relatively higher rates of square footage growth, lower wageswage and benefit costs as a percentage of country sales, and/or less or no direct membership warehouse competition.competition, or lack e-commerce or business delivery. 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.dollars. 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 year 2017 was a 53-week fiscal year ending on September 3, 2017, while 2016References to 2022, 2021, and 2015 were2020 relate to the 52-week fiscal years ending onended August 28, 2016,2022, August 29, 2021, and August 30, 2015,2020, 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 2017 included:2022 versus 2021 include:
•We opened 26 net new warehouses, in 2017: 13including 3 relocations: 14 net new in the U.S., six2 net new in Canada,our Canadian segment, and seven7 new in our Other International segment, compared to 29 net22 new warehouses, including 2 relocations in 2016;2021;
•Net sales increased 9%16% to $126,172,$222,730 driven by a 4%14% increase in comparable sales and sales at new warehouses opened in 20162021 and 2017, and the benefit of one additional week of sales in 2017;2022;
•Membership fee revenue increased 8%9% to $2,853, primarily due$4,224, driven by new member sign-ups, upgrades to Executive membership, sign-ups at existing and new warehouses, an extra week of membership feesincrease in 2017, the annual fee increase, and executive membership upgrades;our renewal rate;
•Gross margin percentage decreased two65 basis points;points, driven primarily by our core merchandise categories and a LIFO charge for higher merchandise costs;
•SG&A expenses as a percentage of net sales decreased 1477 basis points, driven by lower costs associated with the co-branded credit card arrangementprimarily due to leveraging increased sales and ceasing of incremental wages related to COVID-19, despite additional wage and benefits increases;
•We incurred a one-time $77 pretax charge, primarily related to granting our employees one additional day of paid time off in the U.S.;March 2022;
•The effective tax rate in 2022 was 24.6% compared to 24.0% in 2021;
•Net income increased 14%17% to $2,679,$5,844, or $6.08$13.14 per diluted share compared to $2,350,$5,007, or $5.33$11.27 per diluted share in 2016. The 2017 results were positively impacted by2021;
•In June 2022, the Company paid a $82 tax benefit, or $0.19 per diluted share, in connection with the special cash dividend paid to the Company's 401(k) Plan participants and other net benefits of approximately $51, or $0.07 per diluted share, for non-recurring net legal and other matters;
In 2017, we re-paid long-term debt totaling $2,200 representing the aggregate principal balances of the 5.5% and 1.125% Senior Notes; we issued $3,800 in aggregate principal amount of Senior Notes which funded a special cash dividend of $7.00 per share paid$208 and purchased the remaining equity interest of its Taiwan operations from its former joint-venture partner for $842, totaling $1,050 in May 2017 (approximately $3,100);the aggregate; and
•In April 2017,2022, the Board of Directors approved an increase in the quarterly cash dividend from $0.45$0.79 to $0.50$0.90 per share.
COVID-19
The COVID-19 pandemic continued to impact our business during 2022, albeit to a lesser extent. COVID-related and other supply and logistics constraints have continued to adversely affect some merchandise categories and are expected to do so for the foreseeable future. During 2021, we paid $515 in incremental wages related to COVID-19, which ceased in February 2021.
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data) (Continued)
RESULTS OF OPERATIONS
Net Sales
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Net Sales | $ | 126,172 |
| | $ | 116,073 |
| | $ | 113,666 |
|
| Changes in net sales: | | | | | |
| U.S. | 8 | % | | 3 | % | | 5 | % |
| Canada | 10 | % | | (2 | )% | | (3 | )% |
| Other International | 8 | % | | 4 | % | | 2 | % |
| Total Company | 9 | % | | 2 | % | | 3 | % |
| Changes in comparable sales: | | | | | |
| U.S. | 4 | % | | 1 | % | | 3 | % |
| Canada | 5 | % | | (3 | )% | | (5 | )% |
| Other International | 2 | % | | (3 | )% | | (3 | )% |
| Total Company | 4 | % | | 0 | % | | 1 | % |
| Increases in comparable sales excluding the impact of changes in foreign currency and gasoline prices: | | | | | |
| U.S. | 4 | % | | 3 | % | | 6 | % |
| Canada | 4 | % | | 8 | % | | 8 | % |
| Other International | 4 | % | | 4 | % | | 6 | % |
| Total Company | 4 | % | | 4 | % | | 7 | % |
2017 vs. 2016 | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Net Sales | $ | 222,730 | | $ | 192,052 | | $ | 163,220 |
| Increases in net sales: | | | | | |
| U.S. | 17 | % | | 16 | % | | 9 | % |
| Canada | 16 | % | | 22 | % | | 5 | % |
| Other International | 10 | % | | 23 | % | | 13 | % |
| Total Company | 16 | % | | 18 | % | | 9 | % |
| Increases in comparable sales: | | | | | |
| U.S. | 16 | % | | 15 | % | | 8 | % |
| Canada | 15 | % | | 20 | % | | 5 | % |
| Other International | 7 | % | | 19 | % | | 9 | % |
| Total Company | 14 | % | | 16 | % | | 8 | % |
| Increases in comparable sales excluding the impact of changes in foreign currency and gasoline prices: | | | | | |
| U.S. | 10 | % | | 14 | % | | 9 | % |
| Canada | 12 | % | | 12 | % | | 7 | % |
| Other International | 10 | % | | 13 | % | | 11 | % |
| Total Company | 11 | % | | 13 | % | | 9 | % |
Net Sales
Net sales increased $10,099$30,678 or 9%16% during 2017, primarily due2022. The improvement was attributable to a 4%an increase in comparable sales of 14%, and sales at new warehouses opened in 20162021 and 2017,2022. Sales increased $15,830 in core merchandise categories and the benefit$14,848 in warehouse ancillary and other businesses. The rate of one additional week of salesincrease was strongest in 2017. Changesour gasoline, business centers, and travel businesses. Sales continued to be impacted by inflation, higher than what we experienced in previous fiscal years.
During 2022, higher gasoline prices positively impacted net sales by approximately $785, or 68$9,230, 481 basis points, duecompared to an 8%2021, with a 42% increase in the average sales price per gallon. The volume of gasoline sold increased approximately 22%, positively impacting net sales by $3,847, 200 basis points. Changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $295, or 25$1,762, 92 basis points, compared to 2016. The negative impact was driven by2021, attributable primarily to our Other International operations, partially offset by positive impacts attributable to our Canadian operations.
Comparable Sales
Comparable sales increased 4%14% during 20172022 and were positively impacted by an increaseincreases in shopping frequency and to a lesser extent, an increased average ticket. The average ticket, which includes the effects of inflation and changes in foreign currency. E-commerce comparable sales results were positively impactedincreased 10% during 2022, including inflation.
Membership Fees
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Membership fees | $ | 4,224 | | $ | 3,877 | | $ | 3,541 |
| Membership fees increase | 9 | % | | 9 | % | | 6 | % |
Membership fee revenue increased 9% in 2022, driven by an increase in gasoline prices, offset by decreases in foreign currencies relativenew member sign-ups and upgrades to the U.S. dollar. Changes in comparable sales includes the negative impact of cannibalization (established warehouses losing sales to our newly opened locations).
2016 vs. 2015
Net 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.Executive membership. Changes in foreign currencies relative to the U.S. dollar negatively impacted net salesmembership fees by approximately $2,690, or 237 basis points,$42, compared to 2015. The negative impact was primarily attributable to our Canadian operations and within certain of our Other International
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data) (Continued)
operations. 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.
Comparable Sales
Comparable sales were flat during 2016, with 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 includes the negative impact of cannibalization (established warehouses losing sales to our newly opened locations).
Membership Fees
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Membership fees | $ | 2,853 |
| | $ | 2,646 |
| | $ | 2,533 |
|
| Membership fees increase | 8 | % | | 4 | % | | 4 | % |
| Membership fees as a percentage of net sales | 2.26 | % | | 2.28 | % | | 2.23 | % |
2017 vs. 2016
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 (discussed below), and an increased number of upgrades to our higher-fee Executive Membership program.2021. At the end of 2017,2022, our member renewal rates were 90%93% in the U.S. and Canada and 87%90% worldwide.
In Renewal rates continue to benefit from more members auto renewing and increased penetration of Executive members, who on average renew at a higher rate. Our renewal rate, which excludes affiliates of Business members, is a trailing calculation that captures renewals during the first fiscal quarter of 2017, we increased our annual membership fees in certain of our Other International operations. Effective June 1, 2017, we also increased our annual membership fees inperiod seven to eighteen months prior to the U.S. and Canada for Gold Star (individual), Business and Business add-on by $5 to $60 and for Executive Membership from$110 to $120 (annual membership fee of $60, plus the Executive upgrade of $60); and the maximum 2% reward associated with Executive Membership increased from $750 to $1,000 annually.reporting date. 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 on membership fee revenues during 2017 of approximately $23 and will positively impact the next several quarters. We expect these increases to positively impact membership fee revenue by approximately $175 in fiscal 2018.
2016 vs. 2015
The increase in membership fees was primarily due to membership sign-ups at existing and new warehouses and increased 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 fees by approximately $52 in 2016.
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data) (Continued)
Gross Margin
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Net sales | $ | 222,730 | | $ | 192,052 | | $ | 163,220 |
| Less merchandise costs | 199,382 | | 170,684 | | 144,939 |
| Gross margin | $ | 23,348 | | $ | 21,368 | | $ | 18,281 |
| Gross margin percentage | 10.48 | % | | 11.13 | % | | 11.20 | % |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Net sales | $ | 126,172 |
| | $ | 116,073 |
| | $ | 113,666 |
|
| Less merchandise costs | 111,882 |
| | 102,901 |
| | 101,065 |
|
| Gross margin | $ | 14,290 |
| | $ | 13,172 |
| | $ | 12,601 |
|
| Gross margin percentage | 11.33 | % | | 11.35 | % | | 11.09 | % |
2017 vs. 2016Total gross margin percentage decreased 65 basis points compared to 2021. Excluding the impact of gasoline price inflation on net sales, gross margin was 10.94%, a decrease of 19 basis points. This was primarily due to a 33 basis-point decrease in core merchandise categories, predominantly driven by decreases in fresh foods and foods and sundries, and 19 basis points due to a LIFO charge for higher merchandise costs. Gross margin was also negatively impacted by one basis point due to increased 2% rewards. Warehouse ancillary and other businesses positively impacted gross margin by 29 basis points, predominantly gasoline, partially offset by e-commerce. Gross margin was positively impacted by five basis points due to the net impact of ceasing incremental wages related to COVID-19 and the negative impact of a one-time charge related to granting our employees one additional day of paid time off. Changes in foreign currencies relative to the U.S. dollar negatively impacted gross margin by approximately $176, compared to 2021, primarily attributable to our Other International Operations.
The gross margin of ourin 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 eightdecreased 27 basis points due to increasespoints. The decrease was across all categories, most significantly 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 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. Changes of comparable magnitude will not occur in subsequent years. 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.
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. operations,decreased across all segments. All segments were negatively impacted due to amounts 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 decreasedecreases 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.
2016 vs. 2015
The gross margin of our core merchandise categories, when expressed as a percentage of core merchandise sales, increased 13 basis points, primarily due to increases in these categories other than fresh foods.
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 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.
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data) (Continued)
Segment gross margin percentage increased in our U.S. operations predominantly 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. TheGross margin in our U.S. segment gross margin percentage inwas also negatively impacted by the LIFO charge. Our Other International operations decreased in all merchandise categories, except fresh foods, whichsegment was higher.negatively impacted by increased 2% rewards. All segments benefited from the ceasing of incremental wages related to COVID-19.
Selling, General and Administrative Expenses
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| SG&A expenses | $ | 12,950 |
| | $ | 12,068 |
| | $ | 11,445 |
|
| SG&A expenses as a percentage of net sales | 10.26 | % | | 10.40 | % | | 10.07 | % |
2017 vs. 2016 | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| SG&A expenses | $ | 19,779 | | $ | 18,537 | | $ | 16,387 |
| SG&A expenses as a percentage of net sales | 8.88 | % | | 9.65 | % | | 10.04 | % |
SG&A expenses as a percentage of net sales decreased 1477 basis points compared to 2016. Excluding2021. SG&A expenses as a percentage of net sales excluding the impact of gasoline price inflation on net sales, SG&A expenses as a percentage of adjusted net sales was 10.33%9.26%, a decrease of seven39 basis points. Operating costs related to warehouses, ancillary,Warehouse operations and other businesses which includes e-commerce and travel, were lower by nine17 basis points, primarilylargely attributable to leveraging increased sales. This includes the impact of the starting wage increase we instituted in October 2021, as well the increased wages and benefits that were effective on March 14, 2022, and July 4, 2022. SG&A expenses was benefited by a net of 16 basis points due to lower costs associated with the co-branded credit card arrangement in the U.S.positive impact of 18 basis points. The improvement in terms in our current co-brand agreement as comparedceasing incremental wages related to the prior co-brand arrangement led to substantial year over year benefits in fiscal 2017. Changes of comparable magnitude will not occur in subsequent years. This wasCOVID-19, partially offset by higher payrollwrite-offs of certain information technology assets, and employee benefit expenses related to granting our employees one additional day of 11 basis points, primarily in our U.S. operations.paid time off. Central operating costs were higherlower by onefive 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. Stockpoints, and stock compensation expense was also higherlower by one basis point. Changes in foreign currencies relative to the U.S. dollar had an immaterial impact in 2017.
2016 vs. 2015
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. Charges for non-recurring legal and regulatory matters during 2016 negatively impacted SG&A expenses by two basis points. Operating costs related to warehouses, ancillary, and other businesses, which includes e-commerce and travel, 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.
Preopening Expenses
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Preopening expenses | $ | 82 |
| | $ | 78 |
| | $ | 65 |
|
| Warehouse openings, including relocations | | | | | |
| United States | 15 |
| | 25 |
| | 14 |
|
| Canada | 6 |
| | 2 |
| | 1 |
|
| Other International | 7 |
| | 6 |
| | 11 |
|
| Total warehouse openings, including relocations | 28 |
| | 33 |
| | 26 |
|
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data) (Continued)
Preopening expenses include costs for startup operations related$148, compared to new warehouses, including relocations, development in new international markets, and expansions at existing warehouses. In 2017, we entered into two new international markets, Iceland and France. Preopening expenses vary due to the number of warehouse openings, the timing of the opening relative2021, primarily attributable to our year-end, whether the warehouse is owned or leased, and whether the opening is in an existing, new, or international market.Other International operations.
Interest Expense
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Interest expense | $ | 134 |
| | $ | 133 |
| | $ | 124 |
|
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Interest expense | $ | 158 | | | $ | 171 | | | $ | 160 | |
Interest expense primarily relates to Senior Notes issued byand financing leases. Interest expense decreased in 2022 due to repayment of the Company (described in further detail under the heading “Cash Flows from Financing Activities” and in Note 42.300% Senior Notes on December 1, 2021. For more information on our debt arrangements, refer to the consolidated financial statements included in Item 8 of this Report).Report.
Interest Income and Other, Net
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Interest income | $ | 61 | | | $ | 41 | | | $ | 89 | |
| Foreign-currency transaction gains, net | 106 | | | 56 | | | 7 | |
| Other, net | 38 | | | 46 | | | (4) | |
| Interest income and other, net | $ | 205 | | | $ | 143 | | | $ | 92 | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Interest income | $ | 50 |
| | $ | 41 |
| | $ | 50 |
|
| Foreign-currency transaction gains (losses), net | (5 | ) | | 28 |
| | 47 |
|
| Other, net | 17 |
| | 11 |
| | 7 |
|
| Interest income and other, net | $ | 62 |
| | $ | 80 |
| | $ | 104 |
|
2017 vs. 2016
The increase in interest income in 2022 was primarily due to higher global interest rates. Foreign-currency transaction gains, (losses), net, include the 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 by our Canadian and Other International operations.contracts. See Derivatives and Foreign Currency sections in Note 1 to the consolidated financial statements included in Item 8 Note 1 of this Report.
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.
Provision for Income Taxes
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Provision for income taxes | $ | 1,925 | | | $ | 1,601 | | | $ | 1,308 | |
| Effective tax rate | 24.6 | % | | 24.0 | % | | 24.4 | % |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Provision for income taxes | $ | 1,325 |
| | $ | 1,243 |
| | $ | 1,195 |
|
| Effective tax rate | 32.8 | % | | 34.3 | % | | 33.2 | % |
In 2017 and 2015, our provisionThe effective tax rate for 2022 was favorably impacted by net discrete tax benefits of $104 and $68, respectively, primarily due to$130. This included $94 of excess tax benefits recorded in connection withrelated to stock compensation. Excluding discrete net tax benefits, the May 2017 and February 2015tax rate was 26.2% for 2022.
The effective tax rate for 2021 was impacted by net discrete tax benefits of $163. This included $75 of excess tax benefits related to stock compensation, $70 related to the special cash dividendsdividend paid to employees through our 401(K) Retirement Plan of $82401(k) plan, and $57, respectively. These dividends are deductible$19 related to a reduction in the valuation allowance against certain deferred tax assets. Excluding net discrete tax benefits, the tax rate was 26.4% for U.S. income tax purposes.2021.
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data) (Continued)
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our significant sources and uses of cash and cash equivalents:
| | | | 2017 | | 2016 | | 2015 | | 2022 | | 2021 | | 2020 |
| Net cash provided by operating activities | $ | 6,726 |
| | $ | 3,292 |
| | $ | 4,285 |
| Net cash provided by operating activities | $ | 7,392 | | | $ | 8,958 | | | $ | 8,861 | |
| Net cash used in investing activities | (2,366 | ) | | (2,345 | ) | | (2,480 | ) | Net cash used in investing activities | (3,915) | | | (3,535) | | | (3,891) | |
| Net cash used in financing activities | (3,218 | ) | | (2,419 | ) | | (2,324 | ) | Net cash used in financing activities | (4,283) | | | (6,488) | | | (1,147) | |
|
Our primary sources of liquidity are cash flows generated from warehouseour operations, cash and cash equivalents, and short-term investments. Cash and cash equivalents and short-term investments were $5,779$11,049 and $4,729$12,175 at the end of 20172022 and 2016,2021, respectively. Of these balances, approximately $1,255 and $1,071 represented unsettled credit and debit card receivables respectively.represented approximately $2,010 and $1,816 at the end of 2022 and 2021. These receivables generally settle within four days. CashChanges in foreign exchange rates impacted cash and cash equivalents werenegatively by $249 in 2022, and positively impacted by changes$46 and $70 in exchange rates2021 and 2020.
Material contractual obligations arising in the normal course of $25business primarily consist of purchase obligations, long-term debt and $50 in 2017related interest payments, leases, and 2016, respectfully,construction and negatively impacted by $418 in 2015.
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 earningsland purchase obligations. See Notes 4 and 5 to the extent we can do so without an adverse tax consequence. If we determine that such earningsconsolidated financial statements included in Item 8 of this Report for amounts outstanding on August 28, 2022, related to debt and leases.Purchase obligations consist of contracts primarily related to merchandise, equipment, and third-party services, the majority of which are no longer indefinitely reinvested, deferred taxes,due in the next 12 months. Construction and land purchase obligations consist of contracts primarily related to the extent requireddevelopment and applicable,opening of new and relocated warehouses, the majority of which (other than leases) are recorded at that time. During 2017, we changed our position regarding an additional portion ofdue in the undistributed earnings of our Canadian operations, as we determined such earnings could be repatriated without adverse tax consequences. Subsequent to the end of 2017, we repatriated a portion of our undistributed earnings in our Canadian operations without adverse tax consequences.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 and have no current plans to repatriate for use in the U.S. cash and cash equivalents and short-term investments held by 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 $1,463 at September 3, 2017.requirements.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $6,726$7,392 in 2017,2022, compared to $3,292$8,958 in 2016.2021. 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,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. The increaseChanges in our net cash providedinvestment in merchandise inventories (the difference between merchandise inventories and accounts payable) is impacted by operating activities for 2017 when compared
several factors, including how fast inventory is sold, the forward deployment of inventory to 2016 was primarily dueaccelerate delivery times, payment terms with our suppliers, and early payments to accelerated vendor payments of approximately $1,700 made in the last week of fiscal 2016, in advance of implementing our modernized accounting system.obtain discounts from suppliers.
Cash Flows from Investing Activities
Net cash used in investing activities totaled $2,366$3,915 in 2017,2022, compared to $2,345$3,535 in 2016. Cash flow used in investing activities2021, and is primarily related to funding warehouse expansion and remodeling. capital expenditures. Net cash flows from investing activities also includes purchases and maturities of short-term investments.
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data) (Continued)
Capital Expenditure PlansExpenditures
Our primary requirementrequirements for capital isare acquiring land, buildings, and equipment for new and remodeled warehouses. To a lesser extent, capitalCapital is also required for information systems, manufacturing and distribution facilities, initial warehouse operations, our information systems, and working capital. We opened 26 new warehouses and relocated 2 warehouses in 2017 and plan to open up to 24 new warehouses and relocate up to six warehouses in 2018. In 20172022, we spent $2,502$3,891 on capital expenditures, and it is our current intention to spend approximately $2,500approximately $3,800 to $2,700 during$4,000 during fiscal 2018.2023. 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 2022, and plan to open approximately up to 29 additional new warehouses, including four relocations, in 2023. 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.needs or based on the economic environment.
Cash Flows from Financing Activities
Net cash used in financing activities totaled $3,218$4,283 in 2017,2022, compared to $2,419$6,488 in 2016. The primary uses of cash in 2017 were 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. Net cash2021. Cash flows used in financing activities primarily related to the payment of dividends, payments to our former joint-venture partner for a dividend and the purchase of their equity interest in 2016 includes a $1,200 repaymentTaiwan, totaling $1,050 in the aggregate, repayments of our 0.65%2.300% Senior Notes, in December 2015.
In May 2017, we issued $3,800 in aggregate principal amountrepurchases of Senior Notes. The proceeds received were net of a discountcommon stock, and used to pay the special cash dividend and a portion of the redemption of the 1.125% Senior Notes.withholding taxes on stock awards.
Stock Repurchase Programs
During 20172022 and 2016,2021, we repurchased 2,998,000863,000 and 3,184,0001,358,000 shares of common stock, at average prices of $157.87$511.46 and $149.90,$364.39, respectively, totaling approximately $473$442 and $477,$495, respectively. The remaining amount available to be purchased under our approved plan was $2,749 at the end of 2017. 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 $2,808 at the end of 2022.
Dividends
Cash dividends paiddeclared in 20172022 totaled $8.90 per share, which included a special cash dividend of $7.00$3.38 per share, as compared to $1.70$12.98 per share in 2016.2021. Dividends in 2021 included a special dividend of $10.00 per share, aggregating approximately $4,430. In April 2017, our2022, the Board of Directors increased our quarterly cash dividend from $0.45$0.79 to $0.50$0.90 per share.
Bank Credit Facilities and Commercial Paper Programs
We maintain bank credit facilities for working capital and general corporate purposes. At September 3, 2017,August 28, 2022, we had borrowing capacity under these facilities of $833, including a $400 revolving line of credit entered into by our U.S. operations in June 2017 with an expiration date of one year. The Company currently has no plans to draw upon the new revolving line of credit.$1,257. Our international operations maintain $349$773 of the total borrowingthis capacity under bank credit facilities, of which $166$176 is guaranteed by the Company. There were noShort-term borrowings outstanding short-term borrowings under the bank credit facilities were $88 and $41 at the end of 20172022 and 2016.2021.
The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $181.$224. The outstanding standby letters of creditcommitments under these facilities at the end of 20172022 totaled $103 and$184, 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, allmost within one year, and we generally intend to renew these facilities prior to their expiration.
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.
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data) (Continued)
Contractual Obligations
At September 3, 2017, our commitments to make future payments under contractual obligations were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Fiscal Year |
| Contractual obligations | 2018 | | 2019 to 2020 | | 2021 to 2022 | | 2023 and thereafter | | Total |
Purchase obligations (merchandise)(1) | $ | 8,029 |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | 8,035 |
|
Long-term debt(2) | 230 |
| | 2,060 |
| | 2,588 |
| | 2,650 |
| | 7,528 |
|
Operating leases (3) | 216 |
| | 429 |
| | 345 |
| | 2,123 |
| | 3,113 |
|
| Construction and land obligations | 584 |
| | 80 |
| | 4 |
| | — |
| | 668 |
|
Capital lease obligations(4) | 32 |
| | 65 |
| | 66 |
| | 582 |
| | 745 |
|
Purchase obligations (equipment, services and other)(5) | 541 |
| | 117 |
| | 42 |
| | — |
| | 700 |
|
Other(6) | 38 |
| | 17 |
| | 13 |
| | 72 |
| | 140 |
|
| Total | $ | 9,670 |
| | $ | 2,774 |
| | $ | 3,058 |
| | $ | 5,427 |
| | $ | 20,929 |
|
_______________
| |
(1) | Includes only open merchandise purchase orders. |
| |
(2) | 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 $112 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 asset retirement obligations, deferred compensation obligations and current liabilities for unrecognized tax contingencies. The total amount excludes $35 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 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.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 judgments, including those related to revenue recognition, merchandise inventory valuation, impairmentassumptions that affect the reported amounts of long-lived assets insurance/self-insuranceand liabilities and income taxes.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.
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data) (Continued)
Revenue Recognition
We generally recognize sales, which includes gross 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.
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 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 $1,000 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 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 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.
We provide for estimated inventory shrinkage 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.
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 using 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 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.
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data) (Continued)
Insurance/Self-InsuranceSelf-insurance Liabilities
We are predominantly self-insured, with insurance coverage for certain catastrophic risks,Claims for employee health carehealth-care benefits, workers’ compensation, general liability, property damage, directors’ and officers’ liability, vehicle liability, inventory loss, and inventory loss.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 in part, by consideringusing historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The estimated accrualscosts 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 and provide for a certain degree of coverage to account for these liabilitiesvariables, actual claims and costs could bediffer significantly affected if future occurrences and claims differ from these assumptions and historical trends.
Income Taxes
The determination ofrecorded liabilities. Historically, adjustments to 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. Our cumulative foreign undistributed earnings, except the additional portion of earnings in Canada, were considered indefinitely reinvested as of September 3, 2017. 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.not been material.
Recent Accounting Pronouncements
See Note 1 to the consolidatedWe do not expect that any recently issued accounting pronouncements will have a material effect on our financial statements included in Item 8 of this Report for a detailed description of recent accounting pronouncements.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, 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 rateinterest-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.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-pointbasis point change in interest rates as of the end of 20172022 would have had an immaterial incremental change in fair market value of $20.value. For those investments that are classified as available-for-sale, the unrealized gains or
Item 7A—Quantitative and Qualitative Disclosures About Market Risk (amounts in millions) (Continued)
losses related to fluctuations in market volatility and interest rates are reflected within stockholders’ equity in accumulated other comprehensive income.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 2017, the majority of our2022, long-term debt haswith fixed interest rates and is carried at $6,632.was $6,590. 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-ExchangeCurrency 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.subsidiaries. We seek to mitigate risk with the use of these contracts and do not intend to engage in speculative transactions. TheseFor additional information related to the Company's forward foreign-exchange 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 Notesee Notes 1 and Note 3 to the consolidated financial statements included in Item 8 of this Report for additional information on the fair value of unsettled forward foreign-exchange contracts at the end of 2017 and 2016.Report. A hypothetical 10% strengthening of the functional currency compared to the non-functional currency exchange rates at September 3, 2017August 28, 2022, would have decreased the fair value of the contracts by $69$128 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, that we consume, 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 orand normal sales” exception under authoritative guidance and require no mark-to-market adjustment.
Item 8—Financial Statements and Supplementary Data
COSTCO WHOLESALE CORPORATION
The following documents are filed as part of Item 8 of this Report on the pages listed below:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 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.
Item 9—Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A—Controls and Procedures
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 September 3, 2017, 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
Item 9A—Controls and Procedures (Continued)
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 September 3, 2017, 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 September 3, 2017. 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.
|
| |
/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 | |
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 2018 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.
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
The information required by this Item is incorporated herein by reference to the sections entitled “Independent Public Accountants” in Costco’s Proxy Statement.
PART IV
Item 15—Exhibits, Financial Statement Schedules
| |
(a) | Documents filed as part of this report are as follows: |
See the listing of Financial Statements included as a part of this Form 10-K in Item 8 of Part II.
2.Financial Statement Schedules:
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.
| |
(b) | Exhibits: The required exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference. |
|
| | | | | | | | | | |
| | | | | | Incorporated by Reference |
Exhibit
Number
| | Exhibit Description | | Filed
Herewith
| | Form | | Period Ending | | Filing Date |
| | | | | | | | | | |
| | | | | | 10-Q | | 2/15/2015 | | 3/11/2015 |
| | | | | | | | | | |
| | | | | | 8-K | | | | 9/30/2016 |
| | | | | | | | | | |
| | | | | | 8-K | | | | 5/16/2017 |
| | | | | | | | | | |
| | | | | | 8-K | | | | 5/16/2017 |
| | | | | | | | | | |
| | | | | | 8-K | | | | 5/16/2017 |
| | | | | | | | | | |
| | | | | | 8-K | | | | 5/16/2017 |
| | | | | | | | | | |
|
| | | | | | | | | | |
| | | | | | Incorporated by Reference |
Exhibit
Number
| | Exhibit Description | | Filed
Herewith
| | Form | | Period Ending | | Filing Date |
| | | | | | 10-K | | 9/2/2012 | | 10/19/2012 |
| | | | | | | | | | |
| | | | | | 10-Q | | 2/14/2010 | | 3/17/2010 |
| | | | | | | | | | |
| | | | | | 8-K | | | | 1/31/2012 |
| | | | | | | | | | |
| | | | | | DEF 14A | | | | 12/19/2014 |
| | | | | | | | | | |
| | | | | | 10-Q | | 11/22/2015 | | 12/17/2015 |
| | | | | | | | | | |
| | | | | | 10-Q | | 11/22/2015 | | 12/17/2015 |
| | | | | | | | | | |
| | | | | | 10-Q | | 11/22/2015 | | 12/17/2015 |
| | | | | | | | | | |
| | | | | | 10-Q | | 11/22/2015 | | 12/17/2015 |
| | | | | | | | | | |
| | | | | | 10-K | | 8/28/2016 | | 10/12/2016 |
| | | | | | | | | | |
| | | | | | 10-K | | 8/30/2015 | | 10/14/2015 |
| | | | | | | | | | |
| | | | | | 10-Q | | 11/20/2016 | | 12/16/2016 |
| | | | | | | | | | |
| | | | | | 14A | | | | 12/13/1999 |
| | | | | | | | | | |
| | | | | | 10-K | | 9/1/2013 | | 10/16/2013 |
| | | | | | | | | | |
| | | | | | 10-Q/A | | 5/10/2015 | | 8/31/2015 |
| | | | | | | | | | |
| | | | | | 10-Q | | 11/22/2015 | | 12/17/2015 |
| | | | | | | | | | |
|
| | | | | | | | | | |
| | | | | | Incorporated by Reference |
Exhibit
Number
| | Exhibit Description | | Filed
Herewith
| | Form | | Period Ending | | Filing Date |
| | | | | | 10-Q | | 2/14/2016 | | 3/9/2016 |
| | | | | | | | | | |
| | | | | | 10-K | | 8/28/2016 | | 10/12/2016 |
| | | | | | | | | | |
| | | | | | 8-K | | | | 11/3/2016 |
| | | | | | | | | | |
| | | | x | | | | | | |
| | | | | | | | | | |
| | | | x | | | | | | |
| | | | | | | | | | |
| | | | x | | | | | | |
| | | | | | | | | | |
| | | | x | | | | | | |
| | | | | | | | | | |
101.INS | | XBRL Instance Document | | x | | | | | | |
| | | | | | | | | | |
101.SCH | | XBRL Taxonomy Extension Schema Document | | x | | | | | | |
| | | | | | | | | | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | x | | | | | | |
| | | | | | | | | | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | x | | | | | | |
| | | | | | | | | | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | x | | | | | | |
| | | | | | | | | | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | x | | | | | | |
_____________________
* 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.
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 17, 2017
|
| | | |
| 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.
|
| | | | | | |
By | | /s/ W. CRAIG JELINEK
| | | | October 17, 2017 |
| | W. Craig Jelinek
President, Chief Executive Officer and Director
| | | | |
| | | |
By | | /s/ HAMILTON E. JAMES
| | | | October 17, 2017 |
| | Hamilton E. James
Chairman of the Board
| | | | |
| | | |
By | | /s/ RICHARD A. GALANTI
| | | | October 17, 2017 |
| | Richard A. Galanti
Executive Vice President, Chief Financial Officer and Director (Principal Financial Officer)
| | | | |
| | | |
By | | /s/ DANIEL M. HINES
| | | | October 17, 2017 |
| | Daniel M. Hines
Senior Vice President and Corporate Controller
(Principal Accounting Officer)
| | | | |
| | | |
By | | /s/ SUSAN L. DECKER
| | | | October 17, 2017 |
| | Susan L. Decker
Director
| | | | |
| | | |
By | | /s/ KENNETH D. DENMAN
| | | | October 17, 2017 |
| | Kenneth D. Denman
Director | | | | |
| | | |
By | | /s/ DANIEL J. EVANS
| | | | October 17, 2017 |
| | Daniel J. Evans
Director
| | | | |
| | | |
|
| | | | | | |
By | | /s/ JOHN W. MEISENBACH
| | | | October 17, 2017 |
| | John W. Meisenbach
Director
| | | | |
| | | | | | |
By | | /s/ CHARLES T. MUNGER
| | | | October 17, 2017 |
| | Charles T. Munger
Director
| | | | |
| | | | | | |
By | | /S/ JEFFREY S. RAIKES
| | | | October 17, 2017 |
| | Jeffrey S. Raikes
Director
| | | | |
| | | |
By | | /S/ JAMES D. SINGEGAL
| | | | October 17, 2017 |
| | James D. Sinegal
Director
| | | | |
| | | | | | |
By | | /S/ JOHN W. STANTON
| | | | October 17, 2017 |
| | John W. Stanton
Director
| | | | |
| | | | | | |
By | | /S/ MAGGIE WILDEROTTER
| | | | October 17, 2017 |
| | Maggie Wilderotter
Director
| | | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Costco Wholesale Corporation:
We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation as of September 3, 2017 and August 28, 2016, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the 53-week period ended September 3, 2017 and the 52-week periods ended August 28, 2016 and August 30, 2015. 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 September 3, 2017 and August 28, 2016, and the results of their operations and their cash flows for the 53-week period ended September 3, 2017, and the 52-week periods ended August 28, 2016 and August 30, 2015, 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 September 3, 2017, 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 17, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Seattle, Washington
October 17, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Stockholders and Board of Directors and Stockholders
Costco Wholesale Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation’sCorporation and subsidiaries (the Company) as of August 28, 2022, and August 29, 2021, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the 52-week periods ended August 28, 2022, August 29, 2021, and August 30, 2020, 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 28, 2022, and August 29, 2021, and the results of its operations and its cash flows for each of the 52-week periods ended August 28, 2022, August 29, 2021, and August 30, 2020, 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, 2017,August 28, 2022, based on criteria established inInternal Control —– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, (COSO). and our report dated October 4, 2022, 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.
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 28, 2022, were $1,364 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:
•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
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Seattle, Washington
October 4, 2022
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 andsubsidiaries’ (the Company) internal control over financial reporting as of August 28, 2022, 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 28, 2022, 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 August 28, 2022, and August 29, 2021, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the 52-week periods ended August 28, 2022, August 29, 2021, and August 30, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated October 4, 2022, 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 overOver Financial Reporting included in Item 9A.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 Public Company Accounting Oversight Board (United States).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.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 3, 2017, 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 September 3, 2017 and August 28, 2016, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the 53-week period ended September 3, 2017, and the 52-week periods ended August 28, 2016 and August 30, 2015, and our report dated October 17, 2017 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Seattle, Washington
October 17, 2017
4, 2022
COSTCO WHOLESALE CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in millions, except par value and share data)
|
| | | | | | | |
| | September 3,
2017 | | August 28,
2016 |
| ASSETS | | | |
| CURRENT ASSETS | | | |
| Cash and cash equivalents | $ | 4,546 |
| | $ | 3,379 |
|
| Short-term investments | 1,233 |
| | 1,350 |
|
| Receivables, net | 1,432 |
| | 1,252 |
|
| Merchandise inventories | 9,834 |
| | 8,969 |
|
| Other current assets | 272 |
| | 268 |
|
| Total current assets | 17,317 |
| | 15,218 |
|
| PROPERTY AND EQUIPMENT | | | |
| Land | 5,690 |
| | 5,395 |
|
| Buildings and improvements | 15,127 |
| | 13,994 |
|
| Equipment and fixtures | 6,681 |
| | 6,077 |
|
| Construction in progress | 843 |
| | 701 |
|
| | 28,341 |
| | 26,167 |
|
| Less accumulated depreciation and amortization | (10,180 | ) | | (9,124 | ) |
| Net property and equipment | 18,161 |
| | 17,043 |
|
| OTHER ASSETS | 869 |
| | 902 |
|
| TOTAL ASSETS | $ | 36,347 |
| | $ | 33,163 |
|
| LIABILITIES AND EQUITY | | | |
| CURRENT LIABILITIES | | | |
| Accounts payable | $ | 9,608 |
| | $ | 7,612 |
|
| Current portion of long-term debt | 86 |
| | 1,100 |
|
| Accrued salaries and benefits | 2,703 |
| | 2,629 |
|
| Accrued member rewards | 961 |
| | 869 |
|
| Deferred membership fees | 1,498 |
| | 1,362 |
|
| Other current liabilities | 2,639 |
| | 2,003 |
|
| Total current liabilities | 17,495 |
| | 15,575 |
|
| LONG-TERM DEBT, excluding current portion | 6,573 |
| | 4,061 |
|
| OTHER LIABILITIES | 1,200 |
| | 1,195 |
|
| Total liabilities | 25,268 |
| | 20,831 |
|
| COMMITMENTS AND CONTINGENCIES |
|
| |
|
|
| EQUITY | | | |
| Preferred stock $.01 par value; 100,000,000 shares authorized; no shares issued and outstanding | 0 |
| | 0 |
|
| Common stock $.01 par value; 900,000,000 shares authorized; 437,204,000 and 437,524,000 shares issued and outstanding | 4 |
| | 2 |
|
| Additional paid-in capital | 5,800 |
| | 5,490 |
|
| Accumulated other comprehensive loss | (1,014 | ) | | (1,099 | ) |
| Retained earnings | 5,988 |
| | 7,686 |
|
| Total Costco stockholders’ equity | 10,778 |
| | 12,079 |
|
| Noncontrolling interests | 301 |
| | 253 |
|
| Total equity | 11,079 |
| | 12,332 |
|
| TOTAL LIABILITIES AND EQUITY | $ | 36,347 |
| | $ | 33,163 |
|
The accompanying notes are an integral part of these consolidated financial statements.
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(amounts in millions, except per share data)
| | | | | | | | | | | | | | | | | |
| 52 Weeks Ended |
| August 28,
2022 | | August 29,
2021 | | August 30,
2020 |
| REVENUE | | | | | |
| Net sales | $ | 222,730 | | | $ | 192,052 | | | $ | 163,220 | |
| Membership fees | 4,224 | | | 3,877 | | | 3,541 | |
| Total revenue | 226,954 | | | 195,929 | | | 166,761 | |
| OPERATING EXPENSES | | | | | |
| Merchandise costs | 199,382 | | | 170,684 | | | 144,939 | |
| Selling, general and administrative | 19,779 | | | 18,537 | | | 16,387 | |
| Operating income | 7,793 | | | 6,708 | | | 5,435 | |
| OTHER INCOME (EXPENSE) | | | | | |
| Interest expense | (158) | | | (171) | | | (160) | |
| Interest income and other, net | 205 | | | 143 | | | 92 | |
| INCOME BEFORE INCOME TAXES | 7,840 | | | 6,680 | | | 5,367 | |
| Provision for income taxes | 1,925 | | | 1,601 | | | 1,308 | |
| Net income including noncontrolling interests | 5,915 | | | 5,079 | | | 4,059 | |
| Net income attributable to noncontrolling interests | (71) | | | (72) | | | (57) | |
| NET INCOME ATTRIBUTABLE TO COSTCO | $ | 5,844 | | | $ | 5,007 | | | $ | 4,002 | |
| NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: | | | | | |
| Basic | $ | 13.17 | | | $ | 11.30 | | | $ | 9.05 | |
| Diluted | $ | 13.14 | | | $ | 11.27 | | | $ | 9.02 | |
| Shares used in calculation (000’s) | | | | | |
| Basic | 443,651 | | | 443,089 | | | 442,297 | |
| Diluted | 444,757 | | | 444,346 | | | 443,901 | |
|
| | | | | | | | | | | |
| | 53 Weeks Ended | | 52 Weeks Ended | | 52 Weeks Ended |
| | September 3,
2017 | | August 28,
2016 | | August 30,
2015 |
| REVENUE | | | | | |
| Net sales | $ | 126,172 |
| | $ | 116,073 |
| | $ | 113,666 |
|
| Membership fees | 2,853 |
| | 2,646 |
| | 2,533 |
|
| Total revenue | 129,025 |
| | 118,719 |
| | 116,199 |
|
| OPERATING EXPENSES | | | | | |
| Merchandise costs | 111,882 |
| | 102,901 |
| | 101,065 |
|
| Selling, general and administrative | 12,950 |
| | 12,068 |
| | 11,445 |
|
| Preopening expenses | 82 |
| | 78 |
| | 65 |
|
| Operating income | 4,111 |
| | 3,672 |
| | 3,624 |
|
| OTHER INCOME (EXPENSE) | | | | | |
| Interest expense | (134 | ) | | (133 | ) | | (124 | ) |
| Interest income and other, net | 62 |
| | 80 |
| | 104 |
|
| INCOME BEFORE INCOME TAXES | 4,039 |
| | 3,619 |
| | 3,604 |
|
| Provision for income taxes | 1,325 |
| | 1,243 |
| | 1,195 |
|
| Net income including noncontrolling interests | 2,714 |
| | 2,376 |
| | 2,409 |
|
| Net income attributable to noncontrolling interests | (35 | ) | | (26 | ) | | (32 | ) |
| NET INCOME ATTRIBUTABLE TO COSTCO | $ | 2,679 |
| | $ | 2,350 |
| | $ | 2,377 |
|
| NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: | | | | | |
| Basic | $ | 6.11 |
| | $ | 5.36 |
| | $ | 5.41 |
|
| Diluted | $ | 6.08 |
| | $ | 5.33 |
| | $ | 5.37 |
|
| Shares used in calculation (000’s) | | | | | |
| Basic | 438,437 |
| | 438,585 |
| | 439,455 |
|
| Diluted | 440,937 |
| | 441,263 |
| | 442,716 |
|
| CASH DIVIDENDS DECLARED PER COMMON SHARE | $ | 8.90 |
| | $ | 1.70 |
| | $ | 6.51 |
|
The accompanying notes are an integral part of these consolidated financial statements.
36
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in millions)
| | | | | | | | | | | | | | | | | |
| | 52 Weeks Ended |
| | August 28,
2022 | | August 29,
2021 | | August 30,
2020 |
| NET INCOME INCLUDING NONCONTROLLING INTERESTS | $ | 5,915 | | | $ | 5,079 | | | $ | 4,059 | |
| Foreign-currency translation adjustment and other, net | (721) | | | 181 | | | 162 | |
| Comprehensive income | 5,194 | | | 5,260 | | | 4,221 | |
| Less: Comprehensive income attributable to noncontrolling interests | 36 | | | 93 | | | 80 | |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO | $ | 5,158 | | | $ | 5,167 | | | $ | 4,141 | |
|
| | | | | | | | | | | |
| | 53 Weeks Ended | | 52 Weeks Ended | | 52 Weeks Ended |
| | September 3,
2017 | | August 28,
2016 | | August 30,
2015 |
| NET INCOME INCLUDING NONCONTROLLING INTERESTS | $ | 2,714 |
| | $ | 2,376 |
| | $ | 2,409 |
|
| Foreign-currency translation adjustment and other, net | 98 |
| | 26 |
| | (1,063 | ) |
| Comprehensive income | 2,812 |
| | 2,402 |
| | 1,346 |
|
| Less: Comprehensive income attributable to noncontrolling interests | 48 |
| | 30 |
| | 14 |
|
| COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO | $ | 2,764 |
| | $ | 2,372 |
| | $ | 1,332 |
|
The accompanying notes are an integral part of these consolidated financial statements.
37
COSTCO WHOLESALE CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in millions, except par value and share data)
| | | | | | | | | | | |
| August 28,
2022 | | August 29,
2021 |
| ASSETS | | | |
| CURRENT ASSETS | | | |
| Cash and cash equivalents | $ | 10,203 | | | $ | 11,258 | |
| Short-term investments | 846 | | | 917 | |
| Receivables, net | 2,241 | | | 1,803 | |
| Merchandise inventories | 17,907 | | | 14,215 | |
| Other current assets | 1,499 | | | 1,312 | |
| Total current assets | 32,696 | | | 29,505 | |
| OTHER ASSETS | | | |
| Property and equipment, net | 24,646 | | | 23,492 | |
| Operating lease right-of-use assets | 2,774 | | | 2,890 | |
| Other long-term assets | 4,050 | | | 3,381 | |
| TOTAL ASSETS | $ | 64,166 | | | $ | 59,268 | |
| LIABILITIES AND EQUITY | | | |
| CURRENT LIABILITIES | | | |
| Accounts payable | $ | 17,848 | | | $ | 16,278 | |
| Accrued salaries and benefits | 4,381 | | | 4,090 | |
| Accrued member rewards | 1,911 | | | 1,671 | |
| Deferred membership fees | 2,174 | | | 2,042 | |
| Current portion of long-term debt | 73 | | | 799 | |
| Other current liabilities | 5,611 | | | 4,561 | |
| Total current liabilities | 31,998 | | | 29,441 | |
| OTHER LIABILITIES | | | |
| Long-term debt, excluding current portion | 6,484 | | | 6,692 | |
| Long-term operating lease liabilities | 2,482 | | | 2,642 | |
| Other long-term liabilities | 2,555 | | | 2,415 | |
| TOTAL LIABILITIES | 43,519 | | | 41,190 | |
| COMMITMENTS AND CONTINGENCIES | | | |
| EQUITY | | | |
| Preferred stock $0.005 par value; 100,000,000 shares authorized; no shares issued and outstanding | — | | | — | |
| Common stock $0.005 par value; 900,000,000 shares authorized; 442,664,000 and 441,825,000 shares issued and outstanding | 2 | | | 4 | |
| Additional paid-in capital | 6,884 | | | 7,031 | |
| Accumulated other comprehensive loss | (1,829) | | | (1,137) | |
| Retained earnings | 15,585 | | | 11,666 | |
| Total Costco stockholders’ equity | 20,642 | | | 17,564 | |
| Noncontrolling interests | 5 | | | 514 | |
| TOTAL EQUITY | 20,647 | | | 18,078 | |
| TOTAL LIABILITIES AND EQUITY | $ | 64,166 | | | $ | 59,268 | |
The accompanying notes are an integral part of these consolidated financial statements.
38
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Income (Loss) | | Retained
Earnings | | Total Costco
Stockholders’
Equity | | Noncontrolling
Interests | | Total
Equity |
| | Shares (000’s) | | Amount | |
| BALANCE AT SEPTEMBER 1, 2019 | 439,625 | | | $ | 4 | | | $ | 6,417 | | | $ | (1,436) | | | $ | 10,258 | | | $ | 15,243 | | | $ | 341 | | | $ | 15,584 | |
| Net income | — | | | — | | | — | | | — | | | 4,002 | | | 4,002 | | | 57 | | | 4,059 | |
| Foreign-currency translation adjustment and other, net | — | | | — | | | — | | | 139 | | | — | | | 139 | | | 23 | | | 162 | |
| Stock-based compensation | — | | | — | | | 621 | | | — | | | — | | | 621 | | | — | | | 621 | |
| | | | | | | | | | | | | | | |
| Release of vested restricted stock units (RSUs), including tax effects | 2,273 | | | — | | | (330) | | | — | | | — | | | (330) | | | — | | | (330) | |
| | | | | | | | | | | | | | | |
| Repurchases of common stock | (643) | | | — | | | (10) | | | — | | | (188) | | | (198) | | | — | | | (198) | |
| Cash dividends declared and other | — | | | — | | | — | | | — | | | (1,193) | | | (1,193) | | | — | | | (1,193) | |
| BALANCE AT AUGUST 30, 2020 | 441,255 | | | 4 | | | 6,698 | | | (1,297) | | | 12,879 | | | 18,284 | | | 421 | | | 18,705 | |
| Net income | — | | | — | | | — | | | — | | | 5,007 | | | 5,007 | | | 72 | | | 5,079 | |
| Foreign-currency translation adjustment and other, net | — | | | — | | | — | | | 160 | | | — | | | 160 | | | 21 | | | 181 | |
| Stock-based compensation | — | | | — | | | 668 | | | — | | | — | | | 668 | | | — | | | 668 | |
| Release of vested RSUs, including tax effects | 1,928 | | | — | | | (312) | | | — | | | — | | | (312) | | | — | | | (312) | |
| | | | | | | | | | | | | | | |
| Repurchases of common stock | (1,358) | | | — | | | (23) | | | — | | | (472) | | | (495) | | | — | | | (495) | |
| Cash dividends declared | — | | | — | | | — | | | — | | | (5,748) | | | (5,748) | | | — | | | (5,748) | |
| BALANCE AT AUGUST 29, 2021 | 441,825 | | | 4 | | | 7,031 | | | (1,137) | | | 11,666 | | | 17,564 | | | 514 | | | 18,078 | |
| Net income | — | | | — | | | — | | | — | | | 5,844 | | | 5,844 | | | 71 | | | 5,915 | |
| Foreign-currency translation adjustment and other, net | — | | | — | | | — | | | (686) | | | — | | | (686) | | | (35) | | | (721) | |
| Stock-based compensation | — | | | — | | | 728 | | | — | | | — | | | 728 | | | — | | | 728 | |
| Release of vested RSUs, including tax effects | 1,702 | | | — | | | (363) | | | — | | | — | | | (363) | | | — | | | (363) | |
| Dividend to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | (208) | | | (208) | |
| Acquisition of noncontrolling interest | — | | | — | | | (499) | | | (6) | | | — | | | (505) | | | (337) | | | (842) | |
| Repurchases of common stock | (863) | | | — | | | (15) | | | — | | | (427) | | | (442) | | | — | | | (442) | |
| Cash dividends declared and other | — | | | (2) | | | 2 | | | — | | | (1,498) | | | (1,498) | | | — | | | (1,498) | |
| BALANCE AT AUGUST 28, 2022 | 442,664 | | | $ | 2 | | | $ | 6,884 | | | $ | (1,829) | | | $ | 15,585 | | | $ | 20,642 | | | $ | 5 | | | $ | 20,647 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Costco Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
| | Shares (000’s) | | Amount | |
| BALANCE AT AUGUST 31, 2014 | 437,683 |
| | $ | 2 |
| | $ | 4,919 |
| | $ | (76 | ) | | $ | 7,458 |
| | $ | 12,303 |
| | $ | 212 |
| | $ | 12,515 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 2,377 |
| | 2,377 |
| | 32 |
| | 2,409 |
|
| Foreign-currency translation adjustment and other, net | — |
| | — |
| | — |
| | (1,045 | ) | | — |
| | (1,045 | ) | | (18 | ) | | (1,063 | ) |
| Stock-based compensation | — |
| | — |
| | 394 |
| | — |
| | — |
| | 394 |
| | — |
| | 394 |
|
| Stock options exercised, including tax effects | 989 |
| | — |
| | 69 |
| | — |
| | — |
| | 69 |
| | — |
| | 69 |
|
| Release of vested restricted stock units (RSUs), including tax effects | 2,736 |
| | — |
| | (122 | ) | | — |
| | — |
| | (122 | ) | | — |
| | (122 | ) |
| Repurchases of common stock | (3,456 | ) | | — |
| | (42 | ) | | — |
| | (452 | ) | | (494 | ) | | — |
| | (494 | ) |
| Cash dividends declared and other | — |
| | — |
| | — |
| | — |
| | (2,865 | ) | | (2,865 | ) | | — |
| | (2,865 | ) |
| BALANCE AT AUGUST 30, 2015 | 437,952 |
| | 2 |
| | 5,218 |
| | (1,121 | ) | | 6,518 |
| | 10,617 |
| | 226 |
| | 10,843 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 2,350 |
| | 2,350 |
| | 26 |
| | 2,376 |
|
| Foreign-currency translation adjustment and other, net | — |
| | — |
| | — |
| | 22 |
| | — |
| | 22 |
| | 4 |
| | 26 |
|
| Stock-based compensation | — |
| | — |
| | 459 |
| | — |
| | — |
| | 459 |
| | — |
| | 459 |
|
| Stock options exercised, including tax effects | 4 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Release of vested RSUs, including tax effects | 2,749 |
| | — |
| | (146 | ) | | — |
| | — |
| | (146 | ) | | — |
| | (146 | ) |
| Conversion of convertible notes | 3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Repurchases of common stock | (3,184 | ) | | — |
| | (41 | ) | | — |
| | (436 | ) | | (477 | ) | | — |
| | (477 | ) |
| Cash dividends declared and other | — |
| | — |
| | — |
| | — |
| | (746 | ) | | (746 | ) | | (3 | ) | | (749 | ) |
| BALANCE AT AUGUST 28, 2016 | 437,524 |
| | 2 |
| | 5,490 |
| | (1,099 | ) | | 7,686 |
| | 12,079 |
| | 253 |
| | 12,332 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 2,679 |
| | 2,679 |
| | 35 |
| | 2,714 |
|
| Foreign-currency translation adjustment and other, net | — |
| | — |
| | — |
| | 85 |
| | — |
| | 85 |
| | 13 |
| | 98 |
|
| Stock-based compensation | — |
| | — |
| | 518 |
| | — |
| | — |
| | 518 |
| | — |
| | 518 |
|
| Release of vested RSUs, including tax effects | 2,673 |
| | — |
| | (165 | ) | | — |
| | — |
| | (165 | ) | | — |
| | (165 | ) |
| Conversion of convertible notes | 5 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Repurchases of common stock | (2,998 | ) | | — |
| | (41 | ) | | — |
| | (432 | ) | | (473 | ) | | — |
| | (473 | ) |
| Cash dividends declared and other | — |
| | 2 |
| | (2 | ) | | — |
| | (3,945 | ) | | (3,945 | ) | | — |
| | (3,945 | ) |
| BALANCE AT SEPTEMBER 3, 2017 | 437,204 |
| | $ | 4 |
| | $ | 5,800 |
| | $ | (1,014 | ) | | $ | 5,988 |
| | $ | 10,778 |
| | $ | 301 |
| | $ | 11,079 |
|
The accompanying notes are an integral part of these consolidated financial statements.
39
44
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in millions)
| | | | | | | | | | | | | | | | | |
| 52 Weeks Ended |
| August 28,
2022 | | August 29,
2021 | | August 30,
2020 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
| Net income including noncontrolling interests | $ | 5,915 | | | $ | 5,079 | | | $ | 4,059 | |
| Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 1,900 | | | 1,781 | | | 1,645 | |
| Non-cash lease expense | 377 | | | 286 | | | 194 | |
| Stock-based compensation | 724 | | | 665 | | | 619 | |
| Other non-cash operating activities, net | 76 | | | 85 | | | 42 | |
| Deferred income taxes | (37) | | | 59 | | | 104 | |
| Changes in operating assets and liabilities: | | | | | |
| Merchandise inventories | (4,003) | | | (1,892) | | | (791) | |
| Accounts payable | 1,891 | | | 1,838 | | | 2,261 | |
| Other operating assets and liabilities, net | 549 | | | 1,057 | | | 728 | |
| Net cash provided by operating activities | 7,392 | | | 8,958 | | | 8,861 | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | |
| Purchases of short-term investments | (1,121) | | | (1,331) | | | (1,626) | |
| Maturities and sales of short-term investments | 1,145 | | | 1,446 | | | 1,678 | |
| Additions to property and equipment | (3,891) | | | (3,588) | | | (2,810) | |
| Acquisitions | — | | | — | | | (1,163) | |
| Other investing activities, net | (48) | | | (62) | | | 30 | |
| Net cash used in investing activities | (3,915) | | | (3,535) | | | (3,891) | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
| Proceeds from issuance of long-term debt | — | | | — | | | 3,992 | |
| Repayments of long-term debt | (800) | | | (94) | | | (3,200) | |
| Tax withholdings on stock-based awards | (363) | | | (312) | | | (330) | |
| Repurchases of common stock | (439) | | | (496) | | | (196) | |
| Cash dividend payments | (1,498) | | | (5,748) | | | (1,479) | |
| Dividend to noncontrolling interest | (208) | | | — | | | — | |
| Acquisition of noncontrolling interest | (842) | | | — | | | — | |
| Other financing activities, net | (133) | | | 162 | | | 66 | |
| Net cash used in financing activities | (4,283) | | | (6,488) | | | (1,147) | |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (249) | | | 46 | | | 70 | |
| Net change in cash and cash equivalents | (1,055) | | | (1,019) | | | 3,893 | |
| CASH AND CASH EQUIVALENTS BEGINNING OF YEAR | 11,258 | | | 12,277 | | | 8,384 | |
| CASH AND CASH EQUIVALENTS END OF YEAR | $ | 10,203 | | | $ | 11,258 | | | $ | 12,277 | |
| | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | |
| Cash paid during the year for: | | | | | |
| Interest | $ | 145 | | | $ | 149 | | | $ | 124 | |
| Income taxes, net | $ | 1,940 | | | $ | 1,527 | | | $ | 1,052 | |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: | | | | | |
| Capital expenditures included in liabilities | $ | 156 | | | $ | 184 | | | $ | 204 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| | 53 Weeks Ended | | 52 Weeks Ended | | 52 Weeks Ended |
| | September 3,
2017 | | August 28,
2016 | | August 30,
2015 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
| Net income including noncontrolling interests | $ | 2,714 |
| | $ | 2,376 |
| | $ | 2,409 |
|
| Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 1,370 |
| | 1,255 |
| | 1,127 |
|
| Stock-based compensation | 514 |
| | 459 |
| | 394 |
|
| Excess tax benefits on stock-based awards | (38 | ) | | (74 | ) | | (86 | ) |
| Other non-cash operating activities, net | 24 |
| | 17 |
| | (5 | ) |
| Deferred income taxes | (29 | ) | | 269 |
| | (101 | ) |
| Changes in operating assets and liabilities: | | | | | |
| Merchandise inventories | (894 | ) | | (25 | ) | | (890 | ) |
| Accounts payable | 2,258 |
| | (1,532 | ) | | 880 |
|
| Other operating assets and liabilities, net | 807 |
| | 547 |
| | 557 |
|
| Net cash provided by operating activities | 6,726 |
| | 3,292 |
| | 4,285 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | |
| Purchases of short-term investments | (1,279 | ) | | (1,432 | ) | | (1,501 | ) |
| Maturities and sales of short-term investments | 1,385 |
| | 1,709 |
| | 1,434 |
|
| Additions to property and equipment | (2,502 | ) | | (2,649 | ) | | (2,393 | ) |
| Other investing activities, net | 30 |
| | 27 |
| | (20 | ) |
| Net cash used in investing activities | (2,366 | ) | | (2,345 | ) | | (2,480 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
| Change in bank checks outstanding | (236 | ) | | 81 |
| | (45 | ) |
| Repayments of short-term borrowings | 0 |
| | (106 | ) | | (51 | ) |
| Proceeds from short-term borrowings | 0 |
| | 106 |
| | 51 |
|
| Proceeds from issuance of long-term debt | 3,782 |
| | 185 |
| | 1,125 |
|
| Repayments of long-term debt | (2,200 | ) | | (1,288 | ) | | (1 | ) |
| Minimum tax withholdings on stock-based awards | (202 | ) | | (220 | ) | | (178 | ) |
| Excess tax benefits on stock-based awards | 38 |
| | 74 |
| | 86 |
|
| Repurchases of common stock | (469 | ) | | (486 | ) | | (481 | ) |
| Cash dividend payments | (3,904 | ) | | (746 | ) | | (2,865 | ) |
| Other financing activities, net | (27 | ) | | (19 | ) | | 35 |
|
| Net cash used in financing activities | (3,218 | ) | | (2,419 | ) | | (2,324 | ) |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | 25 |
| | 50 |
| | (418 | ) |
| Net change in cash and cash equivalents | 1,167 |
| | (1,422 | ) | | (937 | ) |
| CASH AND CASH EQUIVALENTS BEGINNING OF YEAR | 3,379 |
| | 4,801 |
| | 5,738 |
|
| CASH AND CASH EQUIVALENTS END OF YEAR | $ | 4,546 |
| | $ | 3,379 |
| | $ | 4,801 |
|
| | | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | |
| Cash paid during the year for: | | | | | |
| Interest (reduced by $16, $19, and $14, interest capitalized in 2017, 2016, and 2015, respectively) | $ | 131 |
| | $ | 123 |
| | $ | 117 |
|
| Income taxes, net | $ | 1,185 |
| | $ | 953 |
| | $ | 1,186 |
|
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | |
| Property acquired under build-to-suit and capital leases | $ | 17 |
| | $ | 15 |
| | $ | 109 |
|
The accompanying notes are an integral part of these consolidated financial statements.
40
45
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 September 3, 2017,August 28, 2022, Costco operated 741838 warehouses worldwide: 514578 in the United States (U.S.) locations (in 44 U.S.located in 46 states, Washington, D.C., and Puerto Rico), 97Rico, 107 in Canada, locations, 3740 in Mexico, locations, 2831 in Japan, 29 in the United Kingdom (U.K.) locations, 26 Japan locations,, 17 in Korea, 14 in Taiwan, 13 Korea locations, 13 Taiwan locations, ninein Australia, locations,four in Spain, two Spain locations, one Iceland location,each in France and China, and one France location.in Iceland. The Company operates its e-commerce websites in all countries exceptthe U.S., Canada, U.K., Mexico, Korea, Taiwan, Japan, Australia, Spain, Iceland, and France.Australia.
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. During 2022, the Company paid a cash dividend of $208 and purchased the equity interest of its Taiwan operations from its former joint-venture partner for $842, totaling $1,050 in the aggregate. The Company’s net income excludes income attributable toremaining noncontrolling interest represents the portion of equity interests in its operations in Taiwan and Korea.a consolidated joint venture that is not 100% owned by the Company. Unless otherwise noted, references to net income relate to net income attributable to Costco.
Fiscal Year End
The Company operates on a 52/53 week53-week fiscal year basis with the fiscal year ending on the Sunday closest to August 31. References to 2017relate to the 53-week fiscal year ended September 3, 2017. References to20162022, 2021, and 20152020 relate to the 52-week fiscal years ended August 28, 2016,2022, August 29, 2021, and August 30, 2015,2020, 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. Actual results could differ from those estimates and assumptions.
Reclassification
Reclassifications were made to our 2021 and 2020 consolidated statements of income and cash flows to conform with current year presentation.
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 $1,255$2,010 and $1,071$1,816 at the end of 20172022 and 2016, respectively.2021.
The Company provides for the daily replenishment of major bank accounts as checkspayments are presented. Included in accounts payable at the end of 20172022 and 20162021, are $383$995 and $619, respectively,$999 representing the excess of outstanding checkspayments over cash on deposit at the banks on which the checkspayments 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 in fiscal 2017.
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 1—Summary of Significant Accounting Policies (Continued)
Short-Term Investments
In general, short-termShort-term investments have a maturitygenerally 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 other-than-temporarycredit impairment, using both qualitative and quantitative criteria. In the event a security is deemed to be other-than-temporarily 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 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 LiborLIBOR 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
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, whichand 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.
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 1—Summary of Significant Accounting Policies (Continued)
Receivables, Net
Receivables consist primarily of vendor, reinsurance, credit card incentive, reinsurance, third-party pharmacy and other receivables. Vendor receivables include coupons,discounts and volume rebates or other purchase discounts.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. Credit card incentive receivables primarily represent amounts earned under the co-branded credit card arrangements in the U.S. and Canada. 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’ insurance companies.insurers. Other receivables primarily consist of amounts due from governmental entities, mostly tax-related items.
Receivables are recorded netThe valuation allowance related to receivables was not material to our consolidated financial statements at the end of an allowance for doubtful accounts. The allowance is based on historical experience2022, 2021, and application of the specific identification method. Write-offs of receivables were immaterial for fiscal years 2017, 2016, and 2015.2020.
Merchandise Inventories
Merchandise inventories consist of the following at the end of 2017 and 2016:following:
| | | | 2017 | | 2016 | | 2022 | | 2021 |
| United States | $ | 7,091 |
| | $ | 6,422 |
| United States | $ | 13,160 | | | $ | 10,248 | |
| Canada | 1,040 |
| | 1,015 |
| Canada | 1,966 | | | 1,456 | |
| Other International | 1,703 |
| | 1,532 |
| Other International | 2,781 | | | 2,511 | |
| Merchandise inventories | $ | 9,834 |
| | $ | 8,969 |
| Merchandise inventories | $ | 17,907 | | | $ | 14,215 | |
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. Due to inflation, a $438 charge was recorded during 2022 to merchandise costs to increase the cumulative LIFO valuation on merchandise inventories at August 28, 2022. An immaterial LIFO charge was recorded in 2021. 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 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 and $27 was recorded to merchandise costs in 2016, and 2015, respectively. At the end of 2017 and 2016, the cumulative impact of the LIFO valuation on merchandise inventories was zero and immaterial, 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.
Property and Equipment, Net
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 primarily using the
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 1—Summary of Significant Accounting Policies (Continued)
straight-line method over estimated useful lives or the lease term, if shorter.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 assuredcertain 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. TheseDuring 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 thetheir estimated useful liveslives. In 2022 and 2021, the Company recognized in SG&A expenses write-offs of the software, generally three to seven years.$118 and $84 for certain information technology assets.
Repair and maintenance costs are expensed when incurred. Expenditures for remodels, refurbishments and improvements that add to or change the way an asset functionsfunction 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 20172022 and 20162021 were immaterial.
The following table summarizes the Company's property and equipment balances at the end of 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| Estimated Useful Lives | | 2022 | | 2021 |
| Land | N/A | | $ | 7,955 | | | $ | 7,507 | |
| Buildings and improvements | 5-50 years | | 20,120 | | | 19,139 | |
| Equipment and fixtures | 3-20 years | | 10,275 | | | 9,505 | |
| Construction in progress | N/A | | 1,582 | | | 1,507 | |
| | | 39,932 | | | 37,658 | |
| Accumulated depreciation and amortization | | (15,286) | | | (14,166) | |
| Property and equipment, net | | $ | 24,646 | | | $ | 23,492 | |
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 beis 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 20172022 or 2020. Impairment charges recognized in 2021 were immaterial.
Leases
The Company leases land, buildings, and/or equipment at warehouses and 2016,certain other office and charges were immaterialdistribution 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 2015the 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.
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. 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 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 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 selling, generalother liabilities in the accompanying consolidated balance sheet.
Goodwill and administrative expensesAcquired 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 statementsbalance sheets. The following table summarizes goodwill by reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| United States | | Canada | | Other International | | Total |
| Balance at August 30, 2020 | $ | 947 | | | $ | 27 | | | $ | 14 | | | $ | 988 | |
Changes in currency translation and other (1) | 6 | | | 1 | | | 1 | | | 8 | |
| Balance at August 29, 2021 | $ | 953 | | | $ | 28 | | | $ | 15 | | | $ | 996 | |
| Changes in currency translation | — | | | (1) | | | (2) | | | (3) | |
| Balance at August 28, 2022 | $ | 953 | | | $ | 27 | | | $ | 13 | | | $ | 993 | |
____________
(1)Other consists of income.changes to the purchase price allocation.
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-InsuranceSelf-insurance Liabilities
The Company is predominantly self-insured, with insurance coverage for certain catastrophic risks,Claims for employee health care benefits, workers’ compensation, general liability, property damage, directors’ and officers’ liability, vehicle liability, inventory loss, and inventory loss. We useother 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 participateparticipates 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 20172022 and 2016,2021, these insurance liabilities were $1,059$1,364 and $1,021$1,257 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 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 is not relieved ofretains its primary obligation to the policyholders for activity prior to the termination of the annual agreement.
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 1—Summary of Significant Accounting Policies (Continued)
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. TheseSome of these contracts do not contain any credit-risk-related contingent features.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 2022. There were no derivative instruments in a net liability position at the end of 2021. The aggregate notional amounts of open, unsettled forward foreign-exchange contracts were $637$1,242 and $572$1,331 at the end of 20172022 and 2016,2021, 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 20172022 and 2016.2021. 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 immaterialin 2017, 2016,2022,2021 and 2015.2020.
The Company is exposed to fluctuations in prices for the energy, it consumes, 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 orand normal sales” exception under authoritative guidance and require no mark-to-market adjustment.
Foreign Currency
The functional currencies of the Company’s international subsidiaries are thetheir local currency of the country in which the subsidiary is located.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 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 $84 in 2022 and immaterial for 2017in 2021 and resulted in net gains of $38, and $35 for 2016 and 2015, respectively.2020.
Revenue Recognition
The Company generally recognizes sales for the amount of consideration collected from the member, which includeincludes gross shipping fees where applicable, and is net of returns, at the time thesales taxes collected and remitted to government agencies and 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.returns. 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
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 1—Summary of Significant Accounting Policies (Continued)
inventories excepted to be returned. Amounts collected from members for sales or value added taxes are recordedCompany records, on a net basis.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.
Generally, when CostcoThe 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 is the primary obligor, is subject to inventory risk, has latitude in establishing pricesprincipal for the majority of its transactions and selecting suppliers, can influence product or service specifications, or has several but not all of these indicators,recognizes revenue is recorded on a gross basis. If theThe Company is not the primary obligorprincipal 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 does not possess other indicatorsmaintains the relationship with the member, including assurance of gross reporting as noted above, it records the net amounts earned, which is reflected in net sales.member service and satisfaction.
The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one-year membership period. TheDeferred membership fees at the end of 2022 and 2021 were $2,174 and $2,042, respectively.
In most countries, the Company's Executive members qualify for a 2% reward on qualified purchases, (upsubject to aan annual maximum reward of approximately $1,000 per year),value, which can be redeemed onlydoes not expire and is redeemable at Costco warehouses. The Company accounts for this reward as a reduction in sales. The sales, reduction andnet of the estimated impact of non-redemptions (breakage), with the corresponding liability (classifiedclassified as accrued member rewards in the consolidated balance sheets) aresheets. Estimated breakage is computed after giving effect to the estimated impact of non-redemptions, based on historicalredemption data. TheFor 2022, 2021, and 2020, the net reduction in sales was $1,281, $1,172,$2,307, $2,047, and $1,128$1,707 respectively.
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 2017, 2016,other current liabilities in the consolidated balance sheets.
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 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 2015, respectively.expire on December 31. The Company also maintains co-branded credit card arrangements in Canada and certain other International subsidiaries.
Merchandise Costs
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.
Vendor Consideration
The Company has agreements to receive funds from vendors for couponsdiscounts 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.
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)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, and stock-based compensation expense,preopening, as well as other operating costs incurred to support warehouse and e-commerce website operations.
Retirement Plans
The Company's 401(k) Retirement Planretirement plan is available to all U.S. employees over the age of 18 who have completed 90 days of employment. The plan allows pre-tax deferrals,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 in Canada and contributes a percentage of each employee's salary.wages. Certain subsidiaries in the Company's Other International operations have defined benefit and defined contribution plans, thatwhich are not material. Amounts expensed under all plans were $543, $489,$824, $748, and $454$676 for 2017, 2016,2022, 2021, and 2015, respectively,2020, and are predominantly included in selling, general and administrativeSG&A expenses and merchandise costs in the accompanying consolidated statements of income.
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 1—Summary of Significant Accounting Policies (Continued)
Stock-Based Compensation
Restricted stock unitsStock 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. 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.
Stock-based compensation expense is predominantly included in selling, general and administrativeSG&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. 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.
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 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 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 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.
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 1—Summary of Significant Accounting Policies (Continued)
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 2017 and 2016, respectively, and are included in other liabilities in the accompanying consolidated balance sheets.
Preopening Expenses
Preopening expenses related to new warehouses, new regional offices and other startup operations are expensed as incurred.
Income Taxes
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.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 if any, from tax authorities. When facts and circumstances change, the Company reassesses these probabilities and records any changes as appropriate. Certain of the Company's cumulative foreign undistributed earnings were considered by the Company to be indefinitely reinvested as of September 3, 2017. These earnings would be subject to U.S. income tax if the Company changed its 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.
Net Income per Common Share Attributable to Costco
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.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.
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 1—Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued new guidance on the recognition of revenue from contracts with customers. The guidance converges the requirements for reporting revenue and requires disclosures of the nature, amount, timing, and uncertainty of revenue and cash flows arising from these contracts. Transition is permitted 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 continues to review current accounting policies, business processes, systems and controls to evaluate the impacts of applying the new standard. Based on its preliminary assessment, the Company believes the new guidance will change recognition timing and classification of cash card breakage income to reflect the historical pattern of gift card redemption rather than the current methodology of recognizing income when redemption is considered remote. The Company will also present estimated sales returns on a gross basis rather than net of the sales return reserve on the consolidated balance sheets. The Company continues to evaluate various areas such as gross versus net revenue presentation for certain contracts, identification and treatment of performance obligations associated with membership offers, and accounting for warranty arrangements on qualified purchases. Management continues to evaluate potential impacts on the contracts associated with the co-branded credit card arrangement as well as its adoption methodology.
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. While the Company continues to evaluate this standard and the effect on related disclosures, the primary effect of adoption will be to require 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 consolidated statements of cash flows.
In March 2016, the FASB issued new guidance on stock compensation, intended to simplify accounting for share-based payment transactions. The guidance makes several modifications related to the 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. Adoption of this guidance will likely be material to the provision for income taxes and earnings per share amounts on the Company’s consolidated income statements for the change in the recognition of excess tax benefits or deficiencies. Due to the Company's annual vesting and release of shares in its first fiscal quarter, this may create increased volatility in these amounts during that quarter of each fiscal year. Previously these amounts were reflected in equity. Additionally, these amounts will be reflected as cash flows from operations instead of cash flows from financing activities in the consolidated statements of cash flows. Adoption of this guidance is not expected to have a material impact on the consolidated balance sheets, consolidated statements of cash flows, or related disclosures.
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 2—Investments
The Company’s investments at the end of 2017 and 2016 were as follows:
| | | | | | | | | | | | | | | | | |
| 2022: | Cost
Basis | | Unrealized
Losses, Net | | Recorded
Basis |
| Available-for-sale: | | | | | |
| Government and agency securities | $ | 534 | | | $ | (5) | | | $ | 529 | |
| | | | | |
| | | | | |
| | | | | |
| Held-to-maturity: | | | | | |
| Certificates of deposit | 317 | | | — | | | 317 | |
| | | | | |
| | | | | |
| Total short-term investments | $ | 851 | | | $ | (5) | | | $ | 846 | |
| | 2021: | | 2021: | Cost
Basis | | Unrealized
Gains, Net | | Recorded
Basis |
| Available-for-sale: | | Available-for-sale: | | | | | |
| Government and agency securities | | Government and agency securities | $ | 375 | | | $ | 6 | | | $ | 381 | |
| | | 2017: | Cost Basis | | Unrealized Gains, Net | | Recorded Basis | |
| Available-for-sale: | | | | | | |
| Government and agency securities | $ | 947 |
| | $ | 0 |
| | $ | 947 |
| |
| Asset and mortgage-backed securities | 1 |
| | 0 |
| | 1 |
| |
| Total available-for-sale | 948 |
| | 0 |
| | 948 |
| |
| | Held-to-maturity: | | | | | | Held-to-maturity: | |
| Certificates of deposit | 285 |
| | | | 285 |
| Certificates of deposit | 536 | | | — | | | 536 | |
| | Total short-term investments | $ | 1,233 |
| | $ | 0 |
| | $ | 1,233 |
| Total short-term investments | $ | 911 | | | $ | 6 | | | $ | 917 | |
|
| | | | | | | | | | | |
| 2016: | Cost Basis | | Unrealized Gains, Net | | Recorded Basis |
| Available-for-sale: | | | | | |
| Government and agency securities | $ | 1,028 |
| | $ | 6 |
| | $ | 1,034 |
|
| Asset and mortgage-backed securities | 1 |
| | 0 |
| | 1 |
|
| Total available-for-sale | 1,029 |
| | 6 |
| | 1,035 |
|
| Held-to-maturity: | | | | | |
| Certificates of deposit | 306 |
| | | | 306 |
|
| Bankers' acceptances | 9 |
| | | | 9 |
|
| Total held-to-maturity | 315 |
| | | | 315 |
|
| Total short-term investments | $ | 1,344 |
| | $ | 6 |
| | $ | 1,350 |
|
Gross unrealizedunrecognized holding gains and losses on available-for-sale securities were not material in 2017, 2016,for the years ended August 28, 2022, and 2015.August 29, 2021. At the end of 2017 and 2015, the Company's available-for-sale securities thatthose dates, there were in a continuous unrealized-loss position were not material. The Company had no available-for-sale securities in a material continuous unrealized-loss position in 2016.position. There were no gross unrealized gains and losses on cash equivalents at the end of 2017, 2016, or 2015.
The proceeds from sales of available-for-sale securities were $202, $291, and $246 during 2017, 2016, and 2015, respectively. Gross realized gains2022 or losses from sales of available-for-sale securities were not material in 2017, 2016, and 2015.2021.
The maturities of available-for-sale and held-to-maturity securities at the end of 2017 were2022 are as follows:
| | | | | | | | | | | | | | | | | |
| | Available-For-Sale | | Held-To-Maturity |
| | Cost Basis | | Fair Value | |
| Due in one year or less | $ | 276 | | | $ | 274 | | | $ | 317 | |
| Due after one year through five years | 197 | | | 195 | | | — | |
| Due after five years | 61 | | 60 | | — | |
| Total | $ | 534 | | | $ | 529 | | | $ | 317 | |
|
| | | | | | | | | | | |
| | Available-For-Sale | | Held-To-Maturity |
| | Cost Basis | | Fair Value | |
| Due in one year or less | $ | 185 |
| | $ | 185 |
| | $ | 285 |
|
| Due after one year through five years | 721 |
| | 721 |
| | 0 |
|
| Due after five years | 42 |
| | 42 |
| | 0 |
|
| Total | $ | 948 |
| | $ | 948 |
| | $ | 285 |
|
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 3—Fair Value Measurement
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tablestable below presentpresents information at the end of 2017 and 2016, 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.
|
| | | | | | | |
| 2017: | Level 1 | | Level 2 |
Money market mutual funds(1) | $ | 7 |
| | $ | 0 |
|
| Investment in government and agency securities | 0 |
| | 947 |
|
| Investment in asset and mortgage-backed securities | 0 |
| | 1 |
|
Forward foreign-exchange contracts, in asset position(2) | 0 |
| | 2 |
|
Forward foreign-exchange contracts, in (liability) position(2) | 0 |
| | (8 | ) |
| Total | $ | 7 |
| | $ | 942 |
|
| | | | | | | | Level 2 |
| 2016: | Level 1 | | Level 2 | |
Money market mutual funds(1) | $ | 222 |
| | $ | 0 |
| |
| | | 2022 | | 2021 |
| Investment in government and agency securities | 0 |
| | 1,034 |
| $ | 529 | | | $ | 393 | |
| Investment in asset and mortgage-backed securities | 0 |
| | 1 |
| |
| Forward foreign-exchange contracts, in asset position(2) | 0 |
| | 11 |
| Forward foreign-exchange contracts, in asset position(2) | 34 | | | 17 | |
Forward foreign-exchange contracts, in (liability) position(2) | 0 |
| | (13 | ) | Forward foreign-exchange contracts, in (liability) position(2) | (2) | | | (2) | |
| Total | $ | 222 |
| | $ | 1,033 |
| Total | $ | 561 | | | $ | 408 | |
___________________________
| |
(1) | Included in(1)At August 29, 2021, $12 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. |
During and atcash equivalents and $381 short-term investments are included in the end of both 2017consolidated balance sheets.
(2)The asset and 2016,the liability values are included in other current assets and other current liabilities, respectively, in the consolidated balance sheets.
At August 28, 2022, and August 29, 2021, 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 inbetween levels during 2022 or out of Level 1 or 2 during 2017 and 2016.2021.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Financial assets measured at fair value on a nonrecurring basis include held-to-maturity investments that are carried at amortized costAssets and are not remeasured to fair value on a recurring basis. There were no fair value adjustments to these financial assets during 2017liabilities recognized and 2016. See Note 4 for the fair value of long-term debt.
Nonfinancial assets measureddisclosed at fair value on a nonrecurring basis include items such as financial assets measured at amortized cost and long-lived nonfinancial assets. These assets that are measured at fair value resulting from an impairment, if deemed necessary.determined to be impaired. There were no fair value adjustments to nonfinancial assets during 20172022 and 2016.in 2021 they were immaterial.
Note 4—Debt
Short-Term Borrowings
The Company enters intomaintains various short-term bank credit facilities, which increased to $833 with a borrowing capacity of $1,257 and $1,050, in 2017 from $429 in 2016 due to the addition of a $400 revolving line of credit in the U.S. which expires June 2018. At2022 and 2021, respectively. Borrowings on these short-term facilities were immaterial during 2022 and 2021. Short-term borrowings outstanding were $88 and $41 at the end of 20172022 and 2016, there were no outstanding borrowings under these credit facilities.
In 2017, short term borrowings were immaterial. 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.
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 4—Debt (Continued)
2021.
Long-Term Debt
The Company's long-term debt consists primarily of Senior Notes, that have various principal balances, interest rates, and maturity dates as described below. In May 2017,On December 1, 2021, the Company issued $3,800 in aggregate principal amount ofrepaid, prior to maturity, the 2.300% Senior Notes with maturity dates between May 2021 and May 2027. In February 2015 and December 2012, the Company issued $1,000 and $3,500 in aggregate principal amount of Senior Notes, respectively.
In June 2017, the Company paid the outstanding $1,100 principal balance andat a redemption price plus accrued interest onas specified in the 1.125% Senior Notes through proceeds from the Senior Notes issued in May 2017 and existing sources of cash and cash equivalents and short-term investments. In March 2017, the Company paid the outstanding $1,100 principal balance and interest on the 5.5% Senior Notes with existing sources of cash and cash equivalents and short-term investments.Notes' agreement.
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 primarily of promissory notes and term loansGuaranteed Senior Notes issued by the Company's Japanese subsidiary, and are valued primarily using Level 3 inputs.
At the end of 2022 and 2021, the fair value of the Company's long-term debt, including the current portion, was approximately $6,033 and $7,692, respectively. The carrying value and estimated fair value of long-term debt at the end of 2017 and 2016 consisted of the following:
| | | | | | | | | | | |
| | 2022 | | 2021 |
| 2.300% Senior Notes due May 2022 | $ | — | | | $ | 800 | |
| 2.750% Senior Notes due May 2024 | 1,000 | | | 1,000 | |
| 3.000% Senior Notes due May 2027 | 1,000 | | | 1,000 | |
| 1.375% Senior Notes due June 2027 | 1,250 | | | 1,250 | |
| 1.600% Senior Notes due April 2030 | 1,750 | | | 1,750 | |
| 1.750% Senior Notes due April 2032 | 1,000 | | | 1,000 | |
| Other long-term debt | 590 | | | 731 | |
| Total long-term debt | 6,590 | | | 7,531 | |
| Less unamortized debt discounts and issuance costs | 33 | | | 40 | |
Less current portion(1) | 73 | | | 799 | |
| Long-term debt, excluding current portion | $ | 6,484 | | | $ | 6,692 | |
|
| | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| 5.5% Senior Notes due March 2017 | $ | 0 |
| | $ | 0 |
| | $ | 1,100 |
| | $ | 1,129 |
|
| 1.125% Senior Notes due December 2017 | 0 |
| | 0 |
| | 1,099 |
| | 1,103 |
|
| 1.7% Senior Notes due December 2019 | 1,198 |
| | 1,201 |
| | 1,196 |
| | 1,219 |
|
| 1.75% Senior Notes due February 2020 | 498 |
| | 501 |
| | 498 |
| | 508 |
|
| 2.15% Senior Notes due May 2021 | 994 |
| | 1,007 |
| | 0 |
| | 0 |
|
| 2.25% Senior Notes due February 2022 | 497 |
| | 504 |
| | 497 |
| | 512 |
|
| 2.30% Senior Notes due May 2022 | 793 |
| | 805 |
| | 0 |
| | 0 |
|
| 2.75% Senior Notes due May 2024 | 991 |
| | 1,010 |
| | 0 |
| | 0 |
|
| 3.00% Senior Notes due May 2027 | 986 |
| | 1,009 |
| | 0 |
| | 0 |
|
| Other long-term debt | 702 |
| | 716 |
| | 771 |
| | 803 |
|
| Total long-term debt | 6,659 |
| | 6,753 |
| | 5,161 |
| | 5,274 |
|
| Less current portion | 86 |
| | | | 1,100 |
| | |
| Long-term debt, excluding current portion | $ | 6,573 |
| | | | $ | 4,061 |
| | |
(1)Net of unamortized debt discounts and issuance costs.
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 4—Debt (Continued)
Maturities of long-term debt during the next five fiscal years and thereafter are as follows:
| | | | | |
| 2023 | $ | 73 | |
| 2024 | 1,088 | |
| 2025 | 110 | |
| 2026 | 81 | |
| 2027 | 2,250 | |
| Thereafter | 2,988 | |
| Total | $ | 6,590 | |
|
| | | |
| 2018 | $ | 86 |
|
| 2019 | 91 |
|
| 2020 | 1,700 |
|
| 2021 | 1,091 |
|
| 2022 | 1,300 |
|
| Thereafter | 2,436 |
|
| Total | $ | 6,704 |
|
Note 5—Leases
Operating LeasesThe tables below present information regarding the Company's lease assets and liabilities.
| | | | | | | | | | | |
| 2022 | | 2021 |
| Assets | | | |
| Operating lease right-of-use assets | $ | 2,774 | | | $ | 2,890 | |
Finance lease assets(1) | 1,620 | | | 1,000 | |
| Total lease assets | $ | 4,394 | | | $ | 3,890 | |
| Liabilities | | | |
| Current | | | |
Operating lease liabilities(2) | $ | 239 | | | $ | 222 | |
Finance lease liabilities(2) | 245 | | | 72 | |
| Long-term | | | |
| Operating lease liabilities | 2,482 | | | 2,642 | |
Finance lease liabilities(3) | 1,383 | | | 980 | |
| Total lease liabilities | $ | 4,349 | | | $ | 3,916 | |
_______________
(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.
| | | | | | | | | | | |
| 2022 | | 2021 |
| Weighted-average remaining lease term (years) | | | |
| Operating leases | 20 | | 21 |
| Finance leases | 17 | | 22 |
| Weighted-average discount rate | | | |
| Operating leases | 2.26 | % | | 2.16 | % |
| Finance leases | 3.97 | % | | 4.91 | % |
The aggregate rentalcomponents of lease expense, for 2017, 2016,excluding short-term lease costs and 2015sublease income (which were not material), were as follows:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | 2022 | | 2021 | | 2020 |
Operating lease costs(1) | | | $ | 297 | | | $ | 296 | | | $ | 252 | |
| Finance lease costs: | | | | | | | |
Amortization of lease assets(1) | | | 128 | | | 50 | | | 31 | |
Interest on lease liabilities(2) | | | 45 | | | 37 | | | 33 | |
Variable lease costs(1) | | | 157 | | | 151 | | | 87 | |
| Total lease costs | | | $ | 627 | | | $ | 534 | | | $ | 403 | |
_______________
(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.
Supplemental cash flow information related to leases was $258, $250, and $252, respectively. Sub-lease income and contingent rent was not material in 2017, 2016, or 2015.as follows:
Capital and Build-to-Suit Leases | | | | | | | | | | | | | | | | | |
| | | | | |
| 2022 | | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows — operating leases | $ | 277 | | | $ | 282 | | | $ | 258 | |
| Operating cash flows — finance leases | 45 | | | 37 | | | 33 | |
| Financing cash flows — finance leases | 176 | | | 67 | | | 49 | |
| Operating lease assets obtained in exchange for new or modified leases | 231 | | | 350 | | | 354 | |
| Financing lease assets obtained in exchange for new or modified leases | 794 | | | 399 | | | 317 | |
Gross assets recorded under capital and build-to-suit leases were $404 and $392 at the endAs of 2017 and 2016, respectively. These assets are recorded net of accumulated amortization of $78 and $63 at the end of 2017 and 2016, respectively.
At the end of 2017,August 28, 2022, future minimum payments net of sub-leaseduring the next five fiscal years and thereafter are as follows:
| | | | | | | | | | | | | |
| Operating Leases(1) | | Finance Leases | | |
| 2023 | $ | 277 | | | $ | 288 | | | |
| 2024 | 256 | | | 253 | | | |
| 2025 | 210 | | | 280 | | | |
| 2026 | 207 | | | 119 | | | |
| 2027 | 186 | | | 88 | | | |
| Thereafter | 2,332 | | | 1,191 | | | |
Total(2) | 3,468 | | | 2,219 | | | |
| Less amount representing interest | 747 | | | 591 | | | |
| Present value of lease liabilities | $ | 2,721 | | | $ | 1,628 | | | |
_______________
(1)Operating lease payments have not been reduced by future sublease income of $112$83.
(2)Excludes $660 of lease payments for all years combined, under non-cancelable operating leases with terms of at least one year and capital leases were as follows:that have been signed but not commenced.
|
| | | | | | | |
| | Operating Leases | | Capital Leases(1) |
| 2018 | $ | 216 |
| | $ | 32 |
|
| 2019 | 223 |
| | 32 |
|
| 2020 | 206 |
| | 33 |
|
| 2021 | 177 |
| | 33 |
|
| 2022 | 168 |
| | 33 |
|
| Thereafter | 2,123 |
| | 582 |
|
| Total | $ | 3,113 |
| | 745 |
|
| Less amount representing interest | | | (365 | ) |
| Net present value of minimum lease payments | | | 380 |
|
Less current installments(2) | | | (7 | ) |
Long-term capital lease obligations less current installments(3) | | | $ | 373 |
|
54
_______________ | |
(1) | Includes build-to-suit lease obligations. |
| |
(2) | Included in other current liabilities in the accompanying consolidated balance sheets. |
| |
(3) | Included in other liabilities in the accompanying consolidated balance sheets. |
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 6—Equity
(amountsDividends
Cash dividends declared in millions, except share,2022 totaled $3.38 per share, and warehouse count data) (Continued)
Note 6—Stockholders’ Equity
as compared to $12.98 per share in 2021. Dividends
in 2021 included a special dividend of $10.00 per share, aggregating approximately $4,430. The Company’sCompany's current quarterly dividend rate is $0.50$0.90 per share. In May 2017 and February 2015, the Company paid special cash dividends of $7.00 and $5.00 per share, respectively. The aggregate payment was approximately $3,100 and $2,201, respectively.
Stock Repurchase Programs
The Company’sCompany's stock repurchase program is conducted under a $4,000 authorization by the Board of Directors, approved on April 17, 2015, which expires in April 17, 2019. This authorization revoked previously authorized but unused amounts, totaling $2,528.2023. As of the end of 2017,2022, the remaining amount available for stock repurchases under the approved plan was $2,749.$2,808. The following table summarizes the Company’s stock repurchase activity:
|
| | | | | | | | | | |
| | Shares Repurchased (000’s) | | Average Price per Share | | Total Cost |
| 2017 | 2,998 |
| | $ | 157.87 |
| | $ | 473 |
|
| 2016 | 3,184 |
| | 149.90 |
| | 477 |
|
| 2015 | 3,456 |
| | 142.87 |
| | 494 |
|
| | | | | | | | | | | | | | | | | |
| Shares
Repurchased
(000’s) | | Average
Price per
Share | | Total Cost |
| 2022 | 863 | | | $ | 511.46 | | | $ | 442 | |
| 2021 | 1,358 | | | 364.39 | | | 495 | |
| 2020 | 643 | | | 308.45 | | | 198 | |
These amounts may differ from therepurchases of common 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.
Note 7—Stock-Based Compensation Plans
The Company grants stock-based compensation, primarily to employees and non-employee directors. Since 2009, RSU grantsGrants to all executive officers have beenare generally 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 retirement or voluntary termination. Employees who attain certainat least 25 years of service with the Company receive shares under accelerated vesting provisions on the annual vesting date rather than upon retirement.date. The Seventh Restated 2002 Stock2019 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 2017. 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 23,500,00017,500,000 shares (13,429,000(10,000,000 RSUs) of common stock for future grants, in addition toplus the remaining shares authorizedthat were available for grant and the future forfeited shares from grants under the previous plan.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 equal to the minimum statutory withholdingwithheld for taxes.
As required by the Company's Seventh Plan, in conjunction with the 2017 special cash dividend, the number of shares subject to outstanding RSUs was increased on the dividend record date to preserve their value. The outstanding RSUs were adjusted by multiplying the number of outstanding shares by a factor of 1.032, representing the ratio of the NASDAQ closing price of $180.20 on May 5, 2017, which was the last trading day immediately prior to the ex-dividend date, to the NASDAQ opening price of $174.66 on the ex-dividend date, May 8, 2017. The outstanding RSUs increased by approximately 247,000 and this 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 Seventh Plan, the maximum number of shares issuable under the Seventh Plan was proportionally adjusted, which resulted in an additional 364,000RSU shares available to be granted.
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 7—Stock-Based Compensation Plans (Continued)
Summary of Restricted Stock Unit Activity
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 retirement or voluntary termination.respectively. Recipients are not entitled to vote or receive dividends on non-vestedunvested and undelivered shares. At the end of 2017, 11,780,0002022, 10,445,000 shares were available to be granted as RSUs under the Seventh2019 Incentive Plan.
The following awards were outstanding at the end of 2017:2022:
7,798,000•3,328,000 time-based RSUs, thatwhich vest upon continued employment or service over specified periods of time; and
401,000 •121,000performance-based RSUs, of which 259,00082,000 were granted to executive officers subject to the certificationdetermination of the attainment of specified performance targets for 2017.2022. This certificationdetermination occurred in October 2017,September 2022, at which time a portionat least 33% of the units vested, as a result of the long service of all executive officers.officers receiving performance-based RSUs. The remaining awards vest upon continued employment over specified periods of time.
The following table summarizes RSU transactions during 2017:2022:
| | | | | | | Number of
Units
(in 000’s) | | Weighted-Average
Grant Date Fair
Value |
| | Number of Units (in 000’s) | | Weighted-Average Grant Date Fair Value | |
| Outstanding at the end of 2016 | 8,326 |
| | $ | 120.56 |
| |
| Outstanding at the end of 2021 | | Outstanding at the end of 2021 | 4,349 | | | $ | 257.88 | |
| Granted | 3,856 |
| | 144.12 |
| Granted | 1,679 | | | 476.06 | |
| Vested and delivered | (4,026 | ) | | 119.46 |
| Vested and delivered | (2,456) | | | 290.18 | |
| Forfeited | (204 | ) | | 129.87 |
| Forfeited | (123) | | | 332.84 | |
| Special cash dividend | 247 |
| | N/A |
| |
| Outstanding at the end of 2017 | 8,199 |
| | $ | 128.15 |
| |
| | Outstanding at the end of 2022 | | Outstanding at the end of 2022 | 3,449 | | | $ | 338.41 | |
The weighted-average grant date fair value of RSUs granted was $144.12, $153.46,$476.06, $369.15, and $125.68$294.08 in 2017, 2016,2022, 2021, and 2015,2020, respectively. The remaining unrecognized compensation cost related to non-vested RSUs at the end of 20172022 was $694$758 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 20172022 were approximately 2,782,0001,210,000 RSUs vested but not yet delivered.
Summary of Stock-Based Compensation
The following table summarizes stock-based compensation expense and the related tax benefits under the Company’s plans:benefits:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Stock-based compensation expense | $ | 724 | | | $ | 665 | | | $ | 619 | |
Less recognized income tax benefit | 154 | | | 140 | | | 128 | |
| Stock-based compensation expense, net | $ | 570 | | | $ | 525 | | | $ | 491 | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Stock-based compensation expense before income taxes | $ | 514 |
| | $ | 459 |
| | $ | 394 |
|
| Less recognized income tax benefit | (167 | ) | | (150 | ) | | (131 | ) |
| Stock-based compensation expense, net of income taxes | $ | 347 |
| | $ | 309 |
| | $ | 263 |
|
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 8— Taxes
Income Taxes
Income before income taxes is comprised of the following:
| | | | 2017 | | 2016 | | 2015 | | 2022 | | 2021 | | 2020 |
| Domestic | $ | 2,988 |
| | $ | 2,622 |
| | $ | 2,574 |
| Domestic | $ | 5,759 | | | $ | 4,931 | | | $ | 4,204 | |
| Foreign | 1,051 |
| | 997 |
| | 1,030 |
| Foreign | 2,081 | | | 1,749 | | | 1,163 | |
| Total | $ | 4,039 |
| | $ | 3,619 |
| | $ | 3,604 |
| Total | $ | 7,840 | | | $ | 6,680 | | | $ | 5,367 | |
The provisions for income taxes for 2017, 2016, and 2015 are as follows:
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Federal: | | | | | |
| Current | $ | 802 |
| | $ | 468 |
| | $ | 766 |
|
| Deferred | 7 |
| | 233 |
| | (12 | ) |
| Total federal | 809 |
| | 701 |
| | 754 |
|
| State: | | | | | |
| Current | 161 |
| | 108 |
| | 131 |
|
| Deferred | 8 |
| | 21 |
| | 1 |
|
| Total state | 169 |
| | 129 |
| | 132 |
|
| Foreign: | | | | | |
| Current | 389 |
| | 398 |
| | 399 |
|
| Deferred | (42 | ) | | 15 |
| | (90 | ) |
| Total foreign | 347 |
| | 413 |
| | 309 |
|
| Total provision for income taxes | $ | 1,325 |
| | $ | 1,243 |
| | $ | 1,195 |
|
Tax benefits associated with the release of employee RSUs were allocated to equity attributable to Costco in the amount of $37, $74, and $86, in 2017, 2016, and 2015, respectively. | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Federal: | | | | | |
| Current | $ | 798 | | | $ | 718 | | | $ | 616 | |
| Deferred | (35) | | | 84 | | | 77 | |
| Total federal | 763 | | | 802 | | | 693 | |
| State: | | | | | |
| Current | 333 | | | 265 | | | 230 | |
| Deferred | (5) | | | 11 | | | 8 | |
| Total state | 328 | | | 276 | | | 238 | |
| Foreign: | | | | | |
| Current | 851 | | | 557 | | | 372 | |
| Deferred | (17) | | | (34) | | | 5 | |
| Total foreign | 834 | | | 523 | | | 377 | |
| Total provision for income taxes | $ | 1,925 | | | $ | 1,601 | | | $ | 1,308 | |
The reconciliation between the statutory tax rate and the effective rate for 2017, 2016,2022, 2021, and 20152020 is as follows:
| | | | 2017 | | 2016 | | 2015 | | 2022 | | 2021 | | 2020 |
| Federal taxes at statutory rate | $ | 1,414 |
| | 35.0 | % | | $ | 1,267 |
| | 35.0 | % | | $ | 1,262 |
| | 35.0 | % | Federal taxes at statutory rate | $ | 1,646 | | | 21.0 | % | | $ | 1,403 | | | 21.0 | % | | $ | 1,127 | | | 21.0 | % |
| State taxes, net | 116 |
| | 2.9 |
| | 91 |
| | 2.5 |
| | 85 |
| | 2.3 |
| State taxes, net | 267 | | | 3.4 | | | 243 | | | 3.6 | | | 190 | | | 3.6 | |
| Foreign taxes, net | (64 | ) | | (1.6 | ) | | (21 | ) | | (0.6 | ) | | (125 | ) | | (3.5 | ) | Foreign taxes, net | 231 | | | 3.0 | | | 92 | | | 1.4 | | | 92 | | | 1.7 | |
| Employee stock ownership plan (ESOP) | (104 | ) | | (2.6 | ) | | (17 | ) | | (0.5 | ) | | (66 | ) | | (1.8 | ) | Employee stock ownership plan (ESOP) | (23) | | | (0.3) | | | (91) | | | (1.3) | | | (24) | | | (0.5) | |
| Other | (37 | ) | | (0.9 | ) | | (77 | ) | | (2.1 | ) | | 39 |
| | 1.2 |
| Other | (196) | | | (2.5) | | | (46) | | | (0.7) | | | (77) | | | (1.4) | |
| Total | $ | 1,325 |
| | 32.8 | % | | $ | 1,243 |
| | 34.3 | % | | $ | 1,195 |
| | 33.2 | % | Total | $ | 1,925 | | | 24.6 | % | | $ | 1,601 | | | 24.0 | % | | $ | 1,308 | | | 24.4 | % |
The Company’s provision for income taxes in 2017 and 2015 was favorably impacted byCompany recognized total net tax benefits of $104$130, $163 and $68, respectfully, primarily due$81 in 2022, 2021 and 2020. These include benefits of $94, $75 and $77, related to stock-based compensation. During 2021, there was a net tax benefits recorded in connection withbenefit of $70 related to the May 2017 and February 2015portion of the special cash dividendsdividend paid by the Company to employees through the Company'sour 401(k) Retirement Plan of $82 and $57, respectively. Dividends on these shares are deductible for U.S. income tax purposes.
plan.
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 8—Income Taxes (Continued)
The components of the deferred tax assets (liabilities) are as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Deferred tax assets: | | | |
| Equity compensation | $ | 84 | | | $ | 72 | |
| Deferred income/membership fees | 302 | | | 161 | |
| Foreign tax credit carry forward | 201 | | | 146 | |
| Operating lease liabilities | 727 | | | 769 | |
| Accrued liabilities and reserves | 694 | | | 681 | |
| Other | 5 | | | 62 | |
| Total deferred tax assets | 2,013 | | | 1,891 | |
| Valuation allowance | (313) | | | (214) | |
| Total net deferred tax assets | 1,700 | | | 1,677 | |
| Deferred tax liabilities: | | | |
| Property and equipment | (962) | | | (935) | |
| Merchandise inventories | (231) | | | (216) | |
| Operating lease right-of-use assets | (701) | | | (744) | |
| Foreign branch deferreds | (85) | | | (92) | |
| | | |
| Total deferred tax liabilities | (1,979) | | | (1,987) | |
| Net deferred tax liabilities | $ | (279) | | | $ | (310) | |
|
| | | | | | | |
| | 2017 | | 2016 |
| Equity compensation | $ | 109 |
| | $ | 99 |
|
| Deferred income/membership fees | 167 |
| | 177 |
|
| Accrued liabilities and reserves | 647 |
| | 601 |
|
Other(1) | 18 |
| | 63 |
|
| Property and equipment | (747 | ) | | (779 | ) |
| Merchandise inventories | (252 | ) | | (256 | ) |
| Net deferred tax (liabilities)/assets | $ | (58 | ) | | $ | (95 | ) |
_______________ | |
(1) | Includes foreign tax credits of $36 and $78 for 2017 and 2016, respectively, which will expire beginning in 2025. |
The deferred tax accounts at the end of 20172022 and 20162021 include non-current deferred income tax assets of $254$445 and $202,$444, respectively, included in other long-term assets; and non-current deferred income tax liabilities of $312$724 and $297,$754, respectively, included in other long-term liabilities.
During 2015,In 2022 and 2021, the Company repatriated a portionhad valuation allowances of the earnings in the Canadian operations$313 and $214, primarily related to foreign tax credits that in 2014, the Company determined werebelieves 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 considered indefinitely reinvested. In the fourth quarter of 2015, the Company changed its position regarding an additional portion of the undistributedconsiders fiscal year 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. Duringnon-U.S. consolidated subsidiaries after 2017 the Company changed its position regarding an additional portion of the undistributed earnings of its Canadian operations as they could be repatriated without adverse tax consequences. Accordingly, that portion is no longer considered to be indefinitely reinvested. Subsequentreinvested (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 end of the fiscal year, the Company repatriated a portion of undistributed earnings in its Canadian operations without adverse tax consequences.
U.S. The Company has not provided for U.S. deferred taxes on cumulativecontinues to consider undistributed earnings of $3,176 and $3,280 at the end of 2017 and 2016, respectively, of certain non-U.S. consolidated subsidiaries, because the earnings have not been repatriated, or 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 at this time the U.S. federal income tax liability that would be associated with such earnings if such earnings were not deemedwhich totaled $2,779, to be indefinitely reinvested. Deferred taxes are recorded for earnings of foreign operations when it is determined that such earnings are no longer indefinitely reinvested.
The Company believes that its U.S. current and projected asset position is sufficient to meet its U.S. liquidity requirementsreinvested and has no current plans to repatriatenot provided 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.
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 8—Income Taxes (Continued)
withholding or state taxes.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 20172022 and 20162021 is as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Gross unrecognized tax benefit at beginning of year | $ | 33 | | | $ | 30 | |
| Gross increases—current year tax positions | 1 | | | 2 | |
| Gross increases—tax positions in prior years | 12 | | | 2 | |
| Gross decreases—tax positions in prior years | (12) | | | — | |
| Gross decreases—settlements | (12) | | | — | |
| Lapse of statute of limitations | (6) | | | (1) | |
| Gross unrecognized tax benefit at end of year | $ | 16 | | | $ | 33 | |
|
| | | | | | | |
| | 2017 | | 2016 |
| Gross unrecognized tax benefit at beginning of year | $ | 52 |
| | $ | 158 |
|
| Gross increases—current year tax positions | 3 |
| | 2 |
|
| Gross increases—tax positions in prior years | 17 |
| | 1 |
|
| Gross decreases—tax positions in prior years | 0 |
| | (47 | ) |
| Settlements | (11 | ) | | (25 | ) |
| Lapse of statute of limitations | (9 | ) | | (37 | ) |
| Gross unrecognized tax benefit at end of year | $ | 52 |
| | $ | 52 |
|
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 20172022 and 2016,2021, 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 $29$15 and $46$30 at the end of 20172022 and 2016, respectively.2021.
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 2017 or 2016. Accrued interest and penalties were not materialrecognized during 2022 and 2021, and accrued at the end of 2017 or 2016.each respective period were not material.
The Company is currently under audit by several taxing jurisdictions in the United States and in several foreign countries.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.
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 2014.2018. The Company is currently subject to examination in CanadaCalifornia for fiscal years 2013 to present andpresent.
Other Taxes
The Company is subject to multiple examinations for value added, sales-based, payroll, product, import or other non-income taxes in California for fiscal years 2007 to present. No other examinationsvarious jurisdictions. In certain cases, the Company has received assessments from the authorities. Possible losses or range of possible losses associated with these matters are believedeither 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 material.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.
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
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 basic and of potentially dilutive common shares outstanding (shares in 000’s):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Net income attributable to Costco | $ | 5,844 | | | $ | 5,007 | | | $ | 4,002 | |
| Weighted average basic shares | 443,651 | | | 443,089 | | | 442,297 | |
| RSUs | 1,106 | | | 1,257 | | | 1,604 | |
| Weighted average diluted shares | 444,757 | | | 444,346 | | | 443,901 | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Net income available to common stockholders after assumed conversions of dilutive securities | $ | 2,679 |
| | $ | 2,350 |
| | $ | 2,377 |
|
| Weighted average number of common shares used in basic net income per common share | 438,437 |
| | 438,585 |
| | 439,455 |
|
| RSUs | 2,493 |
| | 2,668 |
| | 3,249 |
|
| Conversion of convertible notes | 7 |
| | 10 |
| | 12 |
|
| Weighted average number of common shares and dilutive potential of common stock used in diluted net income per share | 440,937 |
| | 441,263 |
| | 442,716 |
|
Note 10—Commitments and Contingencies
Legal Proceedings
The Company is involved in a number of claims, proceedings and litigationlitigations 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, theThe Company has recorded an immaterial accrualaccruals with respect to one mattercertain 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.
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 namedan action commenced 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
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 10—Commitments and Contingencies (Continued)
(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, 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 did 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. Plaintiffs 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 was issued in favor of a fee award of $4. 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” provisionJuly 2013 under the settlement, under which it sought 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, which was affirmed by the court of appeals in August 2017.
A class actionCalifornia Labor Code Private Attorneys General Act (PAGA) alleging violation of California Wage Order 7-2001 byfor failing to provide seating to member service assistantsemployees who act as greeterswork at entrance and exit attendantsdoors in the Company’s California warehouses. Canela v. Costco Wholesale Corp., et al. (Case(Case No. 5:13-cv-03598, N.D. Cal. filed July 1, 2013)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 has filed an answer denying the material allegations of the complaint. A bench trial was held in June and July; no decision has been issued.
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 received notices from most states stating that they have appointedfiled an agent to conduct an examinationanswer denying the material allegations of the books and recordscomplaint.
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 settled for an immaterial amount the seating claims on a representative basis, which received court approval in
February 2020. The parties settled the temperature claims for an immaterial amount in April 2022, and court approval was received in May 2022.
In March 2019, employees filed a class action against the Company alleging claims under California law for failure to determine whether itpay 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. 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 has complied withappealed the denial of her motion to intervene.
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 Costco’s motion for partial summary judgment and denied class certification. In August 2019, the plaintiff filed a companion case in state unclaimed property laws. 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 additionDecember 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 seekingpay 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.). An amended complaint was filed, and the turnoverCompany denied the material allegations of unclaimed property subject to escheat laws, the states may seek interest, penalties, costsamended complaint. Based on an agreement in principle concerning settlement of examinations, and other relief. The agent appears to have concluded its examination, without seeking payments from the Company. Certain states have separately also made requests formatter, 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).
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 answered the complaint on October 21, 2021, denying the material allegations. 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.).
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 filed an answer to the second
amended class action complaint, denying the material allegations. The Company also filed an answer to the PAGA representative action, denying the material allegations.
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 former employee 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 the motion to compel in the related case.
In September 2021, an employee filed a class action against the Company alleging violations of the California Labor Code regarding the alleged 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). The Company answered the complaint in January 2022, denying its material allegations. In April 2022, a settlement for an immaterial amount was agreed upon, subject to court approval.
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). The Company filed an answer denying the material allegations.
In May 2022, an employee filed a PAGA-only representative 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).
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 that name the Company, including actions filed by counties and cities in Michigan, New Jersey, Oregon, Virginia and South Carolina, a specific typethird-party payor in Ohio, and a hospital in Texas, class actions filed on behalf of property, someinfants born with opioid-related medical conditions in 40 states, and class actions and individual actions filed on behalf of whichindividuals 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 paid in immaterial amounts.
The Company 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. As previously disclosed, the Company entered into a settlement agreement in January 2017 under which it paid $12 to the Department of Justice, an amount for which a previous accrual was made.
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.dismissed. The Company is seeking to cooperate withdefending all of the request.pending matters.
In November 2016Members of the Board of Directors, six corporate officers and September 2017, the Company received noticesare defendants in a shareholder derivative action related to chicken welfare and alleged breaches of violationfiduciary duties. Smith, et ano. v. Vachris, et al., Superior Court of the State of Washington, County of King, No, 22-2-08937-7SEA, (filed 6/14/22, as amended, 6/30/22); The complaint seeks from the Connecticut Department of Energyindividual defendants damages, injunctive relief, costs, and Environmental Protection regarding hazardous waste practices at its Connecticut warehouses, primarily concerning unsalable pharmaceuticals. The Company is seekingattorneys' fees. A motion to cooperate concerningdismiss the resolution of these notices.amended complaint has been filed.
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,position, results of operations or cash flows; it is possible
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 10—Commitments and Contingencies (Continued)
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.quarter or year.
Note 11—Segment Reporting
The Company and its subsidiaries areis principally engaged in the operation of membership warehouses through wholly owned subsidiaries in the U.S., Canada, Mexico, Japan, U.K., Japan,Korea, Taiwan, Australia, Spain, Iceland,France, China, and France and through majority-owned subsidiaries in Taiwan and Korea. The Company’s reportableIceland. 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. All material inter-segment1. Inter-segment net sales and expenses have been eliminated in computing total revenue and operating income. Certain operating expenses, predominantlyEffective for fiscal 2022, stock-based compensation incurred on behalfwas allocated to the segments in this reporting. This change reflected a decision to evaluate the financial performance of the segments inclusive of this expense. Operating income was restated in each of the segments for all prior periods to reflect this change. The following table provides information for 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 U.S. management.reportable segments:
| | | | | | | | | | | | | | | | | | | | | | | |
| United States | | Canada | | Other
International | | Total |
| 2022 | | | | | | | |
| Total revenue | $ | 165,294 | | | $ | 31,675 | | | $ | 29,985 | | | $ | 226,954 | |
| Operating income | 5,268 | | | 1,346 | | | 1,179 | | | 7,793 | |
| Depreciation and amortization | 1,436 | | | 180 | | | 284 | | | 1,900 | |
| Additions to property and equipment | 2,795 | | | 388 | | | 708 | | | 3,891 | |
| Property and equipment, net | 17,205 | | | 2,459 | | | 4,982 | | | 24,646 | |
| Total assets | 44,904 | | | 6,558 | | | 12,704 | | | 64,166 | |
| 2021 | | | | | | | |
| Total revenue | $ | 141,398 | | | $ | 27,298 | | | $ | 27,233 | | | $ | 195,929 | |
| Operating income | 4,470 | | | 1,093 | | | 1,145 | | | 6,708 | |
| Depreciation and amortization | 1,339 | | | 177 | | | 265 | | | 1,781 | |
| Additions to property and equipment | 2,612 | | | 272 | | | 704 | | | 3,588 | |
| Property and equipment, net | 15,993 | | | 2,317 | | | 5,182 | | | 23,492 | |
| Total assets | 39,589 | | | 5,962 | | | 13,717 | | | 59,268 | |
| 2020 | | | | | | | |
| Total revenue | $ | 122,142 | | | $ | 22,434 | | | $ | 22,185 | | | $ | 166,761 | |
| Operating income | 3,822 | | | 778 | | | 835 | | | 5,435 | |
| Depreciation and amortization | 1,248 | | | 155 | | | 242 | | | 1,645 | |
| Additions to property and equipment | 2,060 | | | 258 | | | 492 | | | 2,810 | |
| Property and equipment, net | 14,916 | | | 2,172 | | | 4,719 | | | 21,807 | |
| Total assets | 38,366 | | | 5,270 | | | 11,920 | | | 55,556 | |
|
| | | | | | | | | | | | | | | |
| | United States Operations | | Canadian Operations | | Other International Operations | | Total |
| 2017 | | | | | | | |
| Total revenue | $ | 93,889 |
| | $ | 18,775 |
| | $ | 16,361 |
| | $ | 129,025 |
|
| Operating income | 2,644 |
| | 841 |
| | 626 |
| | 4,111 |
|
| Depreciation and amortization | 1,044 |
| | 124 |
| | 202 |
| | 1,370 |
|
| Additions to property and equipment | 1,714 |
| | 277 |
| | 511 |
| | 2,502 |
|
| Net property and equipment | 12,339 |
| | 1,820 |
| | 4,002 |
| | 18,161 |
|
| Total assets | 24,068 |
| | 4,471 |
| | 7,808 |
| | 36,347 |
|
| 2016 | | | | | | | |
| Total revenue | $ | 86,579 |
| | $ | 17,028 |
| | $ | 15,112 |
| | $ | 118,719 |
|
| Operating income | 2,326 |
| | 778 |
| | 568 |
| | 3,672 |
|
| Depreciation and amortization | 946 |
| | 109 |
| | 200 |
| | 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 |
|
| 2015 | | | | | | | |
| Total revenue | $ | 84,351 |
| | $ | 17,341 |
| | $ | 14,507 |
| | $ | 116,199 |
|
| Operating income | 2,308 |
| | 771 |
| | 545 |
| | 3,624 |
|
| Depreciation and amortization | 848 |
| | 119 |
| | 160 |
| | 1,127 |
|
| Additions to property and equipment | 1,574 |
| | 148 |
| | 671 |
| | 2,393 |
|
| Net property and equipment | 10,815 |
| | 1,381 |
| | 3,205 |
| | 15,401 |
|
| Total assets | 22,988 |
| | 3,608 |
| | 6,421 |
| | 33,017 |
|
The following table summarizes the percentage of net sales by merchandise category:category; sales from e-commerce websites and business centers have been allocated to the applicable merchandise categories:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Foods and Sundries | $ | 85,629 | | | $ | 77,277 | | | $ | 68,659 | |
| Non-Foods | 61,100 | | | 55,966 | | | 44,807 | |
| Fresh Foods | 29,527 | | | 27,183 | | | 23,204 | |
| Warehouse Ancillary and Other Businesses | 46,474 | | | 31,626 | | | 26,550 | |
| Total net sales | $ | 222,730 | | | $ | 192,052 | | | $ | 163,220 | |
|
| | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Foods | 21 | % | | 22 | % | | 22 | % |
| Sundries | 20 | % | | 21 | % | | 21 | % |
| Hardlines | 16 | % | | 16 | % | | 16 | % |
| Fresh Foods | 14 | % | | 14 | % | | 14 | % |
| Softlines | 12 | % | | 12 | % | | 11 | % |
| Ancillary | 17 | % | | 15 | % | | 16 | % |
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 12—Quarterly Financial Data (Unaudited)
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 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 28, 2022, 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 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 August 28, 2022, 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 August 28, 2022. 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.
Changes in Internal Control Over Financial Reporting
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 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B—Other Information
None.
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 2023 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 two tables that follow reflectinformation required by this Item is incorporated herein by reference to the unaudited quarterly resultssections entitled “Compensation of operations for 2017Directors,” “Executive Compensation,” and 2016.“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.
PART IV
Item 15—Exhibits, Financial Statement Schedules
(a)Documents filed as part of this report are as follows:
1.Financial Statements:
See the listing of Financial Statements included as a part of this Form 10-K in Item 8 of Part II.
|
| | | | | | | | | | | | | | | | | | | |
| | 53 Weeks Ended September 3, 2017 |
| | First Quarter (12 Weeks) | | Second Quarter (12 Weeks) | | Third Quarter (12 Weeks) | | Fourth Quarter (17 Weeks) | | Total (53 Weeks) |
| REVENUE | | | | | | | | | |
| Net sales | $ | 27,469 |
| | $ | 29,130 |
| | $ | 28,216 |
| | $ | 41,357 |
| | $ | 126,172 |
|
| Membership fees | 630 |
| | 636 |
| | 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 |
| | 4,123 |
| | 12,950 |
|
| Preopening expenses | 22 |
| | 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 | 846 |
| | 809 |
| | 965 |
| | 1,419 |
| | 4,039 |
|
| Provision for income taxes | 291 |
| | 288 |
| | 259 |
| (1) | 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 | $ | 545 |
| | $ | 515 |
| | $ | 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 |
| | $ | 6.08 |
|
| Shares used in calculation (000’s) | | | | | | | | | |
| Basic | 438,007 |
| | 439,127 |
| | 438,817 |
| | 437,987 |
| | 438,437 |
|
| Diluted | 440,525 |
| | 440,657 |
| | 441,056 |
| | 441,036 |
| | 440,937 |
|
| CASH DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.45 |
| | $ | 0.45 |
| | $ | 7.50 |
| (2) | $ | 0.50 |
| | $ | 8.90 |
|
_______________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.
(b)Exhibits: The required exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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. | | | | | Incorporated by Reference |
Exhibit
Number | | Exhibit Description | | Filed
Herewith | | Form | | Period Ended | | Filing Date |
| | | | | | | | | | |
(2)3.1 | Includes | | | x | | | | | | |
| | | | | | | | | | |
| 3.2 | | | | | | 10-Q | | 5/8/2022 | | 6/2/2022 |
| | | | | | | | | | |
| 4.1 | | First Supplemental Indenture between Costco Wholesale 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 special cash dividendCompany's Current Report on the Form 8-K filed on March 25, 2002) | | | | 8-K | | | | 3/25/2002 |
| | | | | | | | | | |
| 4.2 | | | | | | 8-K | | | | 4/17/2020 |
| | | | | | | | | | |
| 4.3 | | | | | | 8-K | | | | 4/17/2020 |
| | | | | | | | | | |
| 4.4 | | | | | | 8-K | | | | 4/17/2020 |
| | | | | | | | | | |
| 4.5 | | | | | | 8-K | | | | 5/16/2017 |
| | | | | | | | | | |
| 4.6 | | | | | | 8-K | | | | 5/16/2017 |
| | | | | | | | | | |
| 4.7 | | | | | | 8-K | | | | 5/16/2017 |
| | | | | | | | | | |
| 4.8 | | | | x | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| 10.1* | | | | | | 10-K | | 9/2/2012 | | 10/19/2012 |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| 10.2* | | | | | | DEF 14 | | | | 12/17/2019 |
| | | | | | | | | | |
| 10.3* | | | | | | DEF 14A | | | | 12/19/2014 |
| | | | | | | | | | |
| 10.3.1* | | | | | | 10-Q | | 11/24/2019 | | 12/23/2019 |
| | | | | | | | | | |
| 10.3.2* | | | | | | 10-Q | | 11/24/2019 | | 12/23/2019 |
| | | | | | | | | | |
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data) (Continued)
Note 12—Quarterly Financial Data (Unaudited) (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference |
Exhibit
Number | | Exhibit Description | | Filed
Herewith | | Form | | Period Ended | | Filing Date |
| 10.3.3* | | | | | | 10-Q | | 11/24/2019 | | 12/23/2019 |
| | | | | | | | | | |
| 10.3.4* | | | | | | 10-Q | | 11/24/2019 | | 12/23/2019 |
| | | | | | | | | | |
| 10.4* | | | | | | 8-K | | | | 11/10/2021 |
| | | | | | | | | | |
| 10.5* | | | | | | 10-Q | | 11/20/2016 | | 12/16/2016 |
| | | | | | | | | | |
| 10.5.1* | | | | | | 10-Q | | 11/25/2018 | | 12/20/2018 |
| | | | | | | | | | |
| 10.5.2* | | | | | | 10-Q | | 11/24/2019 | | 12/23/2019 |
| | | | | | | | | | |
| 10.5.3* | | | | | | 10-Q | | 11/22/2020 | | 12/16/2020 |
| | | | | | | | | | |
| 10.5.4* | | | | | | 10-Q | | 11/22/2021 | | 12/22/2021 |
| | | | | | | | | | |
| 10.6 | | | | | | 14A | | | | 12/13/1999 |
| | | | | | | | | | |
| 10.7* | | | | | | 10-K | | 9/1/2013 | | 10/16/2013 |
| | | | | | | | | | |
| 10.8** | | | | | | 10-Q/A | | 5/10/2015 | | 8/31/2015 |
| | | | | | | | | | |
| 10.8.1** | | | | | | 10-Q | | 11/22/2015 | | 12/17/2015 |
| | | | | | | | | | |
| 10.8.2** | | | | | | 10-Q | | 2/14/2016 | | 3/9/2016 |
| | | | | | | | | | |
| 10.8.3** | | | | | | 10-K | | 8/28/2016 | | 10/12/2016 |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | 52 Weeks Ended August 28, 2016 |
| | First Quarter (12 Weeks) | | Second Quarter (12 Weeks) | | Third Quarter (12 Weeks) | | Fourth Quarter (16 Weeks) | | Total
(52 Weeks) |
| REVENUE | | | | | | | | | |
| Net sales | $ | 26,627 |
| | $ | 27,567 |
| | $ | 26,151 |
| | $ | 35,728 |
| | $ | 116,073 |
|
| Membership fees | 593 |
| | 603 |
| | 618 |
| | 832 |
| | 2,646 |
|
| Total revenue | 27,220 |
| | 28,170 |
| | 26,769 |
| | 36,560 |
| | 118,719 |
|
| OPERATING EXPENSES | | | | | | | | | |
| Merchandise costs | 23,621 |
| | 24,469 |
|
| 23,162 |
| | 31,649 |
| | 102,901 |
|
| Selling, general and administrative | 2,806 |
| | 2,835 |
| | 2,731 |
| | 3,696 |
| | 12,068 |
|
| Preopening expenses | 26 |
| | 10 |
| | 18 |
| | 24 |
| | 78 |
|
| Operating income | 767 |
| | 856 |
| | 858 |
| | 1,191 |
| | 3,672 |
|
| OTHER INCOME (EXPENSE) | | | | | | | | | |
| Interest expense | (33 | ) | | (31 | ) | | (30 | ) | | (39 | ) | | (133 | ) |
| Interest income and other, net | 28 |
| | 16 |
| | 7 |
| | 29 |
| | 80 |
|
| INCOME BEFORE INCOME TAXES | 762 |
| | 841 |
| | 835 |
| | 1,181 |
| | 3,619 |
|
| Provision for income taxes | 275 |
| | 286 |
| | 286 |
| | 396 |
| | 1,243 |
|
| Net income including noncontrolling interests | 487 |
| | 555 |
| | 549 |
| | 785 |
| | 2,376 |
|
| Net income attributable to noncontrolling interests | (7 | ) | | (9 | ) | | (4 | ) | | (6 | ) | | (26 | ) |
| NET INCOME ATTRIBUTABLE TO COSTCO | $ | 480 |
| | $ | 546 |
| | $ | 545 |
| | $ | 779 |
| | $ | 2,350 |
|
| NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: | | | | | | | | | |
| Basic | $ | 1.10 |
| | $ | 1.24 |
| | $ | 1.24 |
| | $ | 1.78 |
| | $ | 5.36 |
|
| Diluted | $ | 1.09 |
| | $ | 1.24 |
| | $ | 1.24 |
| | $ | 1.77 |
| | $ | 5.33 |
|
| Shares used in calculation (000’s) | | | | | | | | | |
| Basic | 438,342 |
| | 439,648 |
| | 438,815 |
| | 437,809 |
| | 438,585 |
|
| Diluted | 441,386 |
| | 441,559 |
| | 441,066 |
| | 440,868 |
| | 441,263 |
|
| CASH DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.40 |
| | $ | 0.40 |
| | $ | 0.45 |
| | $ | 0.45 |
| | $ | 1.70 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference |
Exhibit
Number | | Exhibit Description | | Filed
Herewith | | Form | | Period Ended | | Filing Date |
| 10.8.4** | | | | | | 10-Q | | 2/18/2018 | | 3/15/2018 |
| | | | | | | | | | |
| 10.8.5** | | | | | | 10-Q | | 2/17/2019 | | 3/13/2019 |
| | | | | | | | | | |
| 10.8.6** | | | | | | 10-K | | 9/1/2019 | | 10/11/2019 |
| | | | | | | | | | |
| 10.8.7** | | | | | | 10-Q | | 2/14/2021 | | 3/10/2021 |
| | | | | | | | | | |
| 10.8.8** | | | | | | 10-Q | | 2/13/2022 | | 3/10/2022 |
| | | | | | | | | | |
| 21.1 | | | | x | | | | | | |
| | | | | | | | | | |
| 23.1 | | | | x | | | | | | |
| | | | | | | | | | |
| 31.1 | | | | x | | | | | | |
| | | | | | | | | | |
| 32.1 | | | | x | | | | | | |
| | | | | | | | | | |
| 101.INS | | Inline XBRL Instance Document | | x | | | | | | |
| | | | | | | | | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | x | | | | | | |
| | | | | | | | | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | x | | | | | | |
| | | | | | | | | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | x | | | | | | |
| | | | | | | | | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | x | | | | | | |
| | | | | | | | | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | x | | | | | | |
| | | | | | | | | | |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | | x | | | | | | |
_____________________
* 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.
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 4, 2022
| | | | | | | | | | | |
| 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 4, 2022
| | | | | | | | | | | | | | | | | | | | |
| By | | /s/ W. CRAIG JELINEK | | By | | /s/ HAMILTON E. JAMES |
| | W. Craig Jelinek Chief Executive Officer and Director | | | | Hamilton E. James
Chairman of the Board |
| | | |
| By | | /s/ RICHARD A. GALANTI | | By | | /s/ DANIEL M. HINES |
| | Richard A. Galanti
Executive Vice President, Chief Financial Officer and Director
(Principal Financial Officer) | | | | Daniel M. Hines
Senior Vice President and Corporate Controller
(Principal Accounting Officer) |
| | | |
| By | | /s/ RON M. VACHRIS | | By | | /s/ SUSAN L. DECKER |
| | Ron M. Vachris
President, Chief Operating Officer and Director | | | | Susan L. Decker
Director |
| | | |
| By | | /s/ KENNETH D. DENMAN | | By | | /s/ SALLY JEWELL |
| | Kenneth D. Denman
Director | | | | Sally Jewell
Director |
| | | |
| By | | /s/ CHARLES T. MUNGER | | By | | /s/ JEFFREY S. RAIKES |
| | Charles T. Munger
Director | | | | Jeffrey S. Raikes
Director |
| | | |
| By | | /s/ JOHN W. STANTON | | By | | /s/ MARY (MAGGIE) A. WILDEROTTER |
| | John W. Stanton
Director | | | | Mary (Maggie) A. Wilderotter
Director |
