Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying a fair value hierarchy, which requires maximizing the use of observable inputs when measuring fair value. The three levels of inputs are:

The Company’s current financial liabilities have fair values that approximate their carrying values. The Company’s long-term financial liabilities consist of long-term debt, which is recorded on the balance sheet at issuance price and adjusted for any applicable unamortized discounts or premiums. There have been no material changes to the valuation techniques utilized in the fair value measurement of assets and liabilities as disclosed in the Company's Form 10-K for the fiscal year ended September 1, 2013.

The Company is exposed to fluctuations in prices for the energy it consumes, particularly electricity and natural gas, which it seeks to partially mitigate through the use of fixed-price contracts for certain of its warehouses and other facilities, primarily in the U.S. and Canada. The Company also enters into variable-priced contracts for some purchases of electricity and natural gas, in addition to fuel for its gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the “normal purchases or normal sales” exception under authoritative guidance and thus require no mark-to-market adjustment.

At February 16,May 11, 2014, andthe Company's available-for-sale securities that were in continuous unrealized-loss positions were not material. At September 1, 2013, the Company had no available-for-sale securities that were in continuous unrealized-loss positions orpositions. At May 11, 2014, and September 1, 2013, the Company had no gross unrealized gains and losses on cash equivalents.

The maturities of available-for-sale and held-to-maturity securities at February 16,May 11, 2014, were as follows:

The estimated fair value of the Company’s debt was based primarily on reported market values, recently completed market transactions, and estimates based upon interest rates, maturities, and credit risk. Substantially all of the Company's long-term debt is classified as Level 2.

from time-to-time, as conditions warrant, in the open market or in block purchases, and pursuant to plans under SEC Rule 10b5-1.

Certain statements contained in this Report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. They include statements that address activities, events, conditions or developments that we expect or anticipate may occur in the future and may relate to such matters as sales growth, increases in comparable store sales, cannibalization of existing locations by new openings, price or fee changes, earnings performance, earnings per share, stock-based compensation expense, warehouse openings and closures, the amount we expect to spend on our expansion plans, the effect of adopting certain accounting standards, future financial reporting, financing, margins, return on invested capital, strategic direction, expense controls, membership renewal rates, shopping frequency, litigation impact and the demand for our products and services. Forward-looking statements may also be identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Such forward-looking statements involve risks and uncertainties that may cause actual events, results, or performance to differ materially from those indicated by such statements. These risks and uncertainties include, but are not limited to, domestic and international economic conditions, including exchange rates, the effects of competition and regulation, uncertainties in the financial markets, consumer and small business spending patterns and debt levels, breaches of security or privacy of member or business information, conditions affecting the acquisition, development, ownership or use of real estate, actions of vendors, rising costs associated with employees (including health care costs), energy and certain commodities, geopolitical conditions, and other risks identified from time to time in the Company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and we do not undertake to update these forward-looking statements, except as required by law.

This management discussion should be read in conjunction with the management discussion included in our fiscal 2013 annual report on Form 10-K, previously filed with the SEC.

We operate membership warehouses based on the concept that offering our members low prices on a limited selection of nationally branded and select private-label products in a wide range of merchandise categories will produce high sales volumes and rapid turnover. This 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, enables us to operate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets, and supercenters.

We believe that the most important driver of increasing our profitability is sales growth, particularly comparable sales growth. We define comparable warehouse sales as sales from warehouses open for more than one year, including remodels, relocations and expansions, as well as online sales.sales related to websites launched for more than one year. Comparable sales growth is achieved through increasing the frequency with which our members shop and the amounts that they spend on each visit. Sales comparisons can also be particularly influenced by two factors that are beyond our control, including fluctuations in currency exchange rates (with respect to the consolidation of the results of our international operations) and changes in the cost of gasoline and associated competitive conditions (primarily impacting domestic operations). The higher our comparable sales exclusive of currency fluctuations,these items, the more we can leverage certain of our selling, general and administrative expenses, reducing them as a percentage of sales and enhancing profitability. Generating comparable sales growth is foremost a question of making available to our members the right merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long term. Another substantial factor in sales growth is the health of the economies in which we do business, especially the United States. Sales growth and gross margins are also impacted by our competition, which is vigorous and widespread, including a wide range of global, national and regional wholesalers and retailers, including supermarkets, supercenter stores,

stores, department and specialty stores, gasoline stations, and internet-based retailers. While we cannot control or reliably predict general economic health or changes in competition, we believe that we have been successful historically in adapting our business to these changes, such as through adjustments to our pricing and to our merchandise mix, including increasing the penetration of our private label items. Our philosophy is not to focus in the short term on maximizing prices that our members can be charged, but to maintain what we believe is a perception among our members of our “pricing authority” – consistently providing the most competitive values. Our investments in merchandise pricing can, from time to time, include reducing prices on merchandise to drive sales or meet competition and holding prices steady despite cost increases instead of passing the increases on to our members, all negatively impacting near-term gross margin as a percentage of sales.

We also achieve sales growth by opening new warehouses and, to a much lesser extent, relocating existing warehouses to larger and better-located facilities. 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. However, the negative aspects of such growth, including lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouses when openings occur in existing markets, are increasingly less significant relative to the results of our total operations. Our rate of square footage growth is higher in foreign markets, due to the smaller base in those markets, and we expect that to continue.

Our 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 maintain growth in our membership base, upgrade members, and sustain high renewal rates materially influences our profitability.

Our financial performance also depends heavily on our ability to control costs. While we believe that we have achieved successes in this area historically, some significant costs are partially outside our control, most particularly health care and utility expenses. With respect to expenses relating to the compensation of our employees, our philosophy is not to seek to minimize the wages and benefits that they earn. Rather, we believe that achieving our longer-term objectives of reducing employee turnover and enhancing employee satisfaction requires maintaining compensation levels that are better than the industry average for much of our workforce. This may cause us, for example, to absorb costs that other employers might seek to pass through to their workforces. Because our business is operated on very low margins, modest changes in various items in the income statement, particularly gross margin and selling, general and administrative expenses, can have substantial impacts on net income.

In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies relative to the U.S. dollar, which are references to the differences between the foreign-exchange rates we use to convert the financial results of our international operations from local currencies into U.S. dollars for financial reporting purposes. This impact of foreign-exchange rate changes is calculated based on the difference between the current period's currency exchange rates and the comparable prior-year period's currency exchange rates.

Our fiscal year ends on the Sunday closest to August 31. References to the secondthird quarters of 2014 and 2013 relate to the twelve-week fiscal quarters ended February 16,May 11, 2014, and February 17,May 12, 2013, respectively. References to the first halfthirty-six weeks of 2014 and 2013 relate to the twenty-fourthirty-six weeks ended February 16,May 11, 2014, and May 12, 2013, respectively. Certain percentages presented are calculated using actual results prior to rounding. Unless otherwise noted, references to net income relate to net income attributable to Costco.

During the secondthird quarter, changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $503,$343, or 207146 basis points, compared to the secondthird quarter of 2013. The negative impact was primarily due to the Canadian dollar of approximately $347 and the Japanese yen of approximately $113.$320. Changes in gasoline prices negatively impacted net sales by approximately $70,$55, or 2923 basis points, during the second quarter of 2014, due to a 3%2% decrease in the average sales price per gallon.

During the first halfthirty-six weeks of 2014, changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $857,$1,200, or 180169 basis points, compared to the first halfthirty-six weeks of 2013. The negative impact was primarily due to the Canadian dollar of approximately $555$875 and the Japanese yen of approximately $253.$293. Changes in gasoline prices negatively impacted net sales by approximately $310,$363, or 6551 basis points during the first half of 2014, due to a 6%4.5% decrease in the average sales price per gallon.

Membership fees increased 4% and 6% in both the secondthird quarter and first halfthirty-six weeks of 2014, respectively. These increases were primarily due to membership sign-ups at both existing and new warehouses and increased penetration of our higher-fee Executive Membership program. The remainingraising of our membership fees in fiscal 2012 had no impact from raising our annual membership feeson the third quarter of 2014 and positively impacted the first halfthirty-six weeks of 2014 by $9. These increases were partially offset by changes in foreign currencies relative to the U.S. dollar, which negatively impacted membership fees by approximately $13$8 and $23$31 for the secondthird quarter and first halfthirty-six weeks of 2014, respectively. Our member renewal rates are currently 90%91% in the U.S. and Canada and 87% on a worldwide basis.worldwide.

Gross margin as a percentage of net sales decreased sixfive basis points compared to the secondthird quarter of 2013. Excluding the negative effect of gasoline price deflation on net sales, gross margin as a percentage of net sales decreased eight basis points. Gross margin in our core merchandise categories (food and sundries, hardlines, softlines and fresh foods) when expressed as a percentage of net sales, decreased oneexcluding gasoline price deflation, increased seven basis point, primarily due to a decrease in hardlines.points. Warehouse ancillary and other businesses gross margin when expressed as a percentage of net sales was consistent quarter over quarter.unchanged. Additionally, gross margin was negatively impacted by sixeight basis points due to a LIFO charge of $5 recorded$12 in the secondthird quarter of 2014, compared to a benefit of $9 recorded$8 in 2013, and seven basis points due to a non-recurring legal settlement received in the third quarter of 2013. The LIFO charge resulted from higher merchandise inventory costs, primarily food and sundries. Executive Membership 2% reward program, when expressed as a percentage of net sales, was consistent quarter over quarter. Excluding the effect of changes in foreign currencies, the Executive Membership 2% reward program negatively impacted gross margin by one basis point due to the continued growth of the Executive Membership 2% rewardthis program. Changes in foreign currencies relative to the U.S. dollar negatively impacted gross margin by $56$39 in the secondthird quarter of 2014.

Gross margin on a segment basis, when expressed as a percentage of the segment’s own sales (gross margin percentage), decreased in our U.S. operations, primarily due to the LIFO charge and the decrease in hardlinesnon-recurring legal settlement discussed above. Excluding these items, the gross margin in our U.S. operations increased compared to the prior year, primarily due to increases in food and sundries and softlines. The gross margin percentage in our Canadian operations increased slightly, resulting from an increasedecreased primarily due to decreases in fresh foods.hardlines as a result of its lower sales penetration as discussed above, as well as, decreases in food and sundries and softlines. The gross margin percentage in our Other International segment decreased slightly across all categories.increased, primarily due to fresh foods.

Gross margin as a percentage of net sales increased four basis pointswas consistent compared to the first halfthirty-six weeks of 2013. Excluding the effect of gasoline price deflation on net sales, gross margin as a percentage of net sales decreased threefive basis points. Gross margin in our core merchandise categories when expressed as a percentage of net sales, excluding gasoline price deflation, increased onetwo basis point,points, primarily due to increases in softlines and food and sundries.sundries and softlines, partially offset by a decrease in hardlines as a result of its lower sales penetration. Warehouse ancillary and other businesses gross margin when expressed as a percentage of net sales increased one basis point. Additionally, gross margin was negatively impacted by threefive basis points due to a LIFO charge of $6 recorded$18 in the first halfthirty-six weeks of 2014 compared to a benefit of $11$19 in 2013, and two basis points due to continueda non-recurring legal settlement received in the third quarter of 2013. The LIFO charge resulted from higher merchandise inventory costs, primarily in our food and sundries category. Continued growth of the Executive Membership 2% reward program.program also negatively impacted gross margin by one basis point. Changes in foreign currencies relative to the U.S. dollar negatively impacted gross margin by $94$132 in the first halfthirty-six weeks of 2014.