UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended August 29, 201028, 2011

OR

Commission file number 0-20355

Costco Wholesale Corporation

(Exact name of registrant as specified in its charter)

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:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YESx    NO¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES¨    NOx

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. YESx    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YESx    NO¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨    NOx

The aggregate market value of the voting stock held by non-affiliates of the registrant at February 14, 201011, 2011 was $25,866,245,752$32,525,998,477

The number of shares outstanding of the registrant’s common stock as of October 1, 2010September 30, 2011 was 432,333,947433,365,150

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Proxy Statement for the Annual Meeting of StockholdersShareholders to be held on January 27, 2011,26, 2012, are incorporated by reference into Part III of this Form 10-K.

COSTCO WHOLESALE CORPORATION

ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 29, 201028, 2011

TABLE OF CONTENTS

INFORMATION RELATING TO FORWARD LOOKING STATEMENTS

Certain statements contained in this documentReport constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.1995, 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.future and may relate to such matters as sales growth, increases in comparable store sales, cannibalization of existing locations by new openings, price or fee changes, earnings performance, earnings per share, stock-based compensation expense, warehouse openings and closures, the effect of adopting certain accounting standards, future financial reporting, financing, margins, return on invested capital, strategic direction, expense control, membership renewal rates, shopping frequency, litigation impact and the demand for our products and services. Forward-looking statements may also be identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. 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. Seestatements, including, without limitation, the factors set forth in Item 1A—Risk Factors, for a discussionand other factors noted in the Management’s Discussion and Analysis of risksFinancial Condition and uncertainties that may affect our business.Results of Operations, and the consolidated financial statements and related notes in Item 8 of this Report. Forward-looking statements speak only as of the date they are made, and we do not undertake to update these forward-looking statements, except as required by law.

PART I

Item 1—Business

Costco Wholesale Corporation and its subsidiaries (“Costco”(Costco or the “Company”)Company) began operations in 1983 in Seattle, Washington. In October 1993, we merged with The Price Company, which had pioneered the membership warehouse concept, to form Price/Costco, Inc., a Delaware corporation. In January 1997, after the spin-off of most of our non-warehouse assets to Price Enterprises, Inc., we changed our name to Costco Companies, Inc. On August 30, 1999, we reincorporated from Delaware to Washington and changed our name to Costco Wholesale Corporation. Our common stock trades on Thethe NASDAQ Global Select Market under the symbol “COST.”

We report on a 52/53-week fiscal year, consisting of thirteen four-week periods and ending on the Sunday nearest the end of August. The first three quarters consist of three periods each, and the fourth quarter consists of four periods (five weeks in the thirteenth period in a 53-week year). The material seasonal impact in our operations is an increased level of net sales and earnings during the winter holiday season. References to 2011, 2010, and 2009 relate to the 52-week fiscal years ended August 28, 2011, August 29, 2010, and August 30, 2009, respectively.

The Company and its subsidiaries are principally engaged in the operation of membership warehouses in the United States, Canada, the United Kingdom, Japan, Australia, through majority-owned subsidiaries in Taiwan and Korea, and a 50% owned joint venture in Mexico (Mexico). At the beginning of fiscal 2011, we began consolidating our Mexico joint venture due to the adoption of a new accounting standard. Mexico’s results previously were accounted for under the equity method and our 50% share was included in “interest income and other, net” in the consolidated statements of income. In the current year, the financial position and results of Mexico’s operations are fully consolidated and the joint venture partner’s 50% share is included in “net income attributable to noncontrolling interests” in the consolidated statements of income. The initial consolidation of Mexico increased total assets, liabilities, and revenue by approximately 3%, with no impact on net income or net income per common share attributable to Costco. See discussion in Note 1 to the consolidated financial statements included in Item 8 of this Report.

General

We operate membership warehouses based on the concept that offering our members low prices on a limited selection of nationally branded and selected private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. This turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, enables us to operate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets, and supercenters.

We buy the majority of our merchandise directly from manufacturers and route it to a cross-docking consolidation point (“depot”)(depot) or directly to our warehouses. Our depots receive container-based shipments from manufacturers and reallocate these goods for shipment to our individual warehouses, generally in less than twenty-four hours. This maximizes freight volume and handling efficiencies, eliminating many of the costs associated with traditional multiple-step distribution channels. Such traditional steps include purchasing from distributors as opposed to manufacturers, use of central receiving, storing and distributing warehouses, and storage of merchandise in locations off the sales floor.

Because of our high sales volume and rapid inventory turnover, we generally sell inventory before we are required to pay many of our merchandise vendors, even though we take advantage of early payment discounts when available. To the extent that sales increase and inventory turnover becomes more rapid, a greater percentage of inventory is financed through payment terms provided by suppliers rather than by our working capital.

Item 1—Business (Continued)

Our typical warehouse format averages approximately 143,000 square feet; newer units tend to be slightly larger. Floor plans are designed for economy and efficiency in the use of selling space, the handling of merchandise, and the control of inventory. Because shoppers are attracted principally by the quality of merchandise and the availability of low prices, our warehouses need not have elaborate facilities. By strictly controlling the entrances and exits of our warehouses and using a membership format, we have limited inventory losses (shrinkage) to less than two-tenths of one percent of net sales in the last several fiscal years—well below those of typical discount retail operations.

Item 1—Business (Continued)

We generally limit marketing and promotional activities to new warehouse openings, occasional direct mail to prospective new members, and regular direct marketing programs (such as The Costco Connection, a magazine we publish for our members, coupon mailers, weekly email blasts from costco.com, and handouts) to existing members promoting selected merchandise. These practices result in lower marketing expenses as compared to typical retailers. In connection with new warehouse openings, our marketing teams personally contact businesses in the area that are potential business members. These contacts are supported by direct mailings during the period immediately prior to opening. Potential Gold Star (individual) members are contacted by direct mail or by membership offerings distributed through employee associations and other entities. After a membership base is established in an area, most new memberships result from word-of-mouth advertising, follow-up messages distributed through employee groups, and ongoing direct solicitations to prospective members.

Our warehouses generally operate on a seven-day, 69-hour week, open weekdays between 10:00 a.m. and 8:30 p.m., with earlier weekend closing hours on the weekend.hours. Gasoline operations generally have extended hours. Because the hours of operation are shorter than those of traditional retailers, discount retailers and supermarkets, and due to other efficiencies inherent in a warehouse-type operation, labor costs are lower relative to the volume of sales. Merchandise is generally stored on racks above the sales floor and displayed on pallets containing large quantities, thereby reducing labor required for handling and stocking.

Our strategy is to provide our members with a broad range of high quality merchandise at prices consistently lower than they can obtain elsewhere. We seek to limit specific items in each product line to fast-selling models, sizes, and colors. Therefore, we carry an average of approximately 3,9003,600 active stock keeping units (SKUs) per warehouse in our core warehouse business, as opposed to 45,000 to 140,000 SKUs or more at discount retailers, supermarkets, and supercenters. Many consumable products are offered for sale only in case, carton, or multiple-pack quantities only.

In keeping with our policy of member satisfaction, we generally accept returns of merchandise. On certain electronic items, we generally have a 90-day return policy in the United States, Canada and the United Kingdom and provide, free of charge, technical support services, as well as an extended warranty.

Only the 2011 data in the accompanying tables includes Mexico.

The following table indicates the approximate percentage of net sales accounted for by major category of items:

Item 1—Business (Continued)

Ancillary businesses within or next to our warehouses provide expanded products and services and encourage members to shop more frequently. The following table indicates the number of ancillary businesses in operation at fiscal year end:year-end:

Costco Mexico, our 50%-owned joint venture, operatedThe 2010 and 2009 numbers exclude the 32 warehouses at August 29, 2010. We have contractual responsibility for executive, management and functional duties and operations of Costcooperated in Mexico. The Costco Mexico warehouses are not included in the table above as Costco Mexico is accounted for using the equity method of accounting for investments.

Our electronic commerce businesses, costco.com in the U.S. and costco.ca in Canada, provide our members additional products generally not found in our warehouses, in addition to services such as digital photo processing, pharmacy, travel, and membership services.

Our warehouses accept cash, checks, certain debit cards, American Express and a private label Costco credit card. Losses associated with dishonored checks have been minimal, as members who have issued dishonored checks are identified and prevented from making further purchases until restitution is made.

We have direct buying relationships with many producers of national brand-name merchandise. We do not obtain a significant portion of merchandise from any one supplier. We have not experienced any difficulty in obtaining sufficient quantities of merchandise, and believe that if one or more of our current sources of supply became unavailable, we would be able to obtain alternative sources without substantial disruption of our business. We also purchase selected private label merchandise, as long as quality and customer demand are comparable and the value to our members is greater as compared to name brand items.

Certain financial information for our segments and geographic areas is included in Note 12 to the accompanying consolidated financial statements included in Item 8 of this Report.

We report on a 52/53-week fiscal year, consisting of thirteen four-week periods and ending on the Sunday nearest the end of August. The first three quarters consist of three periods each, and the fourth quarter consists of four periods (five weeks in the thirteenth period in a 53-week year). The material seasonal impact in our operations is an increased level of net sales and earnings during the winter holiday season. References to 2010, 2009, and 2008 relate to the 52-week fiscal years ended August 29, 2010, August 30, 2009, and August 31, 2008, respectively.

Membership Policy

Our membership format is designed to reinforce customer loyalty and provide a continuing source of membership fee revenue. Members can utilize their memberships at any Costco warehouse location in

Item 1—Business (Continued)

any country. We have two primary types of members: Business and Gold Star (individual). Our member renewal rate currently at 88%was 89% in the U.S. and Canada, isand approximately 86% on a worldwide basis, consistent with recent years. The renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. Businesses, including individuals with a business license, retail sales license or other evidence of business existence, may become Business members. Business members generally pay an annual membership fee of approximately $50 for the primary and household membership card, with add-on membership cards available for an annual fee of $40approximately $50 (including a free household card). Many of our business members also shop at Costco for their personal needs. Individual memberships (Gold Star memberships)Star) memberships are available to individuals who do not qualify for a Business membership, for an annual fee of approximately $50, which includes a household card.

Item 1—Business (Continued)

Our membership base was made up of the following (in thousands):

TheseThe numbers for 2010 and 2009 exclude approximately 2,900 and 2,800 cardholders of Costco Mexico at the end of 2010, and 2,800 cardholders at the end of 2009 and 2008.those years.

Executive membership is available to all members, with the exception of Business Add-on members, in the U.S., Canada, Mexico, and the United Kingdom for an annual fee of approximately $100. TheThis program, in the U.S. and Canada,excluding Mexico, offers additional savings and benefits on various business and consumer services, such as merchant credit-card processing, auto and home insurance, the Costco auto purchase program, and check printing services.services and a high yield savings program. The services are generally provided by third-parties and vary by country and state. In addition, Executive members qualify for a 2% annual reward (which can be redeemed at Costco warehouses), up to a maximum of approximately $500 per year, on qualified purchases made at Costco. At the end of 2011, 2010, 2009, and 2008,2009, Executive members represented 36%38%, 33%36%, and 30%33%, respectively, of our primary membership base that was eligible for the program.membership. Executive members generally spend more than other members, and the percentage of our net sales attributable to these members continues to increase.

Labor

Our employee count approximated:

TheseThe numbers for 2010 and 2009 exclude approximately 9,000 individuals who were employed by Costco Mexico at the end of 2010, 2009, and 2008.those years. Approximately 13,20013,600 hourly employees in certain of our locations (all former Price Company locations) in five states are represented by the International Brotherhood of Teamsters. All remaining employees are non-union. We consider our employee relations to be very good.

Item 1—Business (Continued)

Competition

Our industry is highly competitive, based on factors such as price, merchandise quality and selection, warehouse location and member service. We compete with over 800 warehouse club locations across the U.S. and Canada (Wal-Mart’s Sam’s Club and BJ’s Wholesale Club), and every major metropolitan area has multiple club operations. In addition, we compete with a wide range of global, national and regional retailerswholesalers and wholesalers,retailers, including supermarkets, supercenters, general merchandise chains,supercenter stores, department and specialty chains, andstores, gasoline stations, as well as electronic commerce businesses.and internet-based retailers. Competitors such as Wal-Mart, Target, Kohl’s and AmazonAmazon.com are among our significant general merchandise retail competitors. We also compete with low-cost operators selling a single category or narrow range of merchandise, such as Lowe’s, Home Depot, Office Depot, PetSmart, Staples, Trader Joe’s, Whole Foods, Best Buy and Barnes & Noble. Our international operations face similar types of competitors.

Item 1—Business (Continued)

Regulation

Certain state laws require that we apply minimum markups to our selling prices for specific goods, such as tobacco products, alcoholic beverages, and gasoline. While compliance with such laws may cause us to charge higher prices, other retailers are also typically governed by the same restrictions, and we believe that compliance with such laws currently in effect do not have a material adverse effect on our operations.

Certain states, counties, and municipalitiesjurisdictions have enacted or proposed laws and regulations that would prevent or restrict the operations or expansion plans of certain large retailers and warehouse clubs, including us, within their jurisdictions. If enacted, such laws and regulations could have a material adverse affect on our operations.

Intellectual Property

We believe that, to varying degrees, our trademarks, trade names, copyrights, proprietary processes, trade secrets, patents, trade dress and similar intellectual property add significant value to our business and are important factors in our success. Our failure to continue to develop, maintain, and protect these properties would adversely affect our business and financial results. We have invested significantly in the development and protection of our well-recognized brands, including the Costco Wholesale^® series of trademarks and our private label brand, Kirkland Signature^®. We believe that Kirkland Signature products are premium products offered to our members at prices that are generally lower than those for national brand products. Kirkland Signature products allow us to ensure our quality standards are met, while minimizingand that they help lower costs, and differentiatingdifferentiate our merchandise offerings from other retailers, and to generally earn higher margins. We expect thatto increase the sales penetration of our private label items will increase their share of our sales in the future. We rely on trademark and copyright law, trade secret protection, and confidentiality and license agreements with our employees and others to protect our proprietary rights. Effective intellectual property protection may not be available in every country in which we operate.

Available Information

Our internet website is www.costco.com. We make available through the Investor Relations section of that site, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5, and any amendments to those reports, as soon as reasonably practicable after filing such materials with, or furnishing such documents to, the Securities and Exchange Commission (SEC). The information found on our website is not part of this or any other report filed with or furnished to the SEC.

Item 1—Business (Continued)

Executive Officers of the Registrant

The following is a list of the names, ages, and positions of the executive officers of the Company. All executive officers have 25 or more years of service with the Company.

The Company has adopted a code of ethics for senior financial officers pursuant to section 406 of the Sarbanes-Oxley Act. Copies of the code are available free of charge by writing to Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, WA 98027. If the Company makes any amendments to this code (other than technical, administrative, or non-substantive amendments) or grants any waivers, including implicit waivers, from this code to the CEO, chief financial officer or controller, we will disclose (on our website or in a Form 8-K report filed with the SEC) the nature of the amendment or waiver, its effective date, and to whom it applies.

Item 1—Business (Continued)

Executive Officers of the Registrant

The following is a list of the names, ages, and positions of the executive officers of the Company. All executive officers have 25 or more years of service with the Company, with the exception of Mr. Murphy who has 24 years of service.

Item 1A—Risk Factors

The risks described below could materially and adversely affect our business, financial condition, and results of operations. These risks are not the only risks that we face. Our business operations could cause our actual results to differ materially from our historical experience and from results or events predictedalso be affected by our forward-looking statements. Those statements may relate to such matters as sales growth, increases in comparable store sales, cannibalization of existing locations by new openings, price changes, earnings performance, earnings per share, stock-based compensation expense, warehouse openings and closures, the effect of adopting certain accounting standards, future financial reporting, financing, margins, return on invested capital, strategic direction, expense control, membership renewal rates, shopping frequency, litigation impact and the demand for our products and services. You should read these risk factors in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Report and our consolidated financial statements and related notes in Item 8 of this Report. There may be otheradditional factors that we cannot anticipate orapply to all companies operating in the United States and globally, as well as other risks that are not described in this report, generally becausepresently known to us or that we do not presently perceive themcurrently consider to be material, that could cause results to differ materially from our expectations or statements. Forward-looking statements speak only as of the date they are made, and we do not undertake to update these forward-looking statements. You are advised to review any further disclosures we make on related subjects in our periodic filings with the SEC.immaterial.

We face strong competition from other retailers and warehouse club operators, which could negatively affect our financial performance.

The retail business is highly competitive. We compete for members, employees, sites, products and services and in other important respects with many other local, regional and national retailers, both in the United States and in foreign countries. We compete with other warehouse club operators, discounta wide range of global, national and regional wholesalers and retailers, including supermarkets, supercenter stores, retail and wholesale grocers, department drug, variety and specialty stores, gasoline stations, and general merchandise wholesalers and distributors, as well as internet-based retailers, wholesalers and catalog businesses.retailers. Such retailers and warehouse club operators compete in a variety of ways, including merchandise pricing, selection and availability, services, location, convenience, and store hours, and price.hours. Our inability to respond effectively to competitive pressures and changes in the retail markets could negatively affect our financial performance. Some competitors may have greater financial resources, better access to merchandise, and greater market penetration than we do.

General economic factors, domestically and internationally, may adversely affect our financial performance.

Higher interest rates, energy costs, inflation, levels of unemployment, healthcare costs, consumer debt levels, unsettled financial markets, weaknesses in housing and real estate markets, reduced consumer confidence, changes related to government fiscal and tax policies and other economic factors could adversely affect demand for our products and services or require a change in the mix of products we sell. Prices of certain commodity products, including gasoline and other food products, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations and periodic delays in delivery. Rapid and significant changes in commodity prices may affect our sales and profit margins. These factors can also increase our merchandise costs and/or selling, general and administrative expenses, and otherwise adversely affect our operations and financial results. General economic conditions can also be affected by the outbreak of war, acts of terrorism, or other significant national or international events.

Item 1A—Risk Factors (Continued)

Our growth strategy includes expanding our business, both in existing markets and in new markets.

Our future growth is dependent, in part, on our ability to acquire property, and build or lease new warehouses. We compete with other retailers and businesses for suitable locations. Local land use and other regulations restricting the construction and operation of our warehouses, as well as local community actions opposed to the location of our warehouses at specific sites and the adoption of local laws restricting our operations and environmental regulations may impact our ability to find suitable locations, and increase the cost of constructing, leasing and operating our warehouses. We also may have difficulty negotiating leases or real estate purchase agreements on acceptable terms. Failure to manage these and other similar factors effectively will affect our ability to timely build or lease new warehouses, which may have a material adverse affect on our future growth and profitability.

Item 1A—Risk Factors (Continued)

We seek to expand our business in existing markets in order to attain a greater overall market share. Because our warehouses typically draw members from their local areas, a new warehouse may draw members away from our existing warehouses and adversely affect comparable warehouse sales performance and member traffic at those existing warehouses.

We also intend to open warehouses in new markets. The risks associated with entering a new market include difficulties in attracting members due to a lack of familiarity with us, attracting members of other wholesale club operators currently operating in the new market, our lack of familiarity with local member preferences, and seasonal differences in the market. In addition, entry into new markets may bring us into competition with new competitors or with existing competitors with a large, established market presence. In new markets, we cannot ensure that our new warehouses will be profitably deployed; as a result, our future profitability may be delayed or otherwise materially adversely affected.

We are highly dependent on the financial performance of our United States and Canada operations.

Our financial and operational performance is highly dependent on our United States and Canada operations, which comprised 92%89% and 83% of consolidated net sales in 2010 and 93% in 2009, and 89% of operating income in 2010 and 92% in 2009.2011, respectively. Within the United States, we are highly dependent on our California operations, which comprised 26% and 27%24% of consolidated net sales in 2010 and 2009, respectively.2011. Our California market, in general, has a larger percentage of higher volume warehouses as compared to our other markets. Any substantial slowing or sustained decline in these operations could materially adversely affect our business and financial results. Declines in financial performance of our United States operations, particularly in California, and our Canada operations could arise from, among other things: failing to meet targets for warehouse openings; declines in actual or estimated comparable warehouse sales growth rates and expectations; negative trends in operating expenses, including increased labor, healthcare and energy costs; cannibalizing existing locations with new warehouses; shifts in sales mix toward lower gross margin products; changes or uncertainties in economic conditions in our markets;markets, including higher levels of unemployment and depressed home values; and failing to consistently to provide high quality products and innovative new products to retain our existing member base and attract new members.

We depend on vendors to supply us with quality merchandise at the right prices in a timely manner.

We depend heavily on our ability to purchase merchandise in sufficient quantities at competitive prices. We have no assurances of continued supply, pricing or access to new products, and any vendor could at any time change the terms upon which it sells to us or discontinue selling to us. Member demands may lead to out-of-stock positions of our merchandise, leading to loss of sales and profits.

Item 1A—Risk Factors (Continued)

We purchase our merchandise from numerous domestic and foreign manufacturers and importers and have thousands of vendor relationships. Our inability to acquire suitable merchandise on acceptable terms or the loss of key vendors could negatively affect us. We may not be able to develop relationships with new vendors, and products from alternative sources, if any, may be of a lesser quality or more expensive than those from existing vendors. Because of our efforts to adhere to high quality standards for which available supply may be limited, particularly for certain food items, the large volume we demand may not be consistently available.

Our suppliers are subject to risks, including labor disputes, union organizing activities, financial liquidity, inclement weather, natural disasters, supply constraints, and general economic and political conditions, that could limit their ability to timely provide us with acceptable merchandise. For these or other reasons, one or more of our suppliers might not adhere to our quality control, legal or regulatory standards.stan

Item 1A—Risk Factors (Continued)

dards. These deficiencies may delay or preclude delivery of merchandise to us and might not be identified before we sell such merchandise to our members. This failure could lead to litigation and recalls, which could damage our reputation and our brands, increase our costs, and otherwise hurt our business.

In addition, the United States’ foreign trade policies, tariffs and other impositions on imported goods, security and safety regulations, trade sanctions imposed on certain countries, the limitation on the importation of certain types of goods or of goods containing certain materials from other countries and other factors relating to foreign trade are beyond our control and could adversely impact our sourcing of goods.

We depend onDisruptions in our depot operations to effectivelycould adversely affect sales and efficiently supply product to our warehouses.member satisfaction.

We depend on the orderly operation of the receiving and distribution process, primarily through our depots. Although we believe that our receiving and distribution process is efficient, unforeseen disruptions in operations due to fires, hurricanes, earthquakes or other catastrophic events, labor shortages and disagreements or shipping problems, may result in delays in the delivery of merchandise to our warehouses, which could adversely affect sales and the satisfaction of our members.

We may not timely identify or effectively respond to consumer trends, which could negatively affect our relationship with our members, the demand for our products and services, and our market share.

It is difficult to consistently and successfully predict the products and services our members will demand. Our success depends, in part, on our ability to identify and respond to trends in demographics and consumer preferences. Failure to timely identify or effectively respond to changing consumer tastes, preferences (including those relating to sustainability of product sources) and spending patterns could negatively affect our relationship with our members, the demand for our products and services and our market share. If we are not successful at predicting our sales trends and adjusting our purchases accordingly, we may have excess inventory, which could result in additional markdowns and reduce our operating performance. This could have an adverse effect on margins and operating income.

Our failure to maintain positive membership loyalty and brand recognition could adversely affect our financial results.

Membership loyalty is essential to our business model. Damage to our brands or reputation may negatively impact comparable warehouse sales, lower employee morale and productivity, diminish member trust, and reduce member renewal rates and, accordingly, membership fee revenues, resulting in a reduction in shareholder value.

Item 1A—Risk Factors (Continued)

In addition, we sell many products under our owned and exclusive Kirkland Signature brand. Maintaining consistent product quality, competitive pricing, and availability of our Kirkland Signature products for our customers is essential to developing and maintaining customer loyalty. These products also generally carry higher margins than national brand products and represent a growing portion of our overall sales. If the Kirkland Signature brand experiences a loss of consumer acceptance or confidence, our sales and gross margin results could be adversely affected.

Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including, but not limited to, revenue recognition, sales returns reserves, impairment of long-lived assets and warehouse closing costs, inventories, vendor rebates and other consideration, self-insurance liabilities, income taxes, unclaimed property laws and litigation, and other contingent liabilities are highly complex and involve many subjective assumptions, estimates and judgments by our management. Changes

Item 1A—Risk Factors (Continued)

in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance. Provisions for losses related to self-insured risks are generally based upon independent actuarially determined estimates. The assumptions underlying the ultimate costs of existing claim losses can be highly unpredictable, which can affect the liability recorded for such claims. For example, variability in inflation rates of health care costs inherent in these claims can affect the amounts realized. In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were enacted. This legislation expands health care coverage to many uninsured individuals and expands coverage to those already insured. We expect our healthcare costs to increase, but not materially, as a result of this legislation. Similarly, changes in legal trends and interpretations, as well as a change in the nature and method of how claims are settled can impact ultimate costs. Although our estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, any changes could have a considerable effect upon future claim costs and currently recorded liabilities and could materially impact our consolidated financial statements.

ChangesUnfavorable changes in Tax Ratestax rates could adversely affect our operations, financial conditions or cash flows.

We compute our income tax provision based on enacted tax rates in the countries in which we operate. As the tax rates vary among countries, a change in earnings attributable to the various jurisdictions in which we operate could result in an unfavorable change in our overall tax provision. Additionally, any change in the enacted tax rates, any adverse outcome in connection with any income tax audits in any jurisdiction, including transfer pricing disputes, or any change in the pronouncements relating to accounting for income taxes may have a material adverse affect on our financial condition, results of operations, or cash flows.

Failure of our internal control over financial reporting could make our financial results inaccurate or untimely.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes: maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of the financial statements; providing reasonable assurance that our receipts and expenditures of our assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to and cannot provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud.

We rely extensively on computer systems to process transactions, summarize results and manage our business. Disruptions in both our primary and back-up systems could harm our business.

Although we believe that we have independent, redundant, and primary and secondary computer systems, given the number of individual transactions we have each year it is important that we maintain

Item 1A—Risk Factors (Continued)

uninterrupted operation of our business-critical computer systems. Our computer systems, including our back-up systems, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, catastrophic events such as fires, earthquakes, tornadoes and hurricanes, and errors by our employees. If our computer systems and our back-up systems are damaged or cease to function properly, we may have to make significant investments to fix or replace them, and we may suffer interruptions in our operations in the interim. Any material interruption in our computer systems may have a material adverse effect on our business or results of operations.

We expect to make significant technology investments in the coming years, which are key to managing our business. We must monitor and choose the right investments and implement them at the right pace. Excessive technological change could impact the effectiveness of adoption, and could make it more difficult for us to realize benefits from the technology. Targeting the wrong opportunities, failing to make the best investments or making an investment commitment significantly above or below our needs may result in the loss of our competitive position or underlying financial data. Additionally, the costs, potential problems, and interruptions associated with implementing technology initiatives could disrupt or reduce the efficiency of our operations in the short term. These initiatives might not provide the anticipated benefits or provide them in a delayed or more costly manner.

Our international operations subject us to risks associated with the legislative, judicial, accounting, regulatory, political and economic factors specific to the countries or regions in which we operate, which could adversely affect our financial performance.

OurDuring 2011, our international operations, are growing.including Canada, generated 27% of our consolidated net sales. We plan to continue expanding our international operations. As a result of these expansion activities in countries outside the United States, we expect that our international operations could account for a larger portion of our net sales in future years. Future operating results internationally could be negatively affected by a variety of factors, many beyond our control and similar to those we face in the United States. These factors include political conditions, economic conditions, regulatory constraints, currency regulations and exchange rates, and other matters in any of the countries or regions in which we operate, now or in the future. Other factors that may impact international operations include foreign trade, monetary and fiscal policies both of the United States and of other countries, laws and regulations of foreign governments and the United States (such as the Foreign Corrupt Practices Act), agencies and similar organizations, and risks associated with having major facilities located in countries which have been historically less stable than the United States. Risks inherent in international operations also include, among others, the costs and difficulties of managing international operations, adverse tax consequences and greater difficulty in enforcing intellectual property rights. Additionally, foreign currency exchange rates and fluctuations may have an adverse impact on our future costs or on future cash flows from our international operations.

Market expectations for our financial performance is high.

We believe that the price of our stock generally reflects high market expectations for our future operating results. Any failure to meet or delay in meeting these expectations, including our comparable warehouse sales growth rates, margins, earnings and earnings per share or new warehouse openings, could cause the market price of our stock to decline, as could changes in our dividend or stock repurchase policies.

We rely extensively on computer systems to process transactions, summarize results and manage our business. Disruptions in both our primary and back-up systems could harm our business.Item 1A—Risk Factors (Continued)

Although we believe that we have independent, redundant, and primary and secondary computer systems, given the number of individual transactions we have each year, it is important that we maintain uninterrupted operation of our business-critical computer systems. Our computer systems, including our back-up systems, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, catastrophic events such as fires, earthquakes, tornadoes and hurricanes, and errors by our employees. If our computer systems and our back-up systems are damaged or cease to function properly, we may have to make significant investments to fix or replace them, and we may suffer interruptions in our operations in the interim. Any material interruption in our computer systems may have a material adverse effect on our business or results of operations. The costs, potential problems, and interruptions associated with implementing technology initiatives could disrupt or reduce the efficiency of our operations in the short term. These initiatives might not provide the anticipated benefits or provide them in a delayed or more costly manner.

Natural disasters or other catastrophic events could unfavorably affect our financial performance.

Natural disasters, such as hurricanes or earthquakes, particularly in California or in Washington state, where our centralized operating systems and administrative personnel are located, could unfavorably affect our operations and financial performance. Such events could result in physical damage to one or more of our properties, the temporary closure of one or more warehouses or depots, the temporary

Item 1A—Risk Factors (Continued)

lack of an adequate work force in a market, the temporary or long-term disruption in the supply of products from some local and overseas suppliers, the temporary disruption in the transport of goods from overseas, delays in the delivery of goods to our depots or warehouses within a country in which we operate and the temporary reduction in the availability of products in our warehouses. Public health issues, such as a potential H1N1 flu pandemic (swine flu), pandemic, whether occurring in the United States or abroad, could disrupt our operations, disrupt the operations of suppliers or customers, or have an adverse impact on consumer spending and confidence levels. We may be required to suspend operations in some or all of our locations, which could have a material adverse effect on our business, financial condition, and results of operations. These events could also reduce demand for our products or make it difficult or impossible to receive products from suppliers.

We are subject to a wide variety of federal, state, regional, local and international laws and regulations relating to the use, storage, discharge, and disposal of hazardous materials and hazardous and non-hazardous wastes, and other environmental matters.

Any failure to comply with these laws could result in costs to satisfy environmental compliance, remediation or compensatory requirements, or the imposition of severe penalties or restrictions on operations by governmental agencies or courts that could adversely affect our operations.

Factors associated with climate change could adversely affect our business.

We use natural gas, diesel fuel, gasoline, and electricity in our distribution and salewarehouse operations. Increased government regulations to limit carbon dioxide and other greenhouse gas emissions may result in increased compliance costs and legislation or regulation affecting energy inputs could materially affect our profitability. In addition, climate change could affect our ability to procure needed commodities at costs and in quantities we currently experience. We also sell a substantial amount of gasoline, the demand for which could be impacted by concerns about climate change and which also could face increased regulation. Climate change may be associated with extreme weather conditions, such as more intense hurricanes, thunderstorms, tornados and snow or ice storms, as well as rising sea levels. Extreme weather conditions increase our costs, and damage resulting from extreme weather may not be fully insured.

We are subject to a wide variety of federal, state, regional, local and international laws and regulations relating to the use, storage, discharge, and disposal of hazardous materials and hazardous and non-hazardous wastes, and other environmental matters.

Any failure to comply with these laws could result in costs to satisfy environmental compliance, remediation or compensatory requirements, or the imposition of severe penalties or restrictions on operations by governmental agencies or courts that could adversely affect our operations.

We are involved in a number of legal proceedings and audits, and while we cannot predict the outcomes of such proceedings and other contingencies with certainty, some of these outcomes may unfavorably affect our operations or increase our costs.

We are or may become involved in a number of legal proceedings and audits, including grand jury investigations, other government investigations, consumer, employment, tort and other litigation (see discussion of Legal Proceedings in Note 11 to the consolidated financial statements included in Item 8 of this Report). We cannot predict with certainty the outcomes of these legal proceedings and other contingencies, including environmental remediation and other proceedings commenced by governmental authorities. The outcome of some of these legal proceedings and other contingencies could require us to take or refrain from taking actions which could unfavorably affect our operations or could require us to pay substantial amounts of money. Additionally, defending against these lawsuits and

Item 1A—Risk Factors (Continued)

proceedings may involve significant expense and diversion of management’s attention and resources. Our business requires compliance with a great variety of laws and regulations. Failure to achieve compliance could subject us to lawsuits and other proceedings, and lead to damage awards, fines and penalties.

Item 1A—Risk Factors (Continued)

We are subject to the risks of selling unsafe products.

If our merchandise offerings, including food and prepared food products for human consumption, drugs and childrens’ products, do not meet or are perceived not to meet applicable safely standards or our members’ expectations regarding safety, we could experience lost sales, increased costs and be exposed to legal and reputational risk. The sale of these items involves the risk of injury to our members. Such injuries may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, manufacturing, storage, handling and transportation phases. Our vendors are generally contractually required to comply with applicable product safety laws, and we are dependent on them to ensure that the products we buy comply with all safety standards. While we are subject to governmental inspection and regulations and work to comply in all material respects with applicable laws and regulations, we cannot be sure that consumption of our products will not cause a health-related illness in the future or that we will not be subject to claims, lawsuits, or government investigations relating to such matters, resulting in costly product recalls and other liabilities. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential members and our corporate and brand image and these effects could be long term.

Our success depends on the continued contributions of management and on our ability to attract, train and retain highly qualified employees.

Our success depends to a significant degree on the continued contributions of members of our senior management and other key operations, merchandising and administrative personnel, and the loss of any such person(s) could have a material adverse effect.effect on our business. Other than an annual agreement with our CEO, Mr. Sinegal, we have no employment agreements with our officers. We must attract, train and retain a large and growing number of highly qualified employees, while controlling related labor costs.costs and maintaining our core values. Our ability to control labor costs is subject to numerous external factors, including prevailing wage rates and healthcare and other insurance costs. We compete with other retail and non-retail businesses for these employees and invest significant resources in training and motivating them. There is no assurance that we will be able to attract or retain highly qualified employees in the future, which could have a material adverse effect on the Company’s business, results of operations and financial condition. The Company does not maintain key man insurance.

If we do not maintain the privacy and security of member-related and business information, we could damage our reputation with members, incur substantial additional costs and become subject to litigation.

We receive, retain, and transmit certain personal information about our members. In addition, our online operations at www.costco.com and www.costco.ca depend upon the secure transmission of confidential information over public networks, including information permitting cashless payments. A compromise of our security systems or those of other business partners that results in our members’ personal information being obtained by unauthorized persons could adversely affect our reputation with our members and others, as well as our operations, results of operations, financial condition and liquidity,liquid-

Item 1A—Risk Factors (Continued)

ity, and could result in litigation against us or the imposition of penalties. In addition, a security breach could require that we expend significant additional resources related to the security of information systems and could result in a disruption of our operations, particularly our online sales operations.

Additionally, the use of individually identifiable data by our business and our business associates is regulated at the international, federal and state levels. Privacy and information security laws and regulations change, and compliance with them may result in cost increases due to necessary systems

Item 1A—Risk Factors (Continued)

changes and the development of new administrative processes. If we or those with whom we share information fail to comply with these laws and regulations or experience a data security breach, our reputation could be damaged, possibly resulting in lost future business, and we could be subjected to additional legal risk as a result of non-compliance.

Our security measures may be undermined due to the actions of outside parties, employee error, malfeasance, or otherwise, and, as a result, an unauthorized party may obtain access to our data systems and misappropriate business and personal information. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may not immediately produce signs of intrusion, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation, and potentially have an adverse effect on our business.

Item 1B—Unresolved Staff Comments

None.

Item 2—Properties

Warehouse Properties

At August 29, 2010,28, 2011, we operated 540592 membership warehouses:

NUMBER OF WAREHOUSES

The following schedule shows warehouse openings (net of closings) by region for the past five fiscal years and expected warehouse openings (net of closings) through December 31, 2010:2011:

The 32 warehouses operated by Costco Mexico, under our oversight, at the end of 2010 are not included in the above tables.

At the end of 2010,2011, our warehouses contained approximately 77.384.4 million square feet of operating floor space: 60.262.1 million in the United States, 10.811.2 million in Canada and 6.311.1 million in other international locations, excludingincluding Mexico.

Our executive offices are located in Issaquah, Washington and occupy approximately 581,000 square feet. We operated eight regional offices in the United States, two regional offices in Canada and fivesix regional offices internationally at the end of 2010,2011, containing approximately 334,000422,000 square feet. Additionally, we operateoperated regional cross-docking facilities (depots) for the consolidation and distribution of most shipments to the warehouses, and various processing, packaging, and other facilities to support ancillary and other businesses. At the end of 2010,2011, we operated 12 depots in the United States, four in Canada and threefour internationally, excluding Mexico, consisting of approximately 7.68.3 million square feet.

Item 3—Legal Proceedings

See discussion of Legal Proceedings in Note 11 to the consolidated financial statements included in Item 8 of this Report.

Item 4—Removed and Reserved

PART II

Item 5—Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information and Dividend Policy

Our common stock is traded on the National Market tier of NASDAQ under the symbol “COST.” On October 1, 2010,September 30, 2011, we had 8,2868,198 stockholders of record.

The following table shows the quarterly high and low closing sale prices as reported by NASDAQ for each quarter during the last two fiscal years and the quarterly cash dividend declared per share of our common stock during the periods indicated.

Payment of future dividends is subject to declaration by the Board of Directors. Factors considered in determining the size of the dividends are our profitability and expected capital needs. Subject to these qualifications, we presently expect to continue to pay dividends on a quarterly basis.

Issuer Purchases of Equity Securities (dollars in millions, except per share data)

The following table sets forth information on our common stock repurchase program activity for the 16-week fourth quarter of fiscal 2010:2011:

Equity Compensation Plans

Information related to our equity compensation plans is incorporated herein by reference to the Proxy Statement. The Proxy Statement will be filed with the SEC within 120 days of the end of our fiscal year.

Item 6—Selected Financial Data

The following table sets forth certain information concerning our consolidated financial condition, operating results, and key operating metrics for the dates and periods indicated.metrics. This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Item 7 and our consolidated financial statements included in Item 8 of this Report.

At the beginning of fiscal 2011, we began consolidating our 50% owned Mexico joint venture (Mexico) on a prospective basis due to the adoption of a new accounting standard. Mexico’s results for the prior years were accounted for under the equity method and our 50% share was included in “interest income and other” in the consolidated statements of income in Item 8. In the current year, the financial position and results of Mexico’s operations are fully consolidated and the joint venture partner’s 50% share is included in “net income attributable to noncontrolling interests” in the consolidated statements of income in Item 8 of this Report. The initial consolidation of Mexico increased total assets, liabilities, and revenue by approximately 3%, with no impact on net income or net income per common share attributable to Costco. See discussion in Note 1 to the consolidated financial statements included in Item 8 of this Report.

SELECTED FINANCIAL DATA

(dollars in millions, except per share and warehouse number data)

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations(dollars in millions, except per share and warehouse number data)

OVERVIEW

Our fiscal year ends on the Sunday closest to August 31. References to 2010, 2009, and 2008 relate to the 52-week years ended August 29, 2010, August 30, 2009, and August 31, 2008, 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 2010 included:

We believe that the most important driver of increasing our profitability is sales growth, particularly comparable sales growth.growth (sales in warehouses open for at least one year). Comparable sales growth is achieved through increasing the frequency with which our members shop and the amounts they spend on each visit. Sales comparisons can also be particularly influenced by two factors that are beyond our control, including fluctuations in currency exchange rates (with respect to the consolidation of the results of our international operations) and changes in the cost of gasoline and associated competitive conditions (primarily impacting domestic operations). The higher our comparable sales not associated with currency fluctuations the more we can leverage certain of our selling, general and administrative expenses, reducing them as a percentage of sales and enhancing profitability. Generating comparable sales growth is foremost a question of making available to our members the right merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long term. Another substantial factor in sales growth is the health of the economies in which we do business, especially the United States. Adverse economic conditions negatively impacted spending by our customers during 2009 and 2010, and that negative impact may continue. Sales growth and our gross margin are also impacted by our competition, which is vigorous and widespread, including other warehouse clubs, discount,a wide range of global, national and regional wholesalers and retailers, including supermarkets, supercenter stores, department drug, variety and

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations(dollars in millions, except per share and warehouse number data) (Continued)

specialty stores, gasoline stations, and supermarkets, as well as internetinternet-based retailers. While we cannot control or reliably predict general economic health or changes in competition, we believe that we have been successful historically in adapting our business to these changes, such as through adjustments to our pricing and to our merchandise mix, including increasing the penetration of our private label items. Our philosophy is not to focus in the short term on maximizing prices that our members can be charged but to maintain what we believe is a perception among our members of our “pricing authority”—consistently providing the most competitive values. This may cause us, for example, to absorb increases in merchandise costs at certain times rather than immediately passing them along to our members, negatively impacting gross margin.

We also achieve sales growth by opening new warehouses and relocating existing warehouses to larger and better-located facilities. As our warehouse base grows, and available and desirable potential sites become more difficult to secure, and square footage growth becomes a comparatively less substantial component of growth, butgrowth. However, the negative aspects of such growth, (includingincluding lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehousewarehouses when openings occur in existing markets)markets, are ameliorated. Our rate of square footage growth is higher in foreign markets, due to the smaller base in those markets, and we expect that to continue.

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

Key items for 2011 included:

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations(dollars in millions, except per share and warehouse number data)(Continued)

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.

Only the 2011 data in the accompanying tables includes Mexico.

Results of Operations

Net Sales

20102011 vs. 20092010

Net Sales

Net sales increased 9.1%$10,793 or 14.2% during 20102011 compared to 2009. The $6,3662010. Excluding sales of Mexico, the increase would have been 11%. This increase was comprised of a $4,871primarily attributable to an increase in comparable warehouse sales, and the remainder primarily from sales at the 20 net new warehouses opened during 20102011 (24 opened, and 2009.

Foreign currencies, particularly in Canada, Korea,four closed, two due to relocation and two temporarily closed for repairs due to damage caused by the March 11, 2011 Japan strengthened againstearthquake, one of which remained closed as of the U.S. dollar, which positively impacted net sales during 2010 by approximately $1,570 (225 basis points)end of 2011). Net sales were also positively impacted by gasoline price inflation during 2010 by approximately $895 (128 basis points), which resulted from a 17% increase in the average sales price per gallon.

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations(dollars in millions, except per share and warehouse number data)(Continued)

Foreign currencies strengthened against the U.S. dollar, which positively impacted net sales during 2011 by approximately $1,308, or 172 basis points. Net sales were also positively impacted by gasoline price increases during 2011 by approximately $1,699, or 223 basis points, which resulted from a 24% increase in the average sales price per gallon.

Our sales results continuecontinued to be negatively impacted, albeit to a lesser extent than in 2010, by general economic conditions, and those conditions may continue to have a significantan adverse impact on spending by our members. We believe, however, that due to the nature of our business model, we are better positioned than many retailers to compete in such an environment.

Comparable Sales

Comparable sales, including Mexico for both this year and last year, increased 10% during 2011, and were positively impacted by increases in the average amount spent by our members and in their shopping frequency. The strengthening of foreign currencies favorably impacted comparable sales by approximately $1,260, or 162 basis points during 2011. Gasoline price inflation positively impacted comparable sales results by approximately $1,679, or 220 basis points during 2011. Reported comparable sales growth includes the negative impact of cannibalization (established warehouses losing sales to our newly opened locations).

2010 vs. 2009

Net Sales

Net sales increased $6,366 or 9.1% during 2010 compared to 2009. The increase was primarily attributable to an increase in comparable warehouse sales and the remainder primarily from sales at the 13 net new warehouses opened during 2010 (14 opened and one closed due to a relocation).

Foreign currencies strengthened against the U.S. dollar, which positively impacted net sales during 2010 by approximately $1,570 or 225 basis points. Net sales were also positively impacted by gasoline price inflation during 2010 by approximately $895, or 128 basis points, which resulted from a 17% increase in the average sales price per gallon.

Comparable Sales

Comparable sales increased 7% in 2010 and were positively impacted primarily by an increase in shopping frequency. Strengthening foreign currencies positively impacted comparable sales by approximately $1,510, (217or 217 basis points)points, in 2010. Gasoline price inflation positively impacted comparable sales results by approximately $882, (126or 126 basis points)points, during 2010. Reported comparable sales growth includes the negative impact of cannibalization (established warehouses losing sales to our newly opened locations).

2009 vs. 2008

Net Sales

Our 2009 sales results, particularly in hardlines and softlines, were negatively impacted by general economic conditions. Net sales decreased 1.5% during 2009 compared to 2008. The $1,088 decrease was comprised of a $2,590 decrease in comparable sales, partially offset by an increase of $1,502 primarily from sales at new warehouses opened during 2009 and 2008. Our sales were also impacted by a lower number of warehouse openings year-over-year.

Foreign currencies, particularly in Canada, the United Kingdom, and Korea, weakened against the U.S. dollar, which negatively impacted net sales during 2009 by approximately $2,421 (341 basis points). Net sales were also negatively impacted by gasoline price deflation during 2009 by approximately $2,164 (305 basis points), which resulted from a 30% decline in the average sales price per gallon.

Comparable Sales

Comparable sales decreased 4% in 2009. Weakening foreign currencies negatively impacted comparable sales by approximately $2,339 (333 basis points) in 2009. Gasoline price deflation negatively impacted comparable sales results by approximately $2,113 (298 basis points) during 2009. Comparable sales were negatively impacted by a decline in the average amount spent (after adjustment for gasoline price deflation and measured in local currencies), partially offset by an increase in shopping frequency. Reported comparable sales growth includes the negative impact of cannibalization.

Membership Fees

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations(dollars in millions, except per share and warehouse number data)(Continued)

2011 vs. 2010

Membership fees increased 10.4% in 2011. Excluding membership fees from Mexico, the increase would have been 8.3% in 2011. This increase was due to the higher penetration of our higher-fee Executive Membership program and the additional membership sign-ups at the 20 net new warehouses opened during 2011. Our member renewal rates are consistent with recent years, currently at 89% in the U.S. and Canada, and approximately 86% on a worldwide basis.

Foreign currencies strengthened against the U.S. dollar, which positively impacted membership fees in 2011 by approximately $30.

2010 vs. 2009

Membership fees increased 10.3% in 2010 compared to 2009. Membership fees in 2010 were positively impacted due to the increased penetration of our higher-fee Executive Membership program, the continued benefit of membership sign-ups at warehouses opened in 2009, and 2008, a 2009 $27 charge to membership fees related to a litigation settlement concerning our membership renewal policy, and the additional membership sign-ups at the 13 net new warehouses opened in 2010 (14 opened and one closed due to a relocation).2010. Our member renewal rate currently at the end of 2010 was 88% in the U.S. and Canada, is consistent with recent years.

Canada. Foreign currencies particularly in Canada, Korea, and Japan, strengthened against the U.S. dollar in 2010, which positively impacted membership fees by approximately $36.

2009 vs. 2008

Membership fees increased 1.8% in 2009 compared to 2008. The increase was primarily due to membership sign-ups at the 15 new warehouses opened in 2009 (19 opened, two closed due to relocations, and two closed Costco Home locations), the continued benefit of membership sign-ups at warehouses opened in 2008, and increased penetration of our higher-fee Executive Membership program. This increase was negatively impacted by the $27 charge for the litigation settlement discussed above, the weakening of foreign currencies against the U.S. dollar, particularly in Canada, the United Kingdom, and Korea, which negatively impacted membership fees during 2009 by approximately $50, and a lower number of warehouse openings year-over-year. Our member renewal rate at the end of 2009 was 87% in the U.S. and Canada.

Gross Margin

2011 vs. 2010

Gross margin as a percent of net sales decreased 14 basis points compared to 2010. Gross margin for core merchandise categories (food and sundries, hardlines, softlines, and fresh foods), when expressed as a percent of core merchandise sales, rather than total net sales, increased 18 basis points, primarily due to hardlines and food and sundries. However, when the core merchandise gross margin is expressed as a percentage of total net sales, it decreased two basis points from the prior year due primarily to the increased sales penetration of the lower-margin gasoline business. Warehouse ancillary and other businesses gross margins decreased by two basis points as a percent of total net sales. The gross margin comparison was negatively impacted by $87 or 10 basis points due to a LIFO inventory charge recorded in 2011. The charge resulted from higher costs for our merchandise inventories, primarily food and sundries and gasoline. There was no LIFO inventory charge recorded in 2010.

Excluding the impact of consolidating Mexico, the gross margin comparison as a percent of net sales would have been a decrease of 18 basis points during 2011. Foreign currencies strengthened against the U.S. dollar, which positively impacted gross margin in 2011 by approximately $149.

2010 vs. 2009

Gross margin as a percent of net sales increased two basis points compared to 2009. TheGross Margin for core merchandise gross margin,categories, when expressed as a percent of core merchandise sales, rather than

Item 7—Management’s Discussion and not Analysis of Financial Condition and Results of Operations(dollars in millions, except per share and warehouse number data)(Continued)

total net sales, increased 25 basis points year-over-year, with all categories showing increases. However, the increased sales penetration of the lower margin gasoline business caused this increase to be only six basis points when expressed as a percent of total net sales. Warehouse ancillary businesses gross margins increased by three basis points as a percent of total net sales. In addition, gross margin comparisons were negatively impacted by five basis points due to a favorable $32 LIFO adjustment in 2009 compared to no LIFO adjustment in 2010. Increased penetration of the Executive Membership two-percent reward program and increased spending by Executive Members negatively affected gross margin by two basis points.

Foreign currencies particularly in Canada, Korea, and Japan, strengthened against the U.S. dollar in 2010, which positively impacted gross margin for 2010 by approximately $183.

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations(dollars in millions, except per share and warehouse number data) (Continued)

2009 vs. 2008

Gross margin, as a percent of net sales, increased 28 basis points compared to 2008. This increase was primarily related to a net 18 basis point increase in our core merchandise departments, primarily in food and sundries, partially offset by a decrease in softlines, and a net seven basis point increase from our warehouse ancillary businesses, primarily our gasoline and pharmacy departments. The majority of this gross margin improvement was due to our lower margin gas business having lower sales penetration, resulting from the decline in the average selling price per gallon. Increased sales penetration of the Executive Membership two-percent reward program negatively affected gross margin by six basis points. In addition, gross margin was favorably impacted by nine basis points due to reversing the $32 LIFO reserve established in the prior year as we experienced net deflation, year-over-year, in the cost of our merchandise inventories.

Foreign currencies, particularly in Canada, the United Kingdom, and Korea, weakened against the U.S. dollar, which negatively impacted gross margin in 2009 by approximately $258.

Selling, General and Administrative Expenses

2011 vs. 2010

SG&A expenses as a percent of net sales decreased 31 basis points compared to 2010; excluding the effect of gasoline price inflation on net sales, the decrease was 11 basis points. The year-over-year decrease was due to a 15 basis point improvement in our warehouse operating costs, largely payroll. This improvement was partially offset by a non-recurring benefit of $24, or three basis points, recorded in fiscal 2010 related to the refund of a previously recorded Canadian employee tax liability.

The consolidation of Mexico, which compared to our other operating segments has lower SG&A expenses as a percent of its own net sales, favorably impacted SG&A expenses as a percent of net sales by seven basis points in 2011. Foreign currencies strengthened against the U.S. dollar, which negatively impacted SG&A during 2011 by approximately $116.

2010 vs. 2009

SG&A expenses as a percent of net sales improved ten basis points compared to 2009. If2009; excluding the effect of gasoline price inflation on net sales in 2010 is excluded, these expensesSG&A expense increased three basis points compared to 2009.points. Warehouse operating costs, excluding the effect of gasoline price inflation, increased seven basis points, primarily due to higher employee benefit costs, particularly employee healthcare and workers’ compensation. SG&A expense comparisons were positively impacted by six basis points related to: the recoverya $24 refund of amounts expensed in fiscal 2007a previously recorded Canadian employee tax liability; and 2008 on behalf of certain employees in Canada to cover adverse tax consequences resulting from our previously announced stock option investigation; and a $23 charge recorded in 2009 to write down the net realizable value of the cash surrender value of employee life insurance contracts with no comparable charge this year.

in 2010. Foreign currencies particularly in Canada, Korea, and Japan, strengthened against the U.S. dollar, which negatively impacted SG&A for 2010 by approximately $140.

2009 vs. 2008Preopening Expenses

SG&A expenses, as a percent of net sales, increased 58 basis points compared to 2008. Increased warehouse operating and central administrative costs, as a percent of net sales, negatively impacted SG&A by approximately 56 basis points, resulting primarily from lower sales levels and higher employee health care costs. Higher stock-based compensation expense had a negative impact of one basis point. In addition, we recorded an adjustment to the net realizable value of the cash surrender value of employee life insurance contracts, which negatively impacted SG&A, as a percent of net sales, by two basis points. The net realizable value of the insurance contracts is largely based on

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations(dollars in millions, except per share and warehouse number data)(Continued)

changes in investment assets underlying the policies and is subject to conditions generally affecting equity and debt markets. In 2008, we recorded a $16 reserve in connection with a legal settlement, which positively impacted the comparison to current year’s SG&A expense, as a percent of net sales, by two basis points.

SG&A expenses, as a percent of net sales, for 2009 were adversely impacted by the decrease in the price of gasoline, as it produced a decline in sales dollars without a comparative reduction in labor or other administrative costs. Foreign currencies, particularly in Canada, the United Kingdom, and Korea, weakened against the U.S. dollar, which positively impacted SG&A for 2009 by approximately $217.

Preopening Expenses

Preopening expenses include costs incurred for startup operations related to new warehouses and the expansion of ancillary operations at existing warehouses. Preopening expenses can vary due to the number of warehouse openings, the timing of the warehouse opening relative to our year-end, whether the warehouse is owned or leased, and whether the opening is in an existing, new, or international market. The 2009 preopening expense included costs related to several international warehouses that opened in the fourth quarter of fiscal 2009.

Provision for Impaired Assets and Closing Costs, Net

This provision primarily includes costs related to: impairment of long-lived assets; future lease obligations, including contract termination costs, of warehouses that have been closed or relocated to new facilities; and accelerated depreciation, based on the shortened useful life through the expected closing date, on buildings to be demolished or sold and that are not otherwise impaired; and gains and losses resulting from the sale of real property, largely comprised of former warehouse locations.

2010 vs. 2009

impaired. The net provision for impaired assets and closing costs was $8 in 2010, compared to $17 in 2009. The provision in 2010 included charges of $6 for warehouse closing expenses and impairment charges of $2.

2009 vs. 2008

The net provision for impaired assets and closing costs was $17charge in 2009 compared to a nominal amount in 2008. The provision in 2009 included charges of $9 for warehouse closing expenses, and impairment charges of $8, primarily related to the closing of our two Costco Home locations in July 2009. The impairment charge in 2008 primarily related to a warehouse in Michigan that was demolished and rebuilt.

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations(dollars in millions, except per share and warehouse number data) (Continued)

locations.

At the end of both2011 and 2010, and 2009, the reserve for warehouse closing costs was $5, and primarily related to future lease obligations.obligations and other contractual obligations associated with exiting the properties.

Interest Expense

Interest expense primarily relates to our $900 of 5.3% and $1,100 of 5.5% Senior Notes (2007 Senior Notes) issued in fiscal 2007. The 5.3% Senior Notes are due March 15, 2012.

Interest Income and Other, Net

2011 vs. 2010

The increase in interest income year-over-year was attributable to increases in our cash and cash equivalents, including short-term investments, slightly higher interest rates, and the consolidation of our Mexico operations. The decrease in earnings of affiliates and other, net is primarily due to the previously discussed change in the accounting treatment of Mexico (see discussion in Note 1 to the consolidated financial statements included in Item 8 of this Report). In addition, there were net gains from foreign currency transactions and from derivative forward foreign currency contracts of $9 and $14 during 2011 and 2010, respectively. See Derivatives section in Note 1 to the consolidated financial statements included in Item 8 of this Report.

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations(dollars in millions, except per share and warehouse number data)(Continued)

2010 vs. 2009

The decrease in interest income iswas due to lower interest rates on our cash and cash equivalents and short-term investment balances. Interest income also includes a $12 other-than-temporary impairment loss recognized on certain securities within our investment portfolio in 2009. No impairment was recognized in 2010.

The increase in earnings of affiliates and other iswas primarily due to an increase in earnings from our 50% owned joint-venture in Mexico. Costco Mexico’s earningsMexico, which increased due to stronger sales and the Mexican peso strengthening against the U.S. dollar. TheIn addition, there were net gain ongains (losses) from foreign currency transactions was $13and from derivative forward foreign currency contracts of $14 and ($5) in 2010 but was not significant in 2009. These amounts generally relate to the difference between the foreign exchange rate in effect when title to merchandise inventory is transferred and the rate at the time of payment. In addition, there was a favorable $1 mark-to-market adjustment in 2010 compared to a negative $5 adjustment in 2009, related to our forward foreign exchange contracts. See Derivatives section for more information.

2009 vs. 2008

The decrease in interest income was largely due to lower interest rates on our cash and cash equivalents and short-term investment balances resulting from a change in policy to invest primarily in U.S. government and agency securities, which earn lower interest rates. In addition, we recognized $12 of other-than-temporary impairment losses on certain securities within our investment portfolio in 2009 compared to an impairment loss of $5 in 2008. The decrease in the earnings of affiliates was primarily attributable to lower earnings by our investment in Costco Mexico. Costco Mexico’s earnings were lower in 2009, primarily due to the peso weakening against the U.S. dollar. In addition, there was a negative $5 mark-to-market adjustment in 2009 compared to a favorable $6 adjustment in 2008, related to our forward foreign exchange contracts.

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations(dollars in millions, except per share and warehouse number data) (Continued)

respectively.

Provision for Income Taxes

The effective tax rate for 2011 was positively impacted by a tax refund received by Mexico. This benefit was offset by various discrete items recognized throughout the year.

The decline in the effective tax rate from 2009 to 2010 iswas primarily attributable to a change in the mix of earnings between domestic and international operations. The 2009 effective tax ratesrate also includeincluded the unfavorable impact of a write-down on investments that were non-deductible for tax purposes.

The lower tax rate in 2008 was primarily attributable to discrete benefits recognized during the year.

Net Income Attributable to Costco (Net Income)

2010 vs. 2009

Net income for 2010 increased to $1,303, or $2.92 per diluted share, from $1,086, or $2.47 per diluted share, during 2009, representing an 18% increase in diluted net income per share. As previously discussed, foreign currencies, particularly in Canada, Korea and Japan, strengthened against the U.S. dollar, which positively impacted net income for 2010 by approximately $61 after-tax, or $0.14 per diluted share. Various factors, discussed in detail above (including sales, membership fees, gross margin, and selling, general and administrative expenses), contributed to the increase in net income for 2010.

2009 vs. 2008

Net income for 2009 decreased to $1,086, or $2.47 per diluted share, from $1,283, or $2.89 per diluted share, during 2008, representing a 15% decrease in diluted net income per share. As previously discussed, foreign currencies, particularly in Canada, the United Kingdom and Korea, weakened against the U.S. dollar, which negatively impacted net income for 2009 by approximately $83 after-tax, or $0.19 per diluted share. Various factors, discussed in detail above (including sales, membership fees, gross margin, and selling, general and administrative expenses), contributed to the decrease in net income for 2009.

LIQUIDITY AND CAPITAL RESOURCES (dollars in millions, except per share data)

Cash Flows

The following table itemizes components of our most liquid assets at the end of 2010 and 2009 (dollars in millions, except per share data):assets:

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations(dollars in millions, except per share and warehouse number data) (Continued)

Our primary sources of liquidity are cash flows generated from warehouse operations and cash and cash equivalents and short-term investment balances. Of these balances, which were $4,749approximately $982 and $3,727$862 at the end of 20102011 and 2009, respectively. Of these balances, approximately $862 and $758 at the end of 2010, and 2009, respectively, represented debit and credit card receivables, primarily related to sales in the week prior to the end of our fiscal year.

Net cash provided by operating activities totaled $3,198 in 2011 compared to $2,780 in 2010, compared to $2,092 in 2009. This netan increase of $688$418. This increase was primarily attributable to a $371 decrease$219 increase in net income including noncontrolling interests, an $87 increase from the change in other current operating assets and liabilities, a $77 increase in deferred income taxes, and a $60 increase in depreciation and amortization, partially offset by an increase in our net investment in merchandise inventories (merchandise inventories less accounts payable), an increase in net income of $224, and a $141 increase from the change in our other current operating assets and liabilities.$70.

Net cash used in investing activities totaled $1,180 in 2011 compared to $2,015 in 2010, compared to $1,101 in 2009, an increasea decrease of $914.$835. This increase relates primarily to a $1,113 decrease in cash provided byused was primarily attributable to an $896 decrease in cash used in the

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations(dollars in millions, except per share and warehouse number data)(Continued)

net investment in short-term investments and a $165 cash increase representing the cash and cash equivalents on Mexico’s balance sheet as of August 29, 2010, partially offset by a $195 decreasean increase in cash used for purchasecapital expenditures of property and equipment.$235. Mexico was consolidated as of the beginning of fiscal 2011 due to the adoption of a new accounting standard. See discussion in Note 1 to the consolidated financial statements included in Item 8 of this Report.

Net cash used in financing activities totaled $1,277 in 2011 compared to $719 in 2010, compared to $439 in 2009, an increase of $280.$558. This increase was primarily attributable to a $482$73 increase in cash used to repurchase Costco’s common stock a $78 increase in repayments of long-term debt and a $42 increase in dividends paid. These were partially offset by a $124 increase$519 reduction in the net proceeds from stock-based awards and, a $116 increaseamount of bank checks outstanding. The reduction in the net proceeds from short-term borrowings.bank checks outstanding is due to maintaining higher balances in banks on which our checks are drawn.

The effect of exchangeExchange rate changes increased cash and cash equivalents by $54 in 2011, compared to an increase of $11 in 2010, compared to a decreasean increase of $14 in 2009.$43. This increase was primarily due to the strengthening of foreign currencies primarilyagainst the U.S. dollar during 2011.

Management believes that our current cash position and operating cash flows will be sufficient to meet our capital requirements for the foreseeable future. We have not provided for U.S. deferred taxes on cumulative undistributed earnings of $2,646 and $1,972 at the end of 2011 and 2010, respectively, of certain non-U.S. consolidated subsidiaries and other entities, including our 50% owned investment in Canada, Korea,Mexico, as such earnings are deemed by us to be indefinitely reinvested. Cash and Japan during 2010.cash equivalents and short-term investments held by these consolidated subsidiaries and other entities may not be available to be used for certain financing activities such as the repayment of short-term debt or to repurchase common stock. At August 28, 2011, cash and cash equivalent balances and short-term investments of $1,828 were held by these non-U.S. consolidated subsidiaries and other entities.

Dividends

In April 2010,2011, our Board of Directors increased our quarterly cash dividend from $0.18$0.205 to $0.205$0.24 per share. Our quarterly cash dividends paid in 20102011 totaled $0.77$0.89 per share, as compared to $0.68$0.77 per share in 2009.2010.

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations(dollars in millions, except per share and warehouse number data)(Continued)

Contractual Obligations

OurAs of August 28, 2011, our commitments at year-end to make future payments under contractual obligations were as follows, as of August 29, 2010:follows:

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations(dollars in millions, except per share and warehouse number data) (Continued)

Expansion Plans

Our primary requirement for capital is the financing of land, buildings, and equipment costs for new and remodeled warehouses. To a lesser extent, capital is also required for initial warehouse operations and working capital. While there can be no assurance that current expectations will be realized and plans are subject to change upon further review, it is our current intention to spend approximately $1,400 to $1,600 during fiscal 20112012 for real estate, construction, remodeling, and equipment for warehouses and related operations. These expenditures are expected to be financed with a combination of cash provided from operations and existing cash and cash equivalents and short-term investments.

We plan to open up to 3120 net new warehouses in 2012, and at least one relocation of an existing warehouse to a larger and better-located facility. In addition, the closed warehouse in Japan is expected to re-open in the third quarter of fiscal 2012.

We opened 20 net new warehouses in 2011 including one to two relocations of existing warehouses to larger and better-located facilities.

Additional Equity Investments in Subsidiaries and Joint Ventures

Our investments in the Costco Mexico joint venture and in other unconsolidated joint ventures that are less than majority owned are accounted for under the equity method. We did not make anyspent $1,290 on capital contributions to Costco Mexico (a 50%-owned joint venture) in 2010, 2009, or 2008.expenditures.

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations(dollars in millions, except per share and warehouse number data)(Continued)

Bank Credit Facilities and Commercial Paper Programs