UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May ~~13, 2018~~12, 2019



☐	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)



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:



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $.01 Par Value	COST	The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically ~~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). YES ☒ NO ☐

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” and~~filer,” “smaller reporting ~~company”~~company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer ☒		Accelerated filer ☐
Non-accelerated filer ☐ ~~(Do not check if a smaller reporting 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

The number of shares outstanding of the issuer's common stock as of May ~~30, 2018~~29, 2019 was ~~438,541,544.~~439,789,186.

Table of Contents

COSTCO WHOLESALE CORPORATION

INDEX TO FORM 10-Q



		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income	4
	Condensed Consolidated Statements of Comprehensive Income	5
	Condensed Consolidated Statements of Equity	6
	Condensed Consolidated Statements of Cash Flows	68
	Notes to Condensed Consolidated Financial Statements	79
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1820
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2729
Item 4.	Controls and Procedures	2729

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	2830
Item 1A.	Risk Factors	2830
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2830
Item 3.	Defaults Upon Senior Securities	2830
Item 4.	Mine Safety Disclosures	2830
Item 5.	Other Information	2830
Item 6.	Exhibits	2931
	Signatures	2931

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1—Financial Statements

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in millions, except par value and share data)

(unaudited)


	May 13, 2018			September 3, 2017			May 12, 2019			September 2, 2018
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	5,877		$	4,546		$	7,013		$	6,055
Short-term investments	1,167			1,233			1,154			1,204
Receivables, net	1,593			1,432			1,704			1,669
Merchandise inventories	10,626			9,834			11,304			11,040
Other current assets	430			272			1,110			321
Total current assets	19,693			17,317			22,285			20,289
PROPERTY AND EQUIPMENT
Land	6,093			5,690			6,310			6,193
Buildings and improvements	15,786			15,127			16,644			16,107
Equipment and fixtures	7,161			6,681			7,858			7,274
Construction in progress	1,070			843			1,412			1,140
	30,110			28,341			32,224			30,714
Less accumulated depreciation and amortization	(10,932		)	(10,180		)	(11,749		)	(11,033		)
Net property and equipment	19,178			18,161			20,475			19,681
OTHER ASSETS	734			869			992			860
TOTAL ASSETS	$	39,605		$	36,347		$	43,752		$	40,830
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable	$	10,705		$	9,608		$	11,331		$	11,237
Accrued salaries and benefits	2,697			2,703			2,888			2,994
Accrued member rewards	1,041			961			1,160			1,057
Deferred membership fees	1,679			1,498			1,761			1,624
Current portion of long-term debt							1,699			90
Other current liabilities	3,289			2,725			3,993			2,924
Total current liabilities	19,411			17,495			22,832			19,926
LONG-TERM DEBT, excluding current portion	6,492			6,573			4,799			6,487
OTHER LIABILITIES	1,255			1,200			1,301			1,314
Total liabilities	27,158			25,268			28,932			27,727
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; 438,602,000 and 437,204,000 shares issued and outstanding	4			4
Preferred stock $0.01 par value; 100,000,000 shares authorized; no shares issued and outstanding							0			0
Common stock $0.01 par value; 900,000,000 shares authorized; 439,811,000 and 438,189,000 shares issued and outstanding							4			4
Additional paid-in capital	6,001			5,800			6,307			6,107
Accumulated other comprehensive loss	(1,038		)	(1,014		)	(1,321		)	(1,199		)
Retained earnings	7,176			5,988			9,496			7,887
Total Costco stockholders’ equity	12,143			10,778			14,486			12,799
Noncontrolling interests	304			301			334			304
Total equity	12,447			11,079			14,820			13,103
TOTAL LIABILITIES AND EQUITY	$	39,605		$	36,347		$	43,752		$	40,830

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(amounts in millions, except per share data)

(unaudited)


	12 Weeks Ended						36 Weeks Ended						12 Weeks Ended						36 Weeks Ended
	May 13, 2018			May 7, 2017			May 13, 2018			May 7, 2017			May 12, 2019			May 13, 2018			May 12, 2019			May 13, 2018
REVENUE
Net sales	$	31,624		$	28,216		$	95,020		$	84,815		$	33,964		$	31,624		$	102,903		$	95,020
Membership fees	737			644			2,145			1,910			776			737			2,302			2,145
Total revenue	32,361			28,860			97,165			86,725			34,740			32,361			105,205			97,165
OPERATING EXPENSES
Merchandise costs	28,131			24,970			84,481			75,185			30,233			28,131			91,576			84,481
Selling, general and administrative	3,155			2,907			9,613			8,827			3,371			3,155			10,310			9,613
Preopening expenses	8			15			37			52			14			8			45			37
Operating income	1,067			968			3,034			2,661			1,122			1,067			3,274			3,034
OTHER INCOME (EXPENSE)
Interest expense	(37		)	(21		)	(111		)	(81		)	(35		)	(37		)	(105		)	(111		)
Interest income and other, net	41			18			70			40			36			41			104			70
INCOME BEFORE INCOME TAXES	1,071			965			2,993			2,620			1,123			1,071			3,273			2,993
Provision for income taxes	309			259			867			838			207			309			679			867
Net income including noncontrolling interests	762			706			2,126			1,782			916			762			2,594			2,126
Net income attributable to noncontrolling interests	(12		)	(6		)	(35		)	(22		)	(10		)	(12		)	(32		)	(35		)
NET INCOME ATTRIBUTABLE TO COSTCO	$	750		$	700		$	2,091		$	1,760		$	906		$	750		$	2,562		$	2,091
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO:
Basic	$	1.71		$	1.59		$	4.77		$	4.01		$	2.06		$	1.71		$	5.83		$	4.77
Diluted	$	1.70		$	1.59		$	4.74		$	3.99		$	2.05		$	1.70		$	5.79		$	4.74
Shares used in calculation (000’s):
Basic	438,740			438,817			438,576			438,650			439,859			438,740			439,767			438,576
Diluted	441,715			441,056			441,383			440,745			442,642			441,715			442,565			441,383
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.57		$	7.50		$	1.57		$	8.40

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in millions)

(unaudited)


	12 Weeks Ended					36 Weeks Ended						12 Weeks Ended						36 Weeks Ended
	May 13, 2018			May 7, 2017		May 13, 2018			May 7, 2017			May 12, 2019			May 13, 2018			May 12, 2019			May 13, 2018
NET INCOME INCLUDING NONCONTROLLING INTERESTS	$	762		$	706	$	2,126		$	1,782		$	916		$	762		$	2,594		$	2,126
Foreign-currency translation adjustment and other, net	(149		)	21		(22		)	(210		)	(42		)	(149		)	(124		)	(22		)
Comprehensive income	613			727		2,104			1,572			874			613			2,470			2,104
Less: Comprehensive income attributable to noncontrolling interests	4			15		37			34			9			4			30			37
COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO	$	609		$	712	$	2,067		$	1,538		$	865		$	609		$	2,440		$	2,067

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~EQUITY

(amounts in millions)

(unaudited)

36 Weeks Ended
May 13,
2018 May 7,
2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income including noncontrolling interests $ 2,126
$ 1,782
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization 1,006
929
Stock-based compensation 431
404
Other non-cash operating activities, net (3 ) (66 )
Deferred income taxes (21 ) 47
Changes in operating assets and liabilities:
Merchandise inventories (828 ) (952 )
Accounts payable 1,160
2,234
Other operating assets and liabilities, net 349
514
Net cash provided by operating activities 4,220
4,892
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (679 ) (901 )
Maturities and sales of short-term investments 743
1,046
Additions to property and equipment (1,913 ) (1,723 )
Other investing activities, net (3 ) 28
Net cash used in investing activities (1,852 ) (1,550 )
CASH FLOWS FROM FINANCING ACTIVITIES
Change in bank checks outstanding (23 ) (243 )
Repayments of long-term debt (58 ) (1,100 )
Tax withholdings on stock-based awards (217 ) (202 )
Repurchases of common stock (238 ) (236 )
Cash dividend payments (439 ) (396 )
Other financing activities, net (39 ) 36
Net cash used in financing activities (1,014 ) (2,141 )
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (23 ) (42 )
Net change in cash and cash equivalents 1,331
1,159
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 4,546
3,379
CASH AND CASH EQUIVALENTS END OF PERIOD $ 5,877
$ 4,538

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the first thirty-six weeks of year for:
Interest (reduced by $11 and $12 for interest capitalized in 2018 and 2017, respectively) $ 81
$ 99
Income taxes, net $ 779
$ 529
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Cash dividend declared, but not yet paid $ 250
$ 3,290



	12 Weeks Ended May 12, 2019
	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		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests			Total Equity
BALANCE AT FEBRUARY 17, 2019	439,989		$	4	$	6,218		$	(1,280	)	$	8,916		$	13,858		$	325		$	14,183
Net income	—		—		—			—			906			906			10			916
Foreign-currency translation adjustment and other, net	—		—		—			(41		)	—			(41		)	(1		)	(42		)
Stock-based compensation	—		—		93			—			—			93			—			93
Release of vested restricted stock units (RSUs), including tax effects	14		—		(1		)	—			—			(1		)	—			(1		)
Repurchases of common stock	(192	)	—		(3		)	—			(41		)	(44		)	—			(44		)
Cash dividend declared and other	—		—		—			—			(285		)	(285		)	—			(285		)
BALANCE AT MAY 12, 2019	439,811		$	4	$	6,307		$	(1,321	)	$	9,496		$	14,486		$	334		$	14,820

	12 Weeks Ended May 13, 2018
	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		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests			Total Equity
BALANCE AT FEBRUARY 18, 2018	438,883		$	4	$	5,920		$	(897	)	$	6,727		$	11,754		$	299		$	12,053
Net income	—		—		—			—			750			750			12			762
Foreign-currency translation adjustment and other, net	—		—		—			(141		)	—			(141		)	(8		)	(149		)
Stock-based compensation	—		—		86			—			—			86			—			86
Release of vested RSUs, including tax effects	9		—		(1		)	—			—			(1		)	—			(1		)
Repurchases of common stock	(290	)	—		(5		)	—			(50		)	(55		)	—			(55		)
Cash dividend declared and other	—		—		1			—			(251		)	(250		)	1			(249		)
BALANCE AT May 13, 2018	438,602		$	4	$	6,001		$	(1,038	)	$	7,176		$	12,143		$	304		$	12,447

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(amounts in millions)

(unaudited)



	36 Weeks Ended May 12, 2019
	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		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests			Total Equity
BALANCE AT SEPTEMBER 2, 2018	438,189		$	4	$	6,107		$	(1,199	)	$	7,887		$	12,799		$	304		$	13,103
Net income	—		—		—			—			2,562			2,562			32			2,594
Foreign-currency translation adjustment and other, net	—		—		—			(122		)	—			(122		)	(2		)	(124		)
Stock-based compensation	—		—		484			—			—			484			—			484
Release of vested RSUs, including tax effects	2,525		—		(271		)	—			—			(271		)	—			(271		)
Repurchases of common stock	(903	)	—		(13		)	—			(182		)	(195		)	—			(195		)
Cash dividend declared and other	—		—		—			—			(771		)	(771		)	—			(771		)
BALANCE AT MAY 12, 2019	439,811		$	4	$	6,307		$	(1,321	)	$	9,496		$	14,486		$	334		$	14,820

	36 Weeks Ended May 13, 2018
	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		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests			Total Equity
BALANCE AT SEPTEMBER 3, 2017	437,204		$	4	$	5,800		$	(1,014	)	$	5,988		$	10,778		$	301		$	11,079
Net income	—		—		—			—			2,091			2,091			35			2,126
Foreign-currency translation adjustment and other, net	—		—		—			(24		)	—			(24		)	2			(22		)
Stock-based compensation	—		—		434			—			—			434			—			434
Release of vested RSUs, including tax effects	2,735		—		(217		)	—			—			(217		)	—			(217		)
Repurchases of common stock	(1,337	)	—		(19		)	—			(214		)	(233		)	—			(233		)
Cash dividend declared and other	—		—		3			—			(689		)	(686		)	(34		)	(720		)
BALANCE AT May 13, 2018	438,602		$	4	$	6,001		$	(1,038	)	$	7,176		$	12,143		$	304		$	12,447

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in millions)

(unaudited)



	36 Weeks Ended
	May 12, 2019			May 13, 2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income including noncontrolling interests	$	2,594		$	2,126
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization	1,019			1,006
Stock-based compensation	482			431
Other non-cash operating activities, net	10			(3		)
Deferred income taxes	(33		)	(21		)
Changes in operating assets and liabilities:
Merchandise inventories	(409		)	(828		)
Accounts payable	0			1,160
Other operating assets and liabilities, net	400			349
Net cash provided by operating activities	4,063			4,220
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments	(753		)	(679		)
Maturities and sales of short-term investments	800			743
Additions to property and equipment	(1,989		)	(1,913		)
Other investing activities, net	(3		)	(3		)
Net cash used in investing activities	(1,945		)	(1,852		)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in bank payments outstanding	166			(23		)
Repayments of long-term debt	(89		)	(58		)
Tax withholdings on stock-based awards	(271		)	(217		)
Repurchases of common stock	(195		)	(238		)
Cash dividend payments	(752		)	(439		)
Other financing activities, net	(5		)	(39		)
Net cash used in financing activities	(1,146		)	(1,014		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(14		)	(23		)
Net change in cash and cash equivalents	958			1,331
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR	6,055			4,546
CASH AND CASH EQUIVALENTS END OF PERIOD	$	7,013		$	5,877

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the first thirty-six weeks of year for:
Interest	$	72		$	81
Income taxes, net	$	780		$	779
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Cash dividend declared, but not yet paid	$	285		$	250

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

COSTCO WHOLESALE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in millions, except share, per share, and warehouse count data)

(unaudited)

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 ~~and e-commerce websites~~ based on the concept that offering ~~its~~ members low prices on a limited selection of ~~nationally branded~~nationally-branded and private-label ~~merchandise~~products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. AtFor the period ended May ~~13, 2018,~~12, 2019, Costco operated ~~749~~772 warehouses worldwide: ~~519~~535 in the United States (U.S.) ~~locations (in~~located in 44 states, Washington, D.C., and Puerto ~~Rico), 98~~Rico, 100 in Canada, ~~locations, 38~~39 in Mexico, ~~locations,~~ 28 in the United Kingdom (U.K.) ~~locations,~~, 26 in Japan, ~~locations, 14~~16 in Korea, ~~locations,~~ 13 in Taiwan, ~~locations, nine~~11 in Australia, ~~locations,~~ two in Spain, ~~locations, one Iceland location,~~ and one ~~France location.~~each in Iceland and France. The Company operates e-commerce websites in the U.S., Canada, Mexico, U.K., Korea, and Taiwan.

Basis of Presentation

The condensed consolidated financial statements include the accounts of Costco, its wholly-owned subsidiaries, and subsidiaries in which it has a controlling interest. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company’s equity. All material inter-company transactions between and among the Company and its consolidated subsidiaries have been eliminated in consolidation. The Company’s net income excludes income attributable to the noncontrolling interest in Taiwan. During the first quarter of 2018, ~~Costco~~the Company purchased its former joint venture partner's remaining equity interest in its Korean operations. Unless otherwise noted, references to net income relate to net income attributable to Costco.

These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (U.S. GAAP) for complete financial statements. Therefore, the interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report filed on Form 10-K for the fiscal year ended September ~~3, 2017.~~2, 2018.

Fiscal Year End

The Company operates on a 52/53 week fiscal year basis, with the fiscal year ending on the Sunday closest to August 31. Fiscal ~~2018~~2019 is a ~~52-week~~52 week year ending on September ~~2, 2018.~~1, 2019. References to the third ~~quarters~~quarter of ~~2018~~2019 and ~~2017~~2018 relate to the ~~12-week~~12 week fiscal quarters ended May ~~13, 2018,~~12, 2019, and May ~~7, 2017,~~13, 2018, respectively. References to the first thirty-six weeks of ~~2018~~2019 and ~~2017~~2018 relate to the ~~thirty-six~~36 weeks ended May ~~13, 2018,~~12, 2019, and May ~~7, 2017,~~13, 2018, respectively.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results ~~and events~~ could differ from those estimates and assumptions.

Table of Contents

~~Note 1—Summary of Significant Accounting Policies (Continued)~~

~~Fair Value~~Revenue Recognition

The Company recognizes sales for the amount of ~~Financial Instruments~~consideration collected from the member, which includes gross shipping fees where applicable, and is net of sales taxes collected and remitted to government agencies and returns. The Company reserves for estimated returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The Company records, on a gross basis, a refund liability and an asset for recovery, which are included in other current liabilities and other current assets, respectively, in the condensed consolidated balance sheets.

Merchandise Sales - The Company offers merchandise in the following core merchandise categories: food and sundries, hardlines, softlines, and fresh foods. The Company also provides expanded products and services through warehouse ancillary and other businesses. The majority of revenue from merchandise sales is recognized at the point of sale. Revenue generated through e-commerce or special orders is recognized upon shipment to the member to the extent there is no installation provided as a part of the contract. 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 condensed 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 condensed consolidated balance sheets.

Principal Versus Agent - The Company is the principal for the majority of its transactions and recognizes revenue on a gross basis. The Company is the principal when it has control of the merchandise or service before it is transferred to the member, which generally is established when Costco is primarily responsible for merchandising decisions, maintains the relationship with the member, including assurance of member service and satisfaction, and has pricing discretion.

Membership Fees - The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one-year membership period. For the first thirty-six weeks of 2019, the Company recognized $2,302 of membership fees, of which $1,451 was included in deferred membership at the end of 2018.

In certain ~~assets~~countries, the Company's Executive members qualify for a 2% reward on qualified purchases (up to a maximum of approximately $1,000 per year), which does not expire and ~~liabilities~~can be redeemed only at ~~fair value.~~Costco warehouses. The ~~carrying value~~Company accounts for this reward as a reduction in sales, net of the ~~Company’s financial instruments, including~~estimated impact of non-redemptions (breakage), with the corresponding liability classified as accrued member rewards in the condensed consolidated balance sheets. Estimated breakage is computed based on redemption data. In the third quarter of 2019 and 2018 the net reduction in sales was $346 and $316, respectively. In the first thirty-six weeks of 2019 and 2018 the net reduction in sales was $1,060 and $962, respectively.

Cash Cards - The Company sells and otherwise provides proprietary cash cards that do not expire 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~~are redeemable at the ~~measurement date. Fair value~~warehouse or online for merchandise or membership. Revenue from cash cards is recognized upon redemption, and 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~~breakage is recognized based on redemption data.

~~Level 3: Significant unobservable inputs that are not corroborated by market data.~~

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, which are amortized to interest expense over the term of the loan. 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 2017 Form 10-K.

~~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~~accounts for outstanding cash card balances as a cash card liability, net of ~~operations by more closely matching current costs with current revenues. The Company records adjustments quarterly, if necessary, for the projected annual effect of inflation or deflation,~~estimated breakage and these estimates are adjusted at fiscal year-end, after actual inflation rates and inventory levels have been determined. Canadian and Other International merchandise inventories are predominantly valued using the cost and retail inventory methods, respectively, using the first-in, first-out (FIFO) basis.

~~As of May 13, 2018, and September 3, 2017, U.S. merchandise inventories valued at LIFO approximated FIFO after considering the lower of cost or market principle.~~

~~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, whose functional currency is not the U.S. dollar. These contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate risk with the use of these contracts and does not intend to engage in speculative transactions. Some of these contracts contain credit-risk-related contingent features that require settlement of outstanding contracts upon certain triggering events. At May 13, 2018, and September 3, 2017, the aggregate fair value amounts of derivative instruments in a net liability position and the amount needed to settle the instruments immediately if the credit-risk-related contingent features were triggered were immaterial. The aggregate notional amounts of unsettled forward foreign-exchange contracts were $663 and $637 at May 13, 2018, and September 3, 2017, 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 as of May ~~13, 2018,~~12, 2019, and September ~~3, 2017.~~2, 2018, the liability was not material.

Co-Branded Credit Card Program - Citibank, N.A. (“Citi”) became the exclusive issuer of co-branded credit cards to U.S. members in June 2016. The Company receives various forms of consideration, including a royalty on purchases made on the card outside of Costco, a portion of which, after giving rise to estimated breakage, is used to fund the rebate that cardholders receive. The rebates are issued in February and expire on December 31 of each year. Breakage is estimated based on redemption data.

810

Table of Contents

~~Note 1—Summary of Significant Accounting Policies (Continued)~~

The unrealized gains or losses recognized in interest income and other, net in the accompanying condensed consolidated statements of income relating to the net changes in the fair value of unsettled forward foreign-exchange contracts was a net gain of $24 in the third quarter of 2018 and immaterial in the third quarter of 2017. The net changes in fair value of unsettled forward foreign-exchange contracts during the first thirty-six weeks of 2018 and 2017 were immaterial.

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 on an index basis for some purchases of natural gas and fuel for its gas stations. These contracts meet the characteristics of derivative instruments, but generally qualify for the “normal purchases or normal sales” exception under authoritative guidance and require no mark-to-market adjustment.

~~Foreign Currency~~

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 condensed 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. The net changes related to these items were immaterial in the third quarter and first thirty-six weeks of 2018 and 2017.

~~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 5 for additional information.

Recent Accounting Pronouncements Adopted

In ~~March 2016,~~May 2014, the Financial Accounting Standards Board (FASB) issued ~~guidance intended to simplify accounting~~Accounting Standards Update (ASU) 2014-09, providing for share-based payment transactions. The guidance relates to income taxes, forfeitures, and minimum statutory tax withholding requirements. The new standard was effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. The Company adopted this guidance at the beginning of its first quarter of fiscal year 2018. As a result,changes in the first thirty-six weeks of 2018 the Company recognized an excess tax benefit of $33 as part of its income tax provision in the accompanying condensed consolidated statements of income. Previously these amounts were reflected in equity. Additionally, these amounts are now reflected as cash flows from operations instead of cash flows from financing activities in the consolidated statements of cash flows on a prospective basis. Adoption of this guidance did not have a material impact on the consolidated balance sheets, consolidated statements of cash flows, or related disclosures.

~~Recent Accounting Pronouncements Not Yet Adopted~~

~~In May 2014, the FASB issued guidance on~~ the recognition of revenue from contracts with customers. The guidance ~~converges the requirements for reporting revenue and~~ requires disclosures sufficient to describe the nature, amount, timing, and uncertainty of revenue and cash flows. The ~~new~~Company adopted the 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~~in the ~~beginning of its~~ first quarter of ~~fiscal~~ 2019, using the modified retrospective approach, ~~through~~and recorded a cumulative effect adjustment of$16 as an increase to retained ~~earnings.~~

~~Table~~earnings, which is included in cash dividend declared and other in the condensed consolidated statements of ~~Contents~~

~~Note 1—Summary of Significant Accounting Policies (Continued)~~

equity.

The ~~Company has substantially completed its assessment~~standard impacted the presentation and timing of certain revenue transactions. Specifically, the changes included gross presentation of the ~~new~~Company’s estimate of merchandise returns reserve and the related recoverable assets, recognizing cash card breakage over the period of redemption, and accelerating the recognition of certain e-commerce and special-order sales. Additionally, the Company’s evaluation under the standard ~~and it does not believe~~of its status as a principal in certain vendor arrangements resulted in the ~~impacts to be material to~~recognition of additional sales on a gross basis.

The effect of the standard on the Company's condensed consolidated ~~financial statements. The Company continues~~balance sheet was an increase to ~~evaluate~~other current liabilities and other current assets of $649 and $694 at adoption and at the ~~disclosure requirements~~end of the third quarter of 2019, respectively, related to the ~~new standard.~~estimate of merchandise returns reserve and the related recoverable assets.

The effect of the adoption of this standard on the Company's condensed consolidated statement of income is as follows:



	As Reported		ASU 2014-09 Effect		Excluding ASU 2014-09 Effect
12 Weeks Ended May 12, 2019
Net Sales	$	33,964	$	346	$	33,618
Merchandise Costs	30,233		342		29,891
Gross Margin ⁽¹⁾	3,731		4		3,727

36 Weeks Ended May 12, 2019
Net Sales	$	102,903	$	865	$	102,038
Merchandise Costs	91,576		856		90,720
Gross Margin ⁽¹⁾	11,327		9		11,318

_______________


(1)	Net sales less merchandise costs.

For related disaggregated revenue disclosures, see Note 10.

Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ~~guidance on leases,~~ASU 2016-02, which ~~will require~~requires recognition on the balance sheet ~~for the~~of rights and obligations created by 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 ~~2020. While~~2020 and utilize the ~~Company continues~~transition option, which allows for a cumulative-effect adjustment in the period of adoption and does not require application of the guidance to ~~evaluate this standard and the effect on related disclosures, the~~comparative periods. The primary effect of adoption will be ~~to require~~ recording right-of-use assets and corresponding lease obligations for current operating leases. Although the Company continues to evaluate the effect to the Company's consolidated financial statements and disclosures, management currently estimates total assets and liabilities will increase by approximately $2,500 to $3,000 upon adoption. This estimate could change as the Company continues to progress with implementation and will also fluctuate based on the lease portfolio, discount rates and currency exchange

Table of Contents

rates as of the adoption date. The adoption is not expected to have a material impact onto the Company's ~~consolidated balance sheets, but not on the~~ consolidated statements of income or ~~consolidated statements~~cash flows. The Company is reviewing current accounting policies and related disclosures, and evaluating changes to business processes, systems and controls to support adoption of ~~cash flows.~~the new standard, which includes implementing a new lease accounting system.

Note 2—Investments

The Company's investments were as follows:


May 13, 2018:	Cost Basis		Unrealized Loss, Net			Recorded Basis
May 12, 2019:								Cost Basis		Unrealized Loss, Net			Recorded Basis
Available-for-sale:
Government and agency securities	$	914	$	(17	)	$	897	$	860	$	(3	)	$	857
Held-to-maturity:
Certificates of deposit	270					270		297					297
Total short-term investments	$	1,184	$	(17	)	$	1,167	$	1,157	$	(3	)	$	1,154


September 3, 2017:	Cost Basis		Unrealized Gains, Net		Recorded Basis
September 2, 2018:							Cost Basis		Unrealized Loss, Net			Recorded Basis
Available-for-sale:
Government and agency securities	$	947	$	0	$	947	$	912	$	(14	)	$	898
Mortgage-backed securities	1		0		1
Total available-for-sale	948		0		948
Held-to-maturity:
Certificates of deposit	285				285		306					306
Total short-term investments	$	1,233	$	0	$	1,233	$	1,218	$	(14	)	$	1,204

Gross unrecognized holding gains and losses on available-for-sale securities were not material for the periods ended May 12, 2019, and September 2, 2018. At May ~~13, 2018,~~12, 2019, and September ~~3, 2017,~~2, 2018, available-for-sale securities ~~with continuous~~in an unrealized-loss ~~positions~~position were ~~immaterial.~~ not material.

There were no sales of available-for-sale securities during the ~~third quarter~~first thirty-six weeks of ~~2018. Proceeds from sales of available-for-sale securities were $121 during the third quarter of 2017.~~2019. Proceeds from sales of available-for-sale securities were $39 ~~and $187~~ during the first thirty-six weeks of ~~2018 and 2017, respectively.~~2018. Gross ~~unrealized and~~ realized gains orand losses for ~~the quarter~~these sales were not material.

The maturities of available-for-sale and ~~first thirty-six weeks of 2018 and 2017 were immaterial.~~held-to-maturity securities at May 12, 2019, are as follows:



	Available-For-Sale				Held-To-Maturity
	Cost Basis		Fair Value		Held-To-Maturity
Due in one year or less	$	397	$	396	$	297
Due after one year through five years	441		439		0
Due after five years	22		22		0
Total	$	860	$	857	$	297

1012

Table of Contents

~~Note 2—Investments (Continued)~~

~~The maturities of available-for-sale and held-to-maturity securities at May 13, 2018, were as follows:~~

Available-For-Sale Held-To-Maturity
Cost Basis Fair Value
Due in one year or less $ 207
$ 206
$ 270
Due after one year through five years 687
672
0
Due after five years 20
19
0
Total $ 914
$ 897
$ 270

Note 3—Fair Value Measurement

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The tables below present information regarding financial assets and financial liabilities that are measured at fair value on a recurring basis and indicate the level within the hierarchy reflecting the valuation techniques utilized to determine fair value.

May 13, 2018: Level 1 Level 2
Money market mutual funds⁽¹⁾
$ 8
$ 0
Investment in government and agency securities⁽²⁾
0
907
Forward foreign-exchange contracts, in asset position⁽³⁾
0
10
Forward foreign-exchange contracts, in (liability) position⁽³⁾
0
(3 )
Total $ 8
$ 914



May 12, 2019:	Level 1		Level 2
Investment in government and agency securities⁽¹⁾	$	0	$	1,009
Forward foreign-exchange contracts, in asset position⁽²⁾	0		7
Forward foreign-exchange contracts, in (liability) position⁽²⁾	0		(3		)
Total	$	0	$	1,013

September 3, 2017: Level 1 Level 2
Money market mutual funds⁽¹⁾
$ 7
$ 0
Investment in government and agency securities⁽²⁾
0
947
Investment in mortgage-backed securities 0
1
Forward foreign-exchange contracts, in asset position⁽³⁾
0
2
Forward foreign-exchange contracts, in (liability) position⁽³⁾
0
(8 )
Total $ 7
$ 942



September 2, 2018:	Level 1		Level 2
Money market mutual funds⁽³⁾	$	9	$	0
Investment in government and agency securities⁽¹⁾	0		903
Forward foreign-exchange contracts, in asset position⁽²⁾	0		16
Forward foreign-exchange contracts, in (liability) position⁽²⁾	0		(2		)
Total	$	9	$	917

_______________


(1)	~~Included in~~At May 12, 2019, $152 cash and cash equivalents and $857 short-term investments are included in the accompanying condensed consolidated balance sheets. At September 2, 2018, immaterial cash and cash equivalents and $898 short-term investments are included in the accompanying condensed consolidated balance sheets.


(2)	At May 13, 2018, $10 and $897 were included in cash and cash equivalents and short-term investments, respectively, in the accompanying condensed consolidated balance sheets. At September 3, 2017, there were no securities included in cash and cash equivalents and $947 included in short-term investments in the accompanying condensed consolidated balance sheets.


~~(3)~~	The asset and the liability values are included in other current assets and other current liabilities, respectively, in the accompanying condensed consolidated balance sheets. ~~See Note 1 for additional information on derivative instruments.~~


(3)	Included in cash and cash equivalents in the accompanying condensed consolidated balance sheets.

During and at the periods ended May ~~13, 2018,~~12, 2019, and September ~~3, 2017,~~2, 2018, the Company did not hold any Level 3 financial assets or liabilities that were measured at fair value on a recurring basis. There were no transfers in or out of Level 1 or 2 during the third quarter or the first thirty-six weeks of ~~2018~~2019 or ~~2017.~~2018.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Assets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as financial assets recorded at amortized cost and long-lived nonfinancial assets. These assets are measured at fair value if determined to be impaired. There were no fair value adjustments to these items during the thirdquarter or first thirty-six weeks of ~~2018 or 2017.~~2019 and 2018.

1113

Table of Contents

Note 4—Debt

The carrying value of the Company’s long-term debt consisted of the following:


	May 13, 2018		September 3, 2017		May 12, 2019		September 2, 2018
1.70% Senior Notes due December 2019	$	1,198	$	1,198	$	1,200	$	1,200
1.75% Senior Notes due February 2020	499		498		500		500
2.15% Senior Notes due May 2021	995		994		1,000		1,000
2.25% Senior Notes due February 2022	498		497		500		500
2.30% Senior Notes due May 2022	794		793		800		800
2.75% Senior Notes due May 2024	992		991		1,000		1,000
3.00% Senior Notes due May 2027	986		986		1,000		1,000
Other long-term debt	649		702		529		613
Total long-term debt	6,611		6,659		6,529		6,613
Less unamortized debt discounts and issuance costs					31		36
Less current portion	119		86		1,699		90
Long-term debt, excluding current portion	$	6,492	$	6,573	$	4,799	$	6,487

The estimated fair value of Senior Notes is valued using Level 2 inputs. Other long-term debt consists ~~primarily~~ of ~~promissory notes and term loans~~Guaranteed Senior Notes issued by the Company's Japan subsidiary and are valued ~~primarily~~ using Level 3 inputs. The fair value of the Company's long-term debt, including the current portion, was approximately ~~$6,493~~$6,519 and ~~$6,753~~$6,492 at May ~~13, 2018,~~12, 2019, and September ~~3, 2017,~~2, 2018, respectively.

Note 5—Equity ~~and Comprehensive Income~~

Dividends

The Company’s current quarterly dividend rate is ~~$0.57~~$0.65 per share, compared to ~~$0.50 per share~~$0.57 in the third quarter of ~~2017.~~2018. On April ~~24, 2018,~~26, 2019, the Board of Directors declared a quarterly ~~cash~~ dividend in the amount of ~~$0.57~~$0.65 per share, which was paid on May ~~25, 2018.~~24, 2019.

Stock Repurchase Programs

Stock repurchase activity during the third quarter and first thirty-six weeks of ~~2018~~2019 and ~~2017~~2018 is summarized below:

Shares Repurchased (000's) Average Price per Share Total Cost
Third quarter of 2018 290
$ 189.66
$ 55
First thirty-six weeks of 2018 1,337
$ 174.30
$ 233

Third quarter of 2017 266
$ 168.09
$ 45
First thirty-six of 2017 1,486
$ 156.51
$ 233



	Shares Repurchased (000's)	Average Price per Share		Total Cost
Third quarter of 2019	192	$	226.57	$	44
First thirty-six weeks 2019	903	$	215.94	$	195

Third quarter of 2018	290	$	189.66	$	55
First thirty-six weeks 2018	1,337	$	174.30	$	233

These amounts may differ from the stock repurchase balances in the accompanying condensed consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of a quarter. On April 26, 2019, the Board of Directors authorized a new share repurchase program in the amount of $4,000, which expires in April 2023. This authorization revoked previously authorized but unused amounts, totaling $2,237. The remaining amount available for stock repurchases under ~~our~~the approved plan ~~which expires in April 2019,~~ was ~~$2,516~~$3,995 at May ~~13, 2018.~~12,

Table of Contents

2019. 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.

~~Table of Contents~~

~~Note 5—Equity and Comprehensive Income (Continued)~~

~~Components of Equity and Comprehensive Income~~

~~The following tables show the changes in equity attributable to Costco and the noncontrolling interests of consolidated subsidiaries:~~

Attributable to Costco
Noncontrolling
Interests

Total
Equity
Equity at September 3, 2017 $ 10,778
$ 301
$ 11,079
Comprehensive income:
Net income 2,091
35
2,126
Foreign-currency translation adjustment and other, net (24 ) 2
(22 )
Comprehensive income 2,067
37
2,104
Stock-based compensation 434
0
434
Release of vested restricted stock units (RSUs), including tax effects (217 ) 0
(217 )
Repurchases of common stock (233 ) 0
(233 )
Cash dividends declared and other (686 ) (34 ) (720 )
Equity at May 13, 2018 $ 12,143
$ 304
$ 12,447

Attributable to Costco
Noncontrolling
Interests

Total
Equity
Equity at August 28, 2016 $ 12,079
$ 253
$ 12,332
Comprehensive income:
Net income 1,760
22
1,782
Foreign-currency translation adjustment and other, net (222 ) 12
(210 )
Comprehensive income 1,538
34
1,572
Stock-based compensation 404
0
404
Release of vested RSUs, including tax effects (165 ) 0
(165 )
Repurchases of common stock (233 ) 0
(233 )
Cash dividends declared and other (3,725 ) 0
(3,725 )
Equity at May 7, 2017 $ 9,898
$ 287
$ 10,185

Note 6—Stock-Based Compensation

~~The~~On January 24, 2019, our shareholders approved the adoption of the 2019 Incentive Plan, which replaced the Seventh Restated 2002 Stock Incentive Plan (Seventh Plan). The 2019 Incentive Plan authorized the issuance of ~~23,500,000~~17,500,000 shares ~~(13,429,000~~(10,000,000 RSUs) of common stock for future grants, ~~in addition to~~plus the remaining shares ~~authorized~~that were available for grant under the ~~previous plan.~~Seventh Plan on January 24, 2019 and future forfeited shares from grants under the Seventh Plan up to a maximum aggregate of 27,800,000 shares (15,885,000 RSUs). The Company issues new shares of common stock upon vesting of RSUs. Shares for vested RSUs are generally delivered to participants annually, net of shares withheld for ~~statutory~~ taxes.

~~Table of Contents~~

~~Note 6—Stock-Based Compensation (Continued)~~

Summary of Restricted Stock Unit Activity

At May ~~13, 2018, 8,262,000~~12, 2019, 15,649,000 shares were available to be granted as RSUs and the following awards were outstanding:

~~7,305,000~~6,307,000 time-based RSUs that vest upon continued employment over specified periods of time;

~~127,000~~78,000 performance-based RSUs, granted to executive officers of the Company, for which the performance targets have been met. The awards vest upon continued employment over specified periods of time; and

~~205,000~~150,000 performance-based RSUs, granted to executive officers of the Company, subject to achievement of performance targets for fiscal ~~2018,~~2019, as determined by the Compensation Committee of the Board of Directors after the end of the fiscal year. These awards are included in the table below and the Company ~~has~~ recognized compensation expense for these awards as it is currently deemed probable that the targets will be achieved.

The following table summarizes RSU transactions during the first thirty-six weeks of ~~2018:~~2019:


	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 September 3, 2017	8,199		$	128.15
Outstanding at September 2, 2018					7,578		$	140.85
Granted	3,722		156.19		2,792		224.00
Vested and delivered	(4,080	)	129.49		(3,707	)	155.64
Forfeited	(204	)	138.42		(128	)	163.68
Outstanding at May 13, 2018	7,637		$	140.83
Outstanding at May 12, 2019					6,535		$	167.55

The remaining unrecognized compensation cost related to non-vested RSUs at May ~~13, 2018,~~12, 2019, was ~~$819,~~$817, and the weighted-average period over which this cost will be recognized is 1.7 years.

Summary of Stock-Based Compensation

The following table summarizes stock-based compensation expense and the related tax benefits under the Company’s plans:


	12 Weeks Ended						36 Weeks Ended						12 Weeks Ended						36 Weeks Ended
	May 13, 2018			May 7, 2017			May 13, 2018			May 7, 2017			May 12, 2019			May 13, 2018			May 12, 2019			May 13, 2018
Stock-based compensation expense before income taxes	$	85		$	82		$	431		$	404		$	93		$	85		$	482		$	431
Less recognized income tax benefit ⁽¹⁾	(19		)	(26		)	(98		)	(132		)	(20		)	(19		)	(104		)	(98		)
Stock-based compensation expense, net of income taxes	$	66		$	56		$	333		$	272		$	73		$	66		$	378		$	333

~~_______________~~


~~(1)~~	~~For 2018, the tax benefit reflects the reduction in the U.S. federal statutory income tax rate from 35% to 21%.~~

1415

Table of Contents

~~Note 7—Income Taxes~~

~~In December 2017,~~Note 7—Taxes

Income Taxes

The effective tax rate for the ~~Tax Cuts~~third quarter and ~~Jobs Act (the “2017 Tax Act”)~~first thirty-six weeks of 2019 was ~~signed into law. Except for certain provisions,~~favorably impacted by the 2017 Tax Act is effective for tax years beginning on or after January 1, 2018. The Company is a fiscal-year taxpayer, so most provisions will become effective for fiscal 2019, including limitations on the Company’s ability to claim foreign tax credits, repeal of the domestic manufacturing deduction, and limitations on certain business deductions. Provisions with significant impacts that were effective starting in the second quarter of fiscal 2018 and throughout the remainder of fiscal 2018 include: a decreasereduction in the U.S. federal ~~income~~corporate tax rate ~~remeasurement~~from 35% to 21%, which was in effect for the entire third quarter and first thirty-six weeks of ~~certain net deferred tax liabilities,~~2019, as compared to a higher blended rate effective for the third quarter and ~~a transition tax on deemed repatriation~~first thirty-six weeks of ~~certain foreign earnings.~~2018. The ~~decrease in the U.S. federal statutory income~~effective tax rate ~~to 21% will result in a blended rate~~ for ~~the Company of 25.6% for fiscal 2018.~~

~~During~~ the first thirty-six weeks of ~~2018, the Company recognized~~2019 included discrete net tax benefits of ~~$131~~$165. During the third quarter of 2019, the Company recognized a net benefit of $73 related to U.S. taxation of deemed foreign dividends, net of losses of current year foreign tax credits, which impacted the ~~2017 Tax Act,~~effective tax rate. The tax rate for the first thirty-six weeks of 2019 was 26.8%, excluding the discrete benefits, but including the impact of ~~lowering~~ the ~~U.S. federal corporate rate. This benefit also included discrete tax expense of $142 for the estimated tax on deemed repatriation of foreign earnings, and $43 for the reduction in~~lost foreign tax ~~credits and~~credits.

Other Taxes

The Company is undergoing multiple examinations for value added, sales-based, payroll, import or other ~~immaterial items, largely offset by a tax benefit of $160 for the provisional remeasurement of~~non-income taxes in various jurisdictions. In certain deferred tax liabilities. These items were predominantly recorded in the second quarter as provisional amounts to reflect the Company's current interpretations and estimates that it believes are reasonable. Ascases, the Company ~~continues to evaluate~~has received assessments from the ~~2017 Tax Act and available data, it anticipates that adjustments may~~authorities. The possible losses or range of possible losses associated with these matters are either immaterial or an estimate of the possible loss or range of loss cannot be made at this time. If certain matters or a group of matters were to be decided adversely to the Company, it could result in ~~future periods up~~a charge that might be material to ~~and including~~ the ~~first~~results of an individual fiscal quarter ~~of fiscal 2019.~~

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, all of which are subject to continuing review.or year.

Note 8—Net Income per Common and Common Equivalent Share

The following table shows the amounts used in computing net income per share and the weighted average number of shares of potentially dilutive common shares outstanding (shares in 000’s):


	12 Weeks Ended				36 Weeks Ended				12 Weeks Ended				36 Weeks Ended
	May 13, 2018		May 7, 2017		May 13, 2018		May 7, 2017		May 12, 2019		May 13, 2018		May 12, 2019		May 13, 2018
Net income attributable to Costco	$	750	$	700	$	2,091	$	1,760	$	906	$	750	$	2,562	$	2,091
Weighted average number of common shares used in basic net income per common share	438,740		438,817		438,576		438,650		439,859		438,740		439,767		438,576
RSUs and other	2,975		2,239		2,807		2,095
RSUs									2,783		2,975		2,798		2,807
Weighted average number of common shares and dilutive potential of common stock used in diluted net income per share	441,715		441,056		441,383		440,745		442,642		441,715		442,565		441,383

Table of Contents

Note 9—Commitments and Contingencies

Legal Proceedings

The Company is involved in a number of claims, proceedings and litigation arising from its business and property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. There may be exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss (taking into account where applicable indemnification arrangements concerning suppliers and insurers) and the accrued amount, if any, thereof, and adjusts the amount as appropriate. As of the date of this Report, the Company has recorded an immaterial ~~accrual~~accruals with respect to ~~one matter~~certain matters described below, in addition to

~~Table of Contents~~

~~Note 9—Commitments and Contingencies (Continued)~~

other immaterial accruals for matters not described below. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot, in the Company's view, be reasonably estimated because, among other things: (i) the remedies or penalties sought are indeterminate or unspecified; (ii) the legal and/or factual theories are not well developed; and/or (iii) the matters involve complex or novel legal theories or a large number of parties.

The Company is a defendant in a class action alleging violation of California Wage Order 7-2001 for failing to provide seating to member service assistants who act as greeters ~~and exit attendants~~ in the Company’s California warehouses. Canela v. Costco Wholesale Corp., et al. (Case No. 5:~~13-cv-03598,~~13-CV-03598, N.D. Cal. filed July 1, 2013). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys’ fees. The Company filed an answer denying the material allegations of the complaint. The ~~plaintiff~~action in the district court has ~~since indicated that exit attendants are no longer a subject~~been stayed pending review by the Ninth Circuit of the ~~litigation.~~

order certifying a class. In January 2019, an employee brought similar claims for relief concerning Costco employees engaged at member services counters in California. Rodriguez v. Costco Wholesale Corp. (Case No. RG19001310, Alameda Superior Court filed Jan. 4, 2019). In December 2018, a depot employee raised similar claims, alleging that employees in California did not receive suitable seating or appropriate workplace temperature conditions. Lane v. Costco Wholesale Corp. (Dec. 6, 2018 Notice to California Labor and Workforce Development Agency). In January 2019, a former seasonal employee filed a class action, alleging failure to provide California seasonal employees meal and rest breaks, proper wage statements, and appropriate wages. Jadan v. Costco Wholesale Corp. (Case No. 19-CV-340438 Santa Clara Superior Court filed Jan. 3, 2019). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys’ fees. On ~~November 23, 2016, the Company’s Canadian subsidiary received from the Ontario Ministry of Health and Long Term Care~~March 25, 2019, employees filed a request for an inspection and information concerning compliance with the anti-rebate provisions in the Ontario Drug Benefit Act and the Drug Interchangeability and Dispensing Fee Act. The Company is seeking to cooperate with the request. The Ministry has indicated it has reason to believeclass action against the Company ~~received payments in violation of these laws.~~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. Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. Nevarez, et ano., v. Costco Wholesale Corp., et al. (Case No. 19ST-CV-10017 Los Angeles County Superior Court filed Mar. 25, 2019).

In December 2017, the United States Judicial Panel on Multidistrict Litigation ~~ordered~~consolidated numerous cases filed against various defendants by counties, cities, hospitals, Native Americantribes, and third-party payors concerning the impacts of opioid abuse. In re National Prescription Opiate Litigation~~(MDL~~ (MDL No. 2804) (N.D. Ohio). Included are federal~~court~~ cases that name the Company, including actions filed by ~~several~~a number of counties and cities in Michigan, ~~a city in~~ New Jersey, ~~and~~Oregon, a third-party payor in ~~Ohio.~~Ohio, and class actions filed on behalf of infants born with opioid-related medical conditions in New York, California, Illinois, Kentucky, Maryland, West Virginia, Ohio, and Missouri. Similar ~~cases that name~~claims against the Company ~~have been filed~~ in state courts in New Jersey and ~~Oklahoma.~~Oklahoma have been dismissed. The Company is defending all of these matters.

The Company and its CEO and CFO are defendants in putative class actions brought on behalf of shareholders who acquired Company stock between June 6 and October 25, 2018. Johnson v. Costco

Table of Contents

Wholesale Corp., et al. (W.D. Wash. filed Nov. 5, 2018); Chen v. Costco Wholesale Corp., et al. (W.D. Wash. filed Dec. 11, 2018). The complaints allege violations of the federal securities laws stemming from the Company’s disclosures concerning internal control over financial reporting. They seek unspecified damages, equitable relief, interest, and costs and attorneys’ fees. On January 30, 2019, an order was entered consolidating the actions and a consolidated amended complaint was filed on April 16, 2019. The Company expects the consolidated action to be vigorously defended.

Members of the Board of Directors, one other individual, and the Company are defendants in a shareholder derivative action related to the internal controls and related disclosures identified in the putative class actions, alleging that the individual defendants breached their fiduciary duties. Wedekind v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, Richard Libenson, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (W.D. Wash. filed Dec. 11, 2018). The complaint seeks unspecified damages, disgorgement of compensation, corporate governance changes, and costs and attorneys' fees. Because the complaint is derivative in nature, it does not seek monetary damages from the Company, which is a nominal defendant. By agreement among the parties the action has been stayed pending further proceedings in the class actions. Similar actions were filed in King County Superior Court on February 20, 2019, Elliott v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, Richard Libenson, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-04824-7), and April 16, 2019, Brad Shuman, et ano. v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-10460-1). These actions have also been stayed.

In November 2016 and September 2017, the Company received notices of violation from the Connecticut Department of Energy and Environmental Protection regarding hazardous waste practices at its Connecticut warehouses, primarily concerning unsalable pharmaceuticals. On February 13, 2019, the Company's affiliate in Spain received notice from the General Directorate on Environment and Sustainability of the Regional Government of Madrid that the Directorate is investigating issues concerning rain, sewage and hydrocarbon drainage related to the Company's warehouse in Getafe. The relief to be sought is not known at this time. The Company is seeking to cooperate concerning the resolution of these notices.

The Company does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company’s financial position, results of operations or cash flows; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual fiscal ~~quarter.~~quarter or year.

~~Table of Contents~~

Note 10—Segment Reporting

The Company and its subsidiaries are principally engaged in the operation of membership warehouses in the U.S., Canada, Mexico, U.K., Japan, Korea, Australia, Spain, Iceland and France and through a majority-owned subsidiary in Taiwan. Reportable segments are largely based on management’s organization of the operating segments for operational decisions and assessments of financial performance, which consider geographic locations. The material accounting policies of the segments are as described in the notes to the consolidated financial statements included in the Company's Annual Report filed on Form 10-K for the fiscal year ended September ~~3, 2017,~~2, 2018, and Note 1 above. Inter-segment net sales and expenses have been eliminated in computing total revenue and operating income. Certain operating expenses, predominantly stock-based compensation, are incurred on behalf of the Company's Canadian and Other International Operations, but are included in the U.S. Operations because those costs ~~are not allocated internally and~~ generally come under the responsibility of the Company's U.S. management team.

United States
Operations

Canadian
Operations

Other
International
Operations
Total
Twelve Weeks Ended May 13, 2018
Total revenue $ 23,475
$ 4,647
$ 4,239
$ 32,361
Operating income 682
210
175
1,067
Depreciation and amortization 242
31
54
327
Additions to property and equipment 468
42
75
585
Twelve Weeks Ended May 7, 2017
Total revenue $ 21,172
$ 4,069
$ 3,619
$ 28,860
Operating income 654
172
142
968
Depreciation and amortization 245
28
47
320
Additions to property and equipment 363
40
137
540
Thirty-six Weeks Ended May 13, 2018

Total revenue $ 69,975

$ 14,163

$ 13,027

$ 97,165
Operating income 1,818

652

564

3,034
Depreciation and amortization 756

94

156

1,006
Additions to property and equipment 1,323

156

434

1,913
Net property and equipment 12,924

1,829

4,425

19,178
Total assets 27,062

4,248

8,295

39,605
Thirty-six Weeks Ended May 7, 2017

Total revenue $ 63,313

$ 12,397

$ 11,015

$ 86,725
Operating income 1,680

543

438

2,661
Depreciation and amortization 712

81

136

929
Additions to property and equipment 1,147

206

370

1,723
Net property and equipment 12,139

1,612

3,784

17,535
Total assets 24,356

4,014

7,261

35,631
Year Ended September 3, 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
18

Table of Contents

The following table provides information for the Company's reportable segments:



	United States Operations		Canadian Operations		Other International Operations		Total
12 Weeks Ended May 12, 2019
Total revenue	$	25,536	$	4,792	$	4,412	$	34,740
Operating income	736		213		173		1,122
Depreciation and amortization	260		32		44		336
Additions to property and equipment	500		38		134		672
12 Weeks Ended May 13, 2018
Total revenue	$	23,475	$	4,647	$	4,239	$	32,361
Operating income	682		210		175		1,067
Depreciation and amortization	242		31		54		327
Additions to property and equipment	468		42		75		585
36 Weeks Ended May 12, 2019
Total revenue	$	76,958	$	14,561	$	13,686	$	105,205
Operating income	2,108		625		541		3,274
Depreciation and amortization	764		100		155		1,019
Additions to property and equipment	1,428		209		352		1,989
Net property and equipment	14,020		1,917		4,538		20,475
Total assets	30,416		4,637		8,699		43,752
36 Weeks Ended May 13, 2018
Total revenue	$	69,975	$	14,163	$	13,027	$	97,165
Operating income	1,818		652		564		3,034
Depreciation and amortization	756		94		156		1,006
Additions to property and equipment	1,323		156		434		1,913
Net property and equipment	12,924		1,829		4,425		19,178
Total assets	27,062		4,248		8,295		39,605
52 Weeks Ended September 2, 2018
Total revenue	$	102,286	$	20,689	$	18,601	$	141,576
Operating income	2,787		939		754		4,480
Depreciation and amortization	1,078		135		224		1,437
Additions to property and equipment	2,046		268		655		2,969
Net property and equipment	13,353		1,900		4,428		19,681
Total assets	28,207		4,303		8,320		40,830

Disaggregated Revenue

The following table summarizes net sales by merchandise category:



	12 Weeks Ended		36 Weeks Ended
	May 12, 2019		May 12, 2019
Foods and Sundries	$	13,524	$	41,131
Hardlines	5,666		17,276
Fresh Foods	4,568		13,551
Softlines	3,413		11,760
Ancillary	6,793		19,185
Total Net Sales	$	33,964	$	102,903

Table of Contents

Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

(amounts in millions, except per share, share, and warehouse count data)

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. They include statements that address activities, events, conditions or developments that we expect or anticipate may occur in the future and may relate to such matters as ~~net~~ sales growth, ~~increases~~changes in comparable ~~warehouse~~ sales, cannibalization of existing locations by new openings, price or fee changes, earnings performance, earnings per share, stock-based compensation expense, warehouse openings and closures, capital spending, the effect of adopting certain accounting standards, future financial reporting, financing, margins, return on invested capital, strategic direction, expense controls, membership renewal rates, shopping frequency, litigation, and the demand for our products and services. Forward-looking statements may also be identified by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “likely,” “plan,” “potential,” “predict,” “project,” ~~“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. Forward-looking~~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. 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, capital spending, actions of vendors, rising costs associated with employees (generally including health care costs), energy and certain commodities, geopolitical conditions (including tariffs), the ability to remediate material weaknesses in internal control, and other risks identified from time to time in our 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 statements, except as required by law.

This management discussion should be read in conjunction with the management discussion included in our fiscal ~~2017~~2018 Annual Report on Form 10-K, previously filed with the SEC.

OVERVIEW

We operate membership warehouses and e-commerce websites based on the concept that offering our members low prices on a limited selection of ~~nationally branded~~nationally-branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. When combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, these volumes and turnover enable us to operate profitably at significantly lower gross margins (net sales less merchandise costs) than most other retailers.

We believe that the most important driver of our profitability is sales growth, particularly comparable ~~warehouse~~ sales ~~(comparable sales)~~ growth. We define comparable sales as sales from warehouses open for more than one year, including remodels, relocations and expansions, as well as online sales related to e-commerce websites operating for more than one year. Comparable sales growth is achieved through increasing shopping frequency from new and existing members and the amount they spend on each visit (average ticket). Sales comparisons can also be particularly influenced by certain factors that are beyond our control: fluctuations in currency exchange rates (with respect to the consolidation of the results of our international operations); ~~and~~ changes in the cost of gasoline and associated competitive ~~conditions (primarily impacting our U.S.~~conditions; and ~~Canadian operations).~~changes from the revenue recognition standard. The higher our comparable sales exclusive of these items, the more we can leverage certain of our selling, general and administrative expenses, reducing them as a percentage of sales and enhancing profitability. Generating comparable sales growth is foremost a question of making available ~~to our members~~ the right merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long term. Another substantial factor in sales growth is the health of the economies in which we do business, including the effects of inflation or deflation, especially the United States. Sales growth and gross margins are also impacted by our competition, which is vigorous and widespread, across a wide range of global, national and ~~regional wholesalers and retailers. While we cannot control or~~

1820

Table of Contents

~~Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)~~ ~~(amounts in millions, except per share, share, and warehouse count data)~~

regional wholesalers and retailers, including those with e-commerce operations. While we cannot control or reliably predict general economic health or changes in competition, we believe that we have been successful historically in adapting our business to these changes, such as through adjustments to our pricing and to our merchandise mix, including increasing the penetration of our private label items and through our online offerings.

Our philosophy is to provide our members with quality goods and services at ~~the most~~ competitive prices. We do not focus in the short term on maximizing prices charged, but instead seek to maintain what we believe is a perception among our members of our “pricing authority” –on quality goods– consistently providing the most competitive values. Our investments in merchandise pricing can, from time to time, include reducing prices on merchandise to drive sales or meet competition and holding prices steady despite cost increases instead of passing the increases on to our members, ~~all~~ negatively impacting near-term gross margin as a percentage of net sales (gross margin percentage). We believe that our gasoline business draws members, but it generally has a significantly lower gross margin percentage relative to our non-gasoline ~~business.~~businesses. A higher penetration of gasoline sales will generally lower our gross margin percentage. ~~Rapidly changing~~Changing gasoline prices may significantly impact our near-term net sales growth. Generally, rising gasoline prices benefit net sales growth which, given the higher sales base, negatively impacts our gross margin percentage but decreases our selling, general and administrative (SG&A) expenses as a percentage of net sales. A decline in gasoline prices has the inverse effect. ~~We do not operate~~Additionally, actions in various countries, particularly China and the United States, have created uncertainty with respect to how tariffs will affect the costs of some of our ~~lower-margin gasoline business~~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 will be influenced in ~~Korea~~part by our merchandising and ~~France.~~pricing strategies in response to potential cost increases. While these potential impacts are uncertain, they could have an adverse impact on our results.

We also achieve sales growth by opening new warehouses. As our warehouse base grows, available and desirable potential sites become more difficult to secure, and square footage growth becomes a comparatively less substantial component of growth. The negative aspects of such growth, however, including lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouses when openings occur in existing markets, are ~~increasingly less significant relative~~continuing to decline in significance as they relate to the results of our total operations. Our rate of square footage growth is generally higher in foreign markets, due to the smaller base in those markets, and we expect that to continue. Our e-commerce business growth, ~~both~~ domestically and internationally, has also increased our sales.

Our membership format is an integral part of our business ~~model~~ and has a significant effect on our profitability. This format is designed to reinforce member loyalty and provide continuing fee revenue. The extent to which we achieve growth in our membership base, increase the penetration of our Executive members, and sustain high renewal rates materially influences our profitability. ~~Paid~~Our paid membership growth israte 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 control costs. While we believe that we have achieved successes in this area, ~~historically,~~ some significant costs are partially outside our control, most particularly health care and utility expenses. With respect to ~~expenses relating to the~~ compensation of our employees, our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that ~~achieving our longer-term objectives of~~ reducing employee turnover and enhancing employee satisfaction requires maintaining compensation levels that are better than the industry average for much of our workforce. This may cause us, for example, to absorb costs that other employers might seek to pass through to their workforces. Because our business is operated on very low margins, modest changes in various items in the income statement, particularly merchandise costs and selling, general and administrative expenses, can have substantial impacts on net income.

Table of Contents

Our operating model is generally the same across our U.S., Canada, and Other International operating segments (see Note 10 included in Part I, Item 1, ~~Note 10~~ of this Report). Certain countries in the Other International segment have relatively higher rates of square footage growth, lower wages and benefits costs as a percentage of country sales, and/or less or no direct membership warehouse competition.

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~~relates 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

~~Table of Contents~~

~~Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)~~ ~~(amounts in millions, except per share, share, and warehouse count data)~~

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. References to the third quarters of ~~2018~~2019 and ~~2017~~2018 relate to the ~~12-week~~12 week fiscal quarters ended May ~~13, 2018,~~12, 2019, and May ~~7, 2017,~~13, 2018, respectively. References to the first thirty-six weeks of ~~2018~~2019 and ~~2017~~2018 relate to the ~~first thirty-six~~36 weeks ended May ~~13, 2018,~~12, 2019, and May ~~7, 2017,~~13, 2018, 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.

Key items for the third quarter of ~~2018~~2019 as compared to the third quarter of ~~2017~~2018 include:

Net sales increased ~~12%~~7% to ~~$31,624,~~$33,964, driven by an increase in comparable sales of ~~10%~~6% and sales at 2023 net new warehouses opened since the end of the third quarter of ~~fiscal 2017;~~

2018;

Membership fee revenue increased ~~14%~~5% to ~~$737,~~$776, primarily due to ~~the fee increase and~~ sign-ups at existing and new ~~warehouses;~~warehouses and the annual fee increase in the U.S. and Canada in June 2017;

Gross margin percentage decreased 46six basis points primarily due to the impact of ~~gasoline price inflation~~the new revenue recognition standard on net ~~sales, a shift in sales penetration to certain lower margin warehouse ancillary businesses from our core merchandise categories, and lower gross margin in our core merchandise categories;~~sales;

SG&A expenses as a percentage of net sales decreased 32six basis points primarily due to the impact of ~~gasoline price inflation and leveraging increased~~the new revenue recognition standard on net sales;

The provision for income taxes in the third quarter of 2019 was positively impacted by a non-recurring tax benefit of $73, or $0.16 per diluted share;

Net income increased 7%21% to $906, or $2.05 per diluted share, compared to $750, or $1.70 per diluted share ~~compared to $700, or $1.59 per diluted share~~ in ~~2017. The prior year results were positively impacted by an $82 tax benefit, or $0.19 per diluted share;~~2018;

On April ~~24, 2018,~~26, 2019, our Board of Directors declared a quarterly ~~cash dividend~~cash-dividend of ~~$0.57~~$0.65 per share, an increase from ~~$0.50 per share,~~$0.57, which was paid on May ~~25, 2018;~~24, 2019; and

~~Subsequent to~~On April 26, 2019, the ~~end~~Board of Directors authorized a new share repurchase program in the ~~quarter, we announced that effective in June 2018, a portion~~amount of the savings generated from the Tax Cuts and Jobs Act (the “2017 Tax Act”) will be used to benefit the majority of our U.S. hourly employees by increasing their wages. The estimated annualized pre-tax cost of these increases is approximately $110-$120.$4,000.

2022

Table of Contents

~~Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)~~ ~~(amounts in millions, except per share, share, and warehouse count data)~~

RESULTS OF OPERATIONS

Net Sales


	12 Weeks Ended						36 Weeks Ended						12 Weeks Ended						36 Weeks Ended
	May 13, 2018			May 7, 2017			May 13, 2018			May 7, 2017			May 12, 2019			May 13, 2018			May 12, 2019			May 13, 2018
Net Sales	$	31,624		$	28,216		$	95,020		$	84,815		$	33,964		$	31,624		$	102,903		$	95,020
Changes in net sales:
U.S.	11		%	8		%	11		%	5		%
Changes in net sales
U.S													9		%	11		%	10		%	11		%
Canada	14		%	5		%	14		%	7		%	3		%	14		%	3		%	14		%
Other International	17		%	8		%	18		%	4		%
Other international													4		%	17		%	5		%	18		%
Total Company	12		%	8		%	12		%	6		%	7		%	12		%	8		%	12		%
Changes in comparable sales:
U.S.	10		%	6		%	9		%	3		%
U.S													7		%	10		%	9		%	9		%
Canada	11		%	2		%	10		%	5		%	1		%	11		%	1		%	10		%
Other International	12		%	4		%	13		%	0		%
Other international													2		%	12		%	2		%	13		%
Total Company	10		%	5		%	10		%	3		%	6		%	10		%	7		%	10		%
Changes in comparable sales excluding the impact of changes in foreign exchange rates and gasoline prices:
U.S.	8		%	5		%	7		%	3		%
Changes in comparable sales excluding the impact of changes in foreign currency and gasoline prices⁽¹⁾:
U.S													6		%	8		%	7		%	7		%
Canada	5		%	3		%	4		%	3		%	5		%	5		%	6		%	4		%
Other International	6		%	6		%	7		%	4		%
Other international													7		%	6		%	6		%	7		%
Total Company	7		%	5		%	7		%	3		%	6		%	7		%	7		%	7		%

_______________


(1)	Excludes the impact of the revenue recognition standard for the periods ended May 12, 2019. See Item 1 Note 1.

Net Sales

Net sales increased ~~$3,408~~$2,340 or ~~12%~~7%, and ~~$10,205~~$7,883 or ~~12%~~8% during the third quarter and first thirty-six weeks of ~~2018,~~2019, respectively, compared to the third quarter and first thirty-six weeks of ~~2017.~~2018. These increases were attributable to an increase in comparable sales of ~~10%~~6% and 7% in the third quarter and first thirty-six weeks of ~~2018~~2019, respectively, and sales at the 2023 net new warehouses opened since the end of the third quarter of ~~2017.~~

2018.

During the third quarter of ~~2018,~~2019, changes ~~in gasoline prices positively impacted net sales by approximately $504, or 179 basis points, due to a 17% increase in the average sales price per gallon. Changes~~ in foreign currencies relative to the U.S. dollar ~~positively~~negatively impacted net sales by approximately ~~$412,~~$427, or ~~146~~135 basis points, compared to the third quarter of ~~2017,~~2018, attributable to our ~~Canadian and~~ Other International and Canadian operations.

The new revenue recognition standard positively impacted net sales by $346, or 110 basis points. Gasoline prices had a slight positive impact on net sales.

During the first thirty-six weeks of ~~2018,~~2019, changes ~~in gasoline prices positively impacted net sales by approximately $1,283, or 151 basis points, due to a 16% increase in the average sales price per gallon.~~

~~Changes~~ in foreign currencies relative to the U.S. dollar ~~positively~~negatively impacted net sales by approximately ~~$1,254,~~$1,199, or ~~148~~126 basis points, compared to the first thirty-six weeks of ~~2017,~~2018, attributable to our Canadian and Other International operations. The new revenue recognition standard positively impacted net sales by $865, or 91 basis points. Changes in gasoline prices also positively impacted net sales by approximately $240, or 25 basis points, due to a 2% increase in the average price per gallon.

Table of Contents

Comparable Sales

Comparable sales increased ~~10%~~6% and 7% in the third quarter and first thirty-six weeks of ~~2018~~2019, respectively, and were positively impacted by increases in shopping frequency and average ticket. Comparable sales for the third quarter and

~~Table of Contents~~

~~Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)~~ ~~(amounts in millions, except per share, share, and warehouse count data)~~

first thirty-six weeks of ~~2018~~2019 were negatively impacted by cannibalization (established warehouses losing sales to our newly opened locations).

Membership Fees


	12 Weeks Ended						36 Weeks Ended						12 Weeks Ended						36 Weeks Ended
	May 13, 2018			May 7, 2017			May 13, 2018			May 7, 2017			May 12, 2019			May 13, 2018			May 12, 2019			May 13, 2018
Membership fees	$	737		$	644		$	2,145		$	1,910		$	776		$	737		$	2,302		$	2,145
Membership fees as a percentage of net sales	2.33		%	2.28		%	2.26		%	2.25		%	2.29		%	2.33		%	2.24		%	2.26		%
Total paid members as of quarter end (000's)	50,900			48,600			—			—			53,100			50,900			—			—
Total cardholders as of quarter end (000's)	93,000			88,900			—			—			97,200			93,000			—			—

Membership fees increased ~~14%~~5% and ~~12%~~7% in the third quarter and first thirty-six weeks of ~~2018,~~2019, respectively. This was primarily due to ~~the fee increase (discussed below) and~~ sign-ups at existing and new ~~warehouses.~~warehouses and the fee increase (discussed below). Renewal rates are ~~90%~~91% in the U.S. and Canada and ~~87%~~88% worldwide.

As previously reported, in fiscal 2017 we increased our ~~annual~~ membership fees ~~in certain of our Other International operations and~~ in the U.S. and Canada. 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 revenues during the third quarter and first thirty-six weeks of ~~2018~~2019 of approximately ~~$48~~$11 and ~~$109 respectively, and will positively impact the next several quarters totaling approximately $175 in fiscal 2018 and $70 in fiscal 2019.~~$72, respectively.

Gross Margin


	12 Weeks Ended						36 Weeks Ended						12 Weeks Ended						36 Weeks Ended
	May 13, 2018			May 7, 2017			May 13, 2018			May 7, 2017			May 12, 2019			May 13, 2018			May 12, 2019			May 13, 2018
Net sales	$	31,624		$	28,216		$	95,020		$	84,815		$	33,964		$	31,624		$	102,903		$	95,020
Less merchandise costs	28,131			24,970			84,481			75,185			30,233			28,131			91,576			84,481
Gross margin	$	3,493		$	3,246		$	10,539		$	9,630		$	3,731		$	3,493		$	11,327		$	10,539
Gross margin percentage	11.05		%	11.51		%	11.09		%	11.35		%	10.99		%	11.05		%	11.01		%	11.09		%

Quarterly Results

The gross margin of our core merchandise categories (food and sundries, hardlines, softlines, and fresh foods), when expressed as a percentage of core merchandise sales (rather than total net sales), ~~decreased four~~increased 21 basis points, ~~across~~with increases in all core merchandise ~~categories, except food and sundries.~~categories. 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 46six basis points compared to the third quarter of ~~2017.~~2018. Excluding the ~~impact~~impacts of the new revenue recognition standard and gasoline price inflation on net sales, gross margin as a percentage of adjusted net sales was ~~11.23%~~11.10%, ~~a decrease~~an increase of 28five basis points. This was primarily due to a ~~shift in sales penetration to certain lower margin warehouse ancillary businesses, which contributed to a 17~~nine basis point ~~decrease in our~~increase across most core merchandise categories, ~~primarily food and sundries, fresh foods, and softlines. Our warehouse~~partially offset by the Executive Membership 2% reward program, which negatively impacted gross margin by three basis points, due to increased spending by Executive Members. Warehouse ancillary and other businesses ~~margin~~ decreased ~~six~~by one basis ~~points, primarily due to our pharmacy business. Gross margin percentage was also negatively impacted by costs related to our new centralized return centers.~~

~~Table of Contents~~

~~Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)~~ ~~(amounts in millions, except per share, share, and warehouse count data)~~

point.

Gross margin on a segment basis, when expressed as a percentage of the segment's own sales and excluding the impact of changes in gasoline prices on net sales (segment gross margin percentage), decreased in our

Table of Contents

U.S. operations, primarily due to ~~a shift in sales penetration to certain lower margin~~ warehouse ancillary ~~businesses.~~and other businesses, partially offset by increases in our core merchandise categories. The segment gross margin percentage in our Canadian operations ~~increased, predominantly~~decreased, primarily due to ~~an increase in~~our core merchandise ~~categories, primarily fresh foods and hardlines.~~categories. The segment gross margin percentage in our Other International operations ~~increased,~~decreased, primarily due to the Executive Membership 2% reward program which was recently introduced in Korea, and our core merchandise categories.

Year-to-date Results

The gross margin of core merchandise categories, when expressed as a percentage of core merchandise sales, ~~(rather than total net sales),~~ increased ~~two~~eight basis points. This was ~~primarily~~ attributable to increases in food and sundries and hardlines partially offset by decreases in softlines.

Total gross margin percentage decreased 26eight basis points compared to the first thirty-six weeks of ~~2017.~~2018. Excluding the ~~impact~~impacts of ~~changes in~~ gasoline ~~prices~~price inflation and the new revenue recognition standard on net sales, gross margin as a percentage of adjusted net sales was ~~11.24%~~11.13%, ~~a decrease~~an increase of 11four basis points from the first thirty-six weeks of ~~2017.~~2018. This was primarily due to a ~~shift in sales penetration to certain lower margin warehouse ancillary businesses, which contributed to an eight~~15 basis point decrease in our core merchandise categories, primarily food and sundries, fresh foods and softlines. Gross margin percentage was also negatively impacted by 12 basis points due to a non-recurring legal settlement benefiting the first quarter of 2017 and costs related to our new centralized return centers. These decreases were partially offset by an increase in our warehouse ancillary and other businesses of 10 basis points, primarily due to our gasoline business.

The segment gross margin percentage decreased in our U.S. operations, predominantly in all our core merchandise categories, the non-recurring legal settlement in 2017, and the costs of our centralized return centers mentioned above. These were partially offset by an increase in our warehouse ancillary and other businesses, predominantly our gasoline business. This increase was partially offset by decreases of four basis points in our core merchandise categories and four basis points due to an adjustment to our estimate of breakage on rewards earned under our co-branded credit card program. Executive Membership 2% reward program negatively impacted gross margin by three basis points, due to increased spending by Executive Members.

The segment gross margin percentage increased in our U.S. operations, primarily due to our warehouse ancillary and other businesses, predominantly our gasoline business, partially offset by our core merchandise categories. The segment gross margin percentage in our Canadian ~~and Other International~~ operations ~~increased,~~decreased due to ~~our~~decreases across all core merchandise categories, except fresh foods, and warehouse ancillary and other ~~businesses,~~businesses. The segment gross margin percentage in our Other International operations decreased, primarily in our ~~gasoline business.~~core merchandise categories.

Selling, General and Administrative Expenses


	12 Weeks Ended						36 Weeks Ended						12 Weeks Ended						36 Weeks Ended
	May 13, 2018			May 7, 2017			May 13, 2018			May 7, 2017			May 12, 2019			May 13, 2018			May 12, 2019			May 13, 2018
SG&A expenses	$	3,155		$	2,907		$	9,613		$	8,827		$	3,371		$	3,155		$	10,310		$	9,613
SG&A expenses as a percentage of net sales	9.98		%	10.30		%	10.12		%	10.41		%	9.92		%	9.98		%	10.02		%	10.12		%

Quarterly Results

SG&A expenses as a percentage of net sales decreased 32six basis points compared to the third quarter of ~~2017.~~2018. Excluding the ~~impact~~impacts of the new revenue recognition standard and gasoline price inflation on net sales, SG&A expenses as a percentage of adjusted net sales ~~were 10.14%~~was 10.03%, ~~a decrease~~an increase of ~~16 basis points. Warehouse operating costs decreased 13 basis points, predominantly in our U.S. operations, due to leveraging increased sales. SG&A expense improved~~ five basis points compared to the prior year. Operating costs related to warehouse, ancillary and other businesses, which includes e-commerce and travel, increased two basis points, primarily due to ~~a non-recurring legal matter~~the wage increases of our U.S. hourly employees that went into effect in ~~the third quarter of 2017~~June 2018. Central operating costs were higher by two basis points and ~~no such item in the third quarter of 2018. These decreases were partially offset~~stock compensation expense was higher by ~~a three~~one basis ~~point increase in central operating costs.~~point.

Year-to-date Results

SG&A expenses as a percentage of net sales decreased 2910 basis points compared to the first thirty-six weeks of ~~2017.~~2018. Excluding the ~~impact~~impacts of gasoline price inflation and the new revenue recognition standard on net sales, SG&A expenses as a percentage of adjusted net sales ~~were 10.26%~~was 10.13%, ~~a decrease~~an increase of 15one basis ~~points. Warehouse~~point. Stock compensation expense was higher by two basis points and operating costs ~~decreased~~related to warehouse, ancillary and other businesses, which includes e-commerce and travel, were lower by one basis point.

2325

Table of Contents

~~Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)~~ ~~(amounts in millions, except per share, share, and warehouse count data)~~

11 basis points, predominantly in our U.S. and Other International operations, due to leveraging increased sales. Stock compensation expense decreased by two basis points, and SG&A also benefited from a two basis point decrease due to a non-recurring legal matter in the third quarter of 2017.

Preopening Expense


	12 Weeks Ended				36 Weeks Ended				12 Weeks Ended				36 Weeks Ended
	May 13, 2018		May 7, 2017		May 13, 2018		May 7, 2017		May 12, 2019		May 13, 2018		May 12, 2019		May 13, 2018
Preopening expenses	$	8	$	15	$	37	$	52	$	14	$	8	$	45	$	37
Warehouse openings, including relocations
United States	0		1		7		9		1		0		9		7
Canada	0		1		1		4		0		0		2		1
Other International	2		1		2		3		2		2		2		2
Total warehouse openings, including relocations	2		3		10		16		3		2		13		10

Preopening expenses include ~~costs for~~ startup ~~operations~~costs related to new warehouses and relocations, developments in new international markets, ~~development of~~ new manufacturing and distribution facilities, and expansions at existing warehouses. Preopening expenses vary due to the number of warehouse openings, the timing of the openings relative to our quarter-end, whether the warehouse is owned or leased, and whether the opening is in an existing, new or international market. For the remainder of fiscal ~~2018,~~2019, we expect to open ~~15 additional~~13 warehouses, including two ~~relocations, compared to 12 warehouses opened in the remainder of fiscal 2017.~~relocations.

Interest Expense

12 Weeks Ended 36 Weeks Ended
May 13,
2018 May 7,
2017 May 13,
2018 May 7,
2017
Interest expense $ 37
$ 21
$ 111
$ 81



	12 Weeks Ended				36 Weeks Ended
	May 12, 2019		May 13, 2018		May 12, 2019		May 13, 2018
Interest expense	$	35	$	37	$	105	$	111

Interest expense is primarily related to Senior ~~Notes~~Notes. In October 2018 we repaid a Guaranteed Senior Note issued by the Company. In May 2017, we issued $3,800 in aggregate principal amount of Senior Notes. Also, in March and June of 2017, we repaid $2,200 in total outstanding principal of the 5.5% and 1.125% Senior Notes, respectively.our Japanese subsidiary.

Interest Income and Other, Net


	12 Weeks Ended				36 Weeks Ended					12 Weeks Ended				36 Weeks Ended
	May 13, 2018		May 7, 2017		May 13, 2018		May 7, 2017			May 12, 2019		May 13, 2018		May 12, 2019		May 13, 2018
Interest income	$	16	$	12	$	45	$	31		$	27	$	16	$	81	$	45
Foreign-currency transaction gains (losses), net	20		3		10		(4		)
Foreign-currency transaction gains, net										3		20		6		10
Other, net	5		3		15		13			6		5		17		15
Interest income and other, net	$	41	$	18	$	70	$	40		$	36	$	41	$	104	$	70

Interest income increased for the third quarter and first thirty-six weeks ~~ended May 13, 2018,~~of 2019, due to higher interest rates ~~earned on cash~~ and ~~cash equivalents as well as~~ higher average cash and ~~cash equivalent~~

~~Table of Contents~~

~~Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)~~ ~~(amounts in millions, except per share, share, and warehouse count data)~~

investment balances. Foreign-currency transaction gains, ~~(losses),~~ net, include ~~mark-to-market adjustments for forward foreign-exchange contracts and~~ the revaluation or settlement of monetary assets and liabilities by our Canadian and Other International ~~operations.~~operations and mark-to-market adjustments for forward foreign-exchange contracts. See Derivatives and Foreign Currency sections in ~~Part I,~~ Item 1,8, Note 1 of ~~this Report.~~our Annual Report on Form 10-K, for the fiscal year ended September 2, 2018.

Table of Contents

Provision for Income Taxes


	12 Weeks Ended						36 Weeks Ended						12 Weeks Ended						36 Weeks Ended
	May 13, 2018			May 7, 2017			May 13, 2018			May 7, 2017			May 12, 2019			May 13, 2018			May 12, 2019			May 13, 2018
Provision for income taxes	$	309		$	259		$	867		$	838		$	207		$	309		$	679		$	867
Effective tax rate	28.8		%	26.8		%	29.0		%	32.0		%	18.5		%	28.8		%	20.7		%	29.0		%

The effective tax ~~rates~~rate for the third quarter and first thirty-six weeks of ~~2018 of 28.8% and 29.0%, respectively, were~~2019 was favorably impacted by the ~~2017 Tax Act, which included a~~ reduction in the U.S. federal corporate tax rate from 35% to 21%~~. Due to~~, which was in effect for the ~~timing of our fiscal year relative to the effective date of the rate change, our U.S. federal corporate rate for fiscal 2018 is expected to be approximately 25.6%. The~~entire third quarter and first thirty-six weeks of ~~2018 was favorably impacted by discrete net tax benefits of $20. This includes~~2019, as compared to a benefit related to the 2017 Tax Act of $160 for the provisional remeasurement of certain deferred tax liabilities offset by discrete tax expense of $142 for the estimated tax on deemed repatriation of unremitted earnings and $43 for the reduction in foreign tax credits and other immaterial items. The provision was also favorably impacted by the adoption of an accounting standard related to stock-based compensation of $33 in the first quarter of 2018.

~~The~~higher blended rate effective ~~tax rates~~ for the third quarter and first thirty-six weeks of ~~2017 were favorably impacted by~~2018. The effective tax rate for the first thirty-six weeks of 2019 included discrete net ~~discrete~~ tax benefits of ~~$82 and $88, respectively, primarily due to~~$165. During the third quarter of 2019, we recognized a net ~~tax~~ benefit of ~~$82~~$73 related to U.S. taxation of deemed foreign dividends, net of losses of current year foreign tax credits, which impacted the ~~May 2017 special cash dividend paid to employees through our 401(k) Retirement Plan.~~

effective tax rate. The ~~determination~~tax rate for the first thirty-six weeks of ~~our provision for income taxes requires significant judgment,~~2019 was 26.8%, excluding the ~~use~~discrete benefits, but including the impact of ~~estimates, and~~ the ~~interpretation and application of complex~~lost foreign tax ~~laws, all of which are subject to continuing review. See Part I, Item 1, Note 7 of this Report for additional information.~~credits.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes our significant sources and uses of cash and cash equivalents:


	36 Weeks Ended						36 Weeks Ended
	May 13, 2018			May 7, 2017			May 12, 2019			May 13, 2018
Net cash provided by operating activities	$	4,220		$	4,892		$	4,063		$	4,220
Net cash used in investing activities	(1,852		)	(1,550		)	(1,945		)	(1,852		)
Net cash used in financing activities	(1,014		)	(2,141		)	(1,146		)	(1,014		)

Our primary sources of liquidity are cash flows from warehouse operations, cash and cash equivalents, and short-term investment balances. Cash and cash equivalents and short-term investments were ~~$7,044~~$8,167 and ~~$5,779~~$7,259 at May ~~13, 2018,~~12, 2019, and September ~~3, 2017,~~2, 2018, respectively. Of these balances, approximately ~~$1,311~~$1,460 and ~~$1,255~~$1,348 represented unsettled credit and debit card receivables, respectively. These receivables generally settle within four days.

Management believes that our cash position and operating cash flows will be sufficient to meet our liquidity and capital requirements for the foreseeable future. ~~While we~~We believe that our U.S. current and projected asset position is sufficient to meet our U.S. liquidity requirements and, beginning in the second quarter of fiscal

~~Table of Contents~~

~~Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)~~ ~~(amounts in millions, except per share, share, and warehouse count data)~~

2018, we no longer consider ~~current~~earnings after fiscal ~~year and future earnings~~2017 of our non-U.S. consolidated subsidiaries to be permanently reinvested. We have recorded the estimated incremental foreign withholding (net of available foreign tax credits) and state income taxes payable assuming a hypothetical repatriation to the U.S. We consider undistributed earnings of non-U.S. consolidated subsidiaries prior to fiscal 2018 to be indefinitely reinvested.

In the first thirty-six weeks of 2018, we recorded a one-time charge of $142 for the estimated tax on deemed repatriation of unremitted earnings under the 2017 Tax Act. The 2017 Tax Act provides for the payment of the tax over an eight year period. Because of the availability of foreign tax credits, the amount payable is $101, of which $84 is classified as long-term and included in other liabilities on our condensed consolidated balance sheet.

Cash Flows from Operating Activities

Net cash provided by operating activities totaled $4,063 in the first thirty-six weeks of 2019, compared to $4,220 in the first thirty-six weeks of ~~2018, compared to $4,892 in the first thirty-six weeks of 2017.~~2018. Cash provided by operations is primarily derived from net sales and membership fees. Cash used in operations generally consists of payments to ~~our~~ merchandise vendors, and warehouse operating costs, ~~(including~~including payroll and employee benefits, utilities, and ~~utilities), as well as~~debit and credit card processing fees. Cash used in operations also includes payments for income taxes. ~~The decrease~~Changes in our net ~~cash provided~~investment in merchandise inventories (the difference between merchandise inventories and accounts payable) is impacted by ~~operating activities was primarily due~~several factors including how fast our inventory is sold, the payment terms with our vendors, and the amount of payables we pay early to ~~accelerated vendor payments~~obtain favorable discounts from our vendors.

Table of ~~approximately $1,700 made in the last week of fiscal 2016, which positively impacted cash flows in the first thirty-six weeks of 2017.~~ Contents

Cash Flows from Investing Activities

Net cash used in investing activities totaled $1,945 in the first thirty-six weeks of 2019 compared to $1,852 in the first thirty-six weeks of 2018, ~~compared~~and primarily related to ~~$1,550 in the first thirty-six weeks of 2017. Cash used in investing activities is primarily to fund warehouse expansion and remodeling activities.~~capital expenditures. Net cash from investing activities also includes purchases and maturities of short-term investments.

Capital Expenditure Plans

~~We opened 10 new warehouses including two relocations in the first thirty-six weeks of 2018 and plan to open 15 additional new warehouses, including two relocations, for the remainder of fiscal 2018.~~ Our primary requirements for capital are acquiring land, buildings, and equipment for new and remodeled warehouses. ~~To a lesser extent, capital~~Capital is also required for ~~initial warehouse operations,~~ information systems, manufacturing and distribution facilities, initial warehouse operations and working capital. In the first thirty-six weeks of ~~2018,~~2019, we spent ~~approximately $1,913,~~$1,989 on capital expenditures, and it is our current intention to spend approximately ~~$2,500~~$2,800 to ~~$2,700~~$3,100 during fiscal ~~2018.~~2019. We opened 13 new warehouses, including three relocations, in the first thirty-six weeks of 2019 and plan to open 13 additional new warehouses, including two relocations, in the remainder of fiscal 2019. There can be no assurance that current expectations will be realized and plans are subject to change upon further review of our capital expenditure needs.

Cash Flows from Financing Activities

Net cash used in financing activities totaled $1,146 in the first thirty-six weeks of 2019 compared to $1,014 in the first thirty-six weeks of ~~2018 compared to $2,141 in the first thirty-six weeks of 2017.~~2018. Cash flow used in financing activities primarily related to the payment of ~~cash~~ dividends, ~~repurchases of common stock, and~~ withholding taxes on stock-based ~~awards. The decrease in cash used in financing activities from~~awards, and repurchases of common stock. Dividends totaling $752 were paid during the first thirty-six weeks of ~~2017~~2019, of which $250 related to ~~2018 related primarily to a repayment of $1,100 of long-term debt~~the dividend declared in ~~the third quarter of 2017.~~August 2018.

Stock Repurchase Programs

On April 26, 2019, the Board of Directors authorized a new share repurchase program in the amount of $4,000, which expires in April 2023. During the first thirty-six weeks of ~~2018~~2019 and ~~2017,~~2018, we repurchased ~~1,337,000~~903,000 and ~~1,486,000~~1,337,000 shares of common stock, at an average price per share of ~~$174.30~~$215.94 and ~~$156.51,~~$174.30, respectively, totaling approximately $195 and $233, ~~in both periods.~~respectively. These amounts may differ from the stock repurchase balances in the accompanying condensed consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of a quarter.

~~Table of Contents~~

~~Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)~~ ~~(amounts in millions, except per share, share, and warehouse count data)~~

~~The amount available for stock repurchases under our approved plan was $2,516 at May 13, 2018.~~ Purchases are made from time-to-time, as conditions warrant, in the open market or in block purchases and pursuant to plans under SEC Rule 10b5-1. Repurchased shares are retired, in accordance with the Washington Business Corporation Act.

Dividends

~~Our current quarterly cash dividend rate is $0.57 per share.~~ On April ~~24, 2018,~~26, 2019, our Board of Directors declared a quarterly dividend of ~~$0.57~~$0.65 per share payable to shareholders of record on May ~~11, 2018.~~10, 2019. The dividend was paid on May ~~25, 2018.~~24, 2019.

Bank Credit Facilities and Commercial Paper Programs

We maintain bank credit facilities for working capital and general corporate purposes. At May ~~13, 2018,~~12, 2019, we had borrowing capacity under these facilities of ~~$866,~~$880, including a $400 revolving line of credit, which expires in June 2019. The Company currently has no plans to draw upon this facility but intends to renew it. Our international operations maintain $353 of the borrowing capacity under bank credit facilities, of which ~~$353 was maintained by our international operations. Of the $353, $166~~$146 is guaranteed by the Company. There were no outstanding short-term borrowings under the bank credit facilities at the end of the third quarter of ~~2018~~2019 or at the end of ~~2017.~~fiscal 2018.

The Company has letter of credit facilities, for commercial and standby letters of credit, totaling ~~$223. Outstanding~~$234. The outstanding commitments under these facilities at the end of the third quarter of ~~2018~~2019 totaled ~~$151, all~~$162, most of which were standby letters of credit with expiration dates within one year. The bank credit facilities have various expiration dates, most of which are within one year, and we generally intend to renew these facilities. The amount of borrowings available at any time under ~~the~~our bank credit facilities is reduced by the amount of standby and commercial letters of credit outstanding.

Table of Contents

Contractual Obligations

As of the date of this ~~report,~~Report, there were no material changes to our contractual obligations outside the ordinary course of business since the end of our last fiscal year.

Critical Accounting Estimates

The preparation of our consolidated financial statements in accordance with U.S. ~~generally accepted accounting principles (U.S. GAAP)~~GAAP requires that we make estimates and judgments. We base these on historical experience and on assumptions that we believe to be reasonable. Our critical accounting policies are discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K, for the fiscal year ended September ~~3, 2017.~~2, 2018. There have been no material changes to the critical accounting policies previously disclosed in that Report.

Recent Accounting Pronouncements

See discussion of Recent Accounting Pronouncements in Note 1 to the condensed consolidated financial statements included in Part I, Item 1 of this Report.

Item 3—Quantitative and Qualitative Disclosures About Market Risk

Our direct exposure to financial market risk results from fluctuations in foreign currency exchange rates and interest rates. There have been no material changes to our market risks as disclosed in our Annual Report on Form 10-K, for the fiscal year ended September ~~3, 2017.~~2, 2018.

Item 4—Controls and Procedures

AsEvaluation of the end of the period covered by this Quarterly Report on Form 10-Q, we performed an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and

~~Table of Contents~~

~~Item 4—~~Disclosure Controls and Procedures ~~(Continued)~~

~~Chief Financial Officer, of our~~Our disclosure controls and procedures (as defined in Rules 13a-15(e) ~~and~~or 15d-15(e) under the Securities ~~and~~ Exchange Act of 1934, ~~(the~~as amended) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange ~~Act)). Based upon~~Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that ~~evaluation,~~information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer (CEO) and the Chief Financial Officer ~~concluded that, as~~(CFO), with assistance from other members of management, have reviewed the ~~end~~effectiveness of ~~the period covered by this Quarterly Report,~~ our disclosure controls and procedures ~~are effective.~~as of May 12, 2019 and, based on their evaluation, have concluded the disclosure controls and procedures were not effective as of that date due to a material weakness in internal control over financial reporting that was disclosed in our Annual Report on Form 10-K for the fiscal year ended September 2, 2018.

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 ~~our most recently completed~~the third quarter of fiscal ~~quarter~~2019 that have materially affected, or are reasonably likely to materially affect, ~~our~~the Company’s internal control over financial ~~reporting.~~reporting except as described below.

Remediation

As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended September 2, 2018, we began implementing a remediation plan to address the material weakness mentioned above. The weakness will not be considered remediated, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal 2019.

Table of Contents

PART II—OTHER INFORMATION

Item 1—Legal Proceedings

See discussion of Legal Proceedings in Note 9 to the condensed consolidated financial statements included in Part I, Item 1 of this Report.

Item 1A—Risk Factors

In addition to the other information set forth in the Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K, for the fiscal year ended September ~~3, 2017.~~2, 2018. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K.

Item 2—Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information on our common stock repurchase program activity for the third quarter of ~~fiscal 2018~~2019 (amounts in millions, except share and per share data):

Period Total Number of Shares Purchased Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Programs⁽¹⁾

Maximum Dollar Value of Shares that May Yet be Purchased Under the Programs⁽¹⁾
February 19, 2018 - March 18, 2018 85,000
$ 188.83
85,000
$ 2,555
March 19, 2018 - April 15, 2018 102,000
185.21
102,000
2,536
April 16, 2018 - May 13, 2018 103,000
194.78
103,000
2,516
Total third quarter 290,000
$ 189.66
290,000



Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs⁽¹⁾	Maximum Dollar Value of Shares that May Yet be Purchased Under the Programs⁽¹⁾
February 18, 2019 - March 17, 2019	126,000	$	218.48	126,000	$	2,248
March 18, 2019 - April 14, 2019	41,000	241.07		41,000	2,238
April 15, 2019 - May 12, 2019	25,000	243.46		25,000	3,995
Total third quarter	192,000	$	226.57	192,000

_______________


(1)	Our stock repurchase program is conducted under a $4,000 authorization approved by of our Board of Directors in April ~~2015,~~2019, which expires in April ~~2019.~~2023. This authorization revoked previously authorized but unused amounts, totaling $2,237.

Item 3—Defaults Upon Senior Securities

None.

Item 4—Mine Safety Disclosures

Not applicable.

Item 5—Other Information

None.

Table of Contents

Item 6—Exhibits

The following exhibits are filed as part of this Quarterly Report on Form 10-Q or are incorporated herein by reference.



			Incorporated by Reference
Exhibit Number	Exhibit Description	Filed Herewith	Form	Period Ending	Filing Date

3.1	Articles of Incorporation as amended of Costco Wholesale Corporation		10-Q	2/~~15/2015~~17/2019	3/~~11/2015~~13/2019

3.2	Bylaws as amended of ~~the registrant~~Costco Wholesale Corporation		8-K		~~11/2/2017~~4/30/2019

31.1	Rule 13(a) – 14(a) Certifications	x

32.1	Section 1350 Certifications	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

SIGNATURES

Pursuant to the requirements 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.



	COSTCO WHOLESALE CORPORATION (Registrant)

June ~~6, 2018~~5, 2019	By	/s/ W. CRAIG JELINEK
Date		W. Craig Jelinek President, Chief Executive Officer and Director

June ~~6, 2018~~5, 2019	By	/s/ RICHARD A. GALANTI
Date		Richard A. Galanti Executive Vice President, Chief Financial Officer and Director

2931



	Attributable to Costco			Noncontrolling Interests			Total Equity
Equity at September 3, 2017	$	10,778		$	301		$	11,079
Comprehensive income:
Net income	2,091			35			2,126
Foreign-currency translation adjustment and other, net	(24		)	2			(22		)
Comprehensive income	2,067			37			2,104
Stock-based compensation	434			0			434
Release of vested restricted stock units (RSUs), including tax effects	(217		)	0			(217		)
Repurchases of common stock	(233		)	0			(233		)
Cash dividends declared and other	(686		)	(34		)	(720		)
Equity at May 13, 2018	$	12,143		$	304		$	12,447