UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended ~~May 12, 2019~~February 16, 2020



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

Commission file number 0-20355

Costco Wholesale Corporation

(Exact name of registrant as specified in its charter)



Washington		91-1223280
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

999 Lake Drive, Issaquah, WA98027

(Address of principal executive offices) (Zip Code)

(Registrant’s telephone number, including area code): ~~(425)~~ (425) 313-8100

Securities registered pursuant to Section 12(b) of the Act:



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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ~~YES~~ Yes☒ NO No ☐

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



Large accelerated filer☒	☒	Accelerated filer	☐
Non-accelerated filer☐	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ~~YES~~ Yes ☐ NO No ☒

The number of shares outstanding of the issuer's common stock as of ~~May 29, 2019~~March 4, 2020 was ~~439,789,186.~~441,579,952.

Table of Contents

COSTCO WHOLESALE CORPORATION

INDEX TO FORM 10-Q



		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated ~~Balance Sheets~~Statements of Income	3
	Condensed Consolidated Statements of Comprehensive Income	4
	Condensed Consolidated ~~Statements of Comprehensive Income~~Balance Sheets	5
	Condensed Consolidated Statements of Equity	6
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2021
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2930
Item 4.	Controls and Procedures	2930

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	3031
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3031
Item 3.	Defaults Upon Senior Securities	3031
Item 4.	Mine Safety Disclosures	3031
Item 5.	Other Information	3031
Item 6.	Exhibits	3132
	Signatures	3132

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1—Financial Statements

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(amounts in millions, except per share data) (unaudited)



	12 Weeks Ended						24 Weeks Ended
	February 16, 2020			February 17, 2019			February 16, 2020			February 17, 2019
REVENUE
Net sales	$	38,256		$	34,628		$	74,492		$	68,939
Membership fees	816			768			1,620			1,526
Total revenue	39,072			35,396			76,112			70,465
OPERATING EXPENSES
Merchandise costs	34,056			30,720			66,289			61,343
Selling, general and administrative	3,743			3,464			7,475			6,939
Preopening expenses	7			9			21			31
Operating income	1,266			1,203			2,327			2,152
OTHER INCOME (EXPENSE)
Interest expense	(34		)	(34		)	(72		)	(70		)
Interest income and other, net	45			46			80			68
INCOME BEFORE INCOME TAXES	1,277			1,215			2,335			2,150
Provision for income taxes	330			314			532			472
Net income including noncontrolling interests	947			901			1,803			1,678
Net income attributable to noncontrolling interests	(16		)	(12		)	(28		)	(22		)
NET INCOME ATTRIBUTABLE TO COSTCO	$	931		$	889		$	1,775		$	1,656
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO:
Basic	$	2.10		$	2.02		$	4.02		$	3.77
Diluted	$	2.10		$	2.01		$	4.00		$	3.74
Shares used in calculation (000s):
Basic	442,021			440,284			441,920			439,721
Diluted	443,727			442,337			443,704			442,535

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

Table of Contents

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in millions) (unaudited)



	12 Weeks Ended				24 Weeks Ended
	February 16, 2020		February 17, 2019		February 16, 2020		February 17, 2019
NET INCOME INCLUDING NONCONTROLLING INTERESTS	$	947	$	901	$	1,803	$	1,678
Foreign-currency translation adjustment and other, net	47		52		172		(82		)
Comprehensive income	994		953		1,975		1,596
Less: Comprehensive income attributable to noncontrolling interests	22		13		44		21
COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO	$	972	$	940	$	1,931	$	1,575

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

Table of Contents

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED ~~BALANCE SHEETS~~STATEMENTS OF COMPREHENSIVE INCOME

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

millions) (unaudited)

May 12,
2019 September 2,
2018
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,013
$ 6,055
Short-term investments 1,154
1,204
Receivables, net 1,704
1,669
Merchandise inventories 11,304
11,040
Other current assets 1,110
321
Total current assets 22,285
20,289
PROPERTY AND EQUIPMENT
Land 6,310
6,193
Buildings and improvements 16,644
16,107
Equipment and fixtures 7,858
7,274
Construction in progress 1,412
1,140

32,224
30,714
Less accumulated depreciation and amortization (11,749 ) (11,033 )
Net property and equipment 20,475
19,681
OTHER ASSETS 992
860
TOTAL ASSETS $ 43,752
$ 40,830
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable $ 11,331
$ 11,237
Accrued salaries and benefits 2,888
2,994
Accrued member rewards 1,160
1,057
Deferred membership fees 1,761
1,624
Current portion of long-term debt 1,699
90
Other current liabilities 3,993
2,924
Total current liabilities 22,832
19,926
LONG-TERM DEBT, excluding current portion 4,799
6,487
OTHER LIABILITIES 1,301
1,314
Total liabilities 28,932
27,727
COMMITMENTS AND CONTINGENCIES
EQUITY
Preferred stock $0.01 par value; 100,000,000 shares authorized; no shares issued and outstanding 0
0
Common stock $0.01 par value; 900,000,000 shares authorized; 439,811,000 and 438,189,000 shares issued and outstanding 4
4
Additional paid-in capital 6,307
6,107
Accumulated other comprehensive loss (1,321 ) (1,199 )
Retained earnings 9,496
7,887
Total Costco stockholders’ equity 14,486
12,799
Noncontrolling interests 334
304
Total equity 14,820
13,103
TOTAL LIABILITIES AND EQUITY $ 43,752
$ 40,830



	12 Weeks Ended				24 Weeks Ended
	February 16, 2020		February 17, 2019		February 16, 2020		February 17, 2019
NET INCOME INCLUDING NONCONTROLLING INTERESTS	$	947	$	901	$	1,803	$	1,678
Foreign-currency translation adjustment and other, net	47		52		172		(82		)
Comprehensive income	994		953		1,975		1,596
Less: Comprehensive income attributable to noncontrolling interests	22		13		44		21
COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO	$	972	$	940	$	1,931	$	1,575

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

~~Table of Contents~~

~~COSTCO WHOLESALE CORPORATION~~

~~CONDENSED CONSOLIDATED STATEMENTS OF INCOME~~

~~(amounts in millions, except per share data)~~

~~(unaudited)~~

12 Weeks Ended 36 Weeks Ended
May 12,
2019 May 13,
2018 May 12,
2019 May 13,
2018
REVENUE
Net sales $ 33,964
$ 31,624
$ 102,903
$ 95,020
Membership fees 776
737
2,302
2,145
Total revenue 34,740
32,361
105,205
97,165
OPERATING EXPENSES
Merchandise costs 30,233
28,131
91,576
84,481
Selling, general and administrative 3,371
3,155
10,310
9,613
Preopening expenses 14
8
45
37
Operating income 1,122
1,067
3,274
3,034
OTHER INCOME (EXPENSE)
Interest expense (35 ) (37 ) (105 ) (111 )
Interest income and other, net 36
41
104
70
INCOME BEFORE INCOME TAXES 1,123
1,071
3,273
2,993
Provision for income taxes 207
309
679
867
Net income including noncontrolling interests 916
762
2,594
2,126
Net income attributable to noncontrolling interests (10 ) (12 ) (32 ) (35 )
NET INCOME ATTRIBUTABLE TO COSTCO $ 906
$ 750
$ 2,562
$ 2,091
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO:
Basic $ 2.06
$ 1.71
$ 5.83
$ 4.77
Diluted $ 2.05
$ 1.70
$ 5.79
$ 4.74
Shares used in calculation (000’s):
Basic 439,859
438,740
439,767
438,576
Diluted 442,642
441,715
442,565
441,383

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

Table of Contents

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in millions)

(unaudited)


	12 Weeks Ended						36 Weeks Ended						12 Weeks Ended				24 Weeks Ended
	May 12, 2019			May 13, 2018			May 12, 2019			May 13, 2018			February 16, 2020		February 17, 2019		February 16, 2020		February 17, 2019
NET INCOME INCLUDING NONCONTROLLING INTERESTS	$	916		$	762		$	2,594		$	2,126		$	947	$	901	$	1,803	$	1,678
Foreign-currency translation adjustment and other, net	(42		)	(149		)	(124		)	(22		)	47		52		172		(82		)
Comprehensive income	874			613			2,470			2,104			994		953		1,975		1,596
Less: Comprehensive income attributable to noncontrolling interests	9			4			30			37			22		13		44		21
COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO	$	865		$	609		$	2,440		$	2,067		$	972	$	940	$	1,931	$	1,575

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

Table of Contents

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED ~~STATEMENTS OF EQUITY~~BALANCE SHEETS

(amounts in ~~millions)~~

millions, except par value and share data) (unaudited)

12 Weeks Ended May 12, 2019
Common Stock
Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Income (Loss)

Retained
Earnings

Total Costco
Stockholders’
Equity

Noncontrolling
Interests

Total
Equity
Shares (000’s) Amount
BALANCE AT FEBRUARY 17, 2019 439,989
$ 4
$ 6,218
$ (1,280 ) $ 8,916
$ 13,858
$ 325
$ 14,183
Net income —
—
—
—
906
906
10
916
Foreign-currency translation adjustment and other, net —
—
—
(41 ) —
(41 ) (1 ) (42 )
Stock-based compensation —
—
93
—
—
93
—
93
Release of vested restricted stock units (RSUs), including tax effects 14
—
(1 ) —
—
(1 ) —
(1 )
Repurchases of common stock (192 ) —
(3 ) —
(41 ) (44 ) —
(44 )
Cash dividend declared and other —
—
—
—
(285 ) (285 ) —
(285 )
BALANCE AT MAY 12, 2019 439,811
$ 4
$ 6,307
$ (1,321 ) $ 9,496
$ 14,486
$ 334
$ 14,820

12 Weeks Ended May 13, 2018
Common Stock Additional
Paid-in
Capital Accumulated
Other
Comprehensive
Income (Loss) Retained
Earnings Total Costco
Stockholders’
Equity Noncontrolling
Interests Total
Equity
Shares (000’s) Amount
BALANCE AT FEBRUARY 18, 2018 438,883
$ 4
$ 5,920
$ (897 ) $ 6,727
$ 11,754
$ 299
$ 12,053
Net income —
—
—
—
750
750
12
762
Foreign-currency translation adjustment and other, net —
—
—
(141 ) —
(141 ) (8 ) (149 )
Stock-based compensation —
—
86
—
—
86
—
86
Release of vested RSUs, including tax effects 9
—
(1 ) —
—
(1 ) —
(1 )
Repurchases of common stock (290 ) —
(5 ) —
(50 ) (55 ) —
(55 )
Cash dividend declared and other —
—
1
—
(251 ) (250 ) 1
(249 )
BALANCE AT May 13, 2018 438,602
$ 4
$ 6,001
$ (1,038 ) $ 7,176
$ 12,143
$ 304
$ 12,447



	February 16, 2020			September 1, 2019
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	7,786		$	8,384
Short-term investments	929			1,060
Receivables, net	1,988			1,535
Merchandise inventories	11,850			11,395
Other current assets	1,150			1,111
Total current assets	23,703			23,485
PROPERTY AND EQUIPMENT
Land	6,696			6,417
Buildings and improvements	17,853			17,136
Equipment and fixtures	8,406			7,801
Construction in progress	906			1,272
Accumulated depreciation and amortization	(12,380		)	(11,736		)
Net property and equipment	21,481			20,890
OTHER ASSETS
Operating lease right-of-use assets	2,596			0
Other long-term assets	1,002			1,025
TOTAL ASSETS	$	48,782		$	45,400
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable	$	11,072		$	11,679
Accrued salaries and benefits	3,415			3,176
Accrued member rewards	1,243			1,180
Deferred membership fees	1,865			1,711
Current portion of long-term debt	500			1,699
Other current liabilities	4,600			3,792
Total current liabilities	22,695			23,237
OTHER LIABILITIES
Long-term debt, excluding current portion	5,099			5,124
Long-term operating lease liabilities	2,446			0
Other long-term liabilities	1,543			1,455
TOTAL LIABILITIES	31,783			29,816
COMMITMENTS AND CONTINGENCIES
EQUITY
Preferred stock $0.01 par value; 100,000,000 shares authorized; no shares issued and outstanding	0			0
Common stock $0.01 par value; 900,000,000 shares authorized; 441,622,000 and 439,625,000 shares issued and outstanding	4			4
Additional paid-in capital	6,506			6,417
Accumulated other comprehensive loss	(1,280		)	(1,436		)
Retained earnings	11,384			10,258
Total Costco stockholders’ equity	16,614			15,243
Noncontrolling interests	385			341
TOTAL EQUITY	16,999			15,584
TOTAL LIABILITIES AND EQUITY	$	48,782		$	45,400

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

Table of Contents

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(amounts in millions) (unaudited)

~~(unaudited)~~


	36 Weeks Ended May 12, 2019																											12 Weeks Ended February 16, 2020
	Common Stock				Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings				Total Costco Stockholders’ Equity				Noncontrolling Interests				Total Equity			Common Stock							Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests		Total Equity
	Shares (000’s)		Amount									Shares (000s)					Total Costco Stockholders’ Equity			Amount					Total Equity										Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests		Total Equity
BALANCE AT SEPTEMBER 2, 2018	438,189		$	4	Additional Paid-in Capital			$	Accumulated Other Comprehensive Income (Loss)	6,107			Retained Earnings	$	(1,199	)		$	7,887		Noncontrolling Interests			$	12,799			$	304			$	13,103
BALANCE AT NOVEMBER 24, 2019																												441,778			$	4			$	6,391			$	(1,321	)		$	10,787		$	15,861		$	363	$	16,224
Net income																												—			—				—				—				931			931			16		947
Foreign-currency translation adjustment and other, net																												—			—				—				41				—			41			6		47
Stock-based compensation																												—			—				118				—				—			118			—		118
Release of vested restricted stock units (RSUs), including tax effects																												6			—				(1		)		—				—			(1		)	—		(1		)
Repurchases of common stock																												(162	)		—				(2		)		—				(47		)	(49		)	—		(49		)
Cash dividend declared																												—			—				—				—				(287		)	(287		)	—		(287		)
BALANCE AT FEBRUARY 16, 2020																												441,622			$	4			$	6,506			$	(1,280	)		$	11,384		$	16,614		$	385	$	16,999
BALANCE AT
BALANCE AT																												12 Weeks Ended February 17, 2019
																												Common Stock							Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests		Total Equity
																												Shares (000s)			Amount				Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests		Total Equity
BALANCE AT NOVEMBER 25, 2018																												440,546			$	4			$	6,107			$	(1,331	)		$	8,387		$	13,167		$	312	$	13,479
Net income	—		—		—				—				2,562				2,562				32				2,594			—			—				—				—				889			889			12		901
Foreign-currency translation adjustment and other, net	—		—		—				(122		)		—				(122		)		(2		)		(124		)	—			—				—				51				—			51			1		52
Stock-based compensation	—		—		484				—				—				484				—				484			—			—				119				—				—			119			—		119
Release of vested RSUs, including tax effects	2,525		—		(271		)		—				—				(271		)		—				(271		)	4			—				—				—				—			—			—		—
Repurchases of common stock	(903	)	—		(13		)		—				(182		)		(195		)		—				(195		)	(561	)		—				(8		)		—				(109		)	(117		)	—		(117		)
Cash dividend declared and other	—		—		—				—				(771		)		(771		)		—				(771		)	—			—				—				—				(251		)	(251		)	—		(251		)
BALANCE AT MAY 12, 2019	439,811		$	4	$	6,307			$	(1,321	)		$	9,496			$	14,486			$	334			$	14,820

	36 Weeks Ended May 13, 2018
	Common Stock				Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings				Total Costco Stockholders’ Equity				Noncontrolling Interests				Total Equity
	Shares (000’s)		Amount
BALANCE AT SEPTEMBER 3, 2017	437,204		$	4	Additional Paid-in Capital			$	Accumulated Other Comprehensive Income (Loss)	5,800			Retained Earnings			$	Total Costco Stockholders’ Equity			(1,014	Noncontrolling Interests			)	Total Equity				$	5,988			$	10,778			$	301			$	11,079
Net income	—		—		—				—				2,091				2,091				35				2,126
Foreign-currency translation adjustment and other, net	—		—		—				(24		)		—				(24		)		2				(22		)
Stock-based compensation	—		—		434				—				—				434				—				434
Release of vested RSUs, including tax effects	2,735		—		(217		)		—				—				(217		)		—				(217		)
Repurchases of common stock	(1,337	)	—		(19		)		—				(214		)		(233		)		—				(233		)
Cash dividend declared and other	—		—		3				—				(689		)		(686		)		(34		)		(720		)
BALANCE AT May 13, 2018	438,602		$	4	$	6,001			$	(1,038	)		$	7,176			$	12,143			$	304			$	12,447
BALANCE AT FEBRUARY 17, 2019																												439,989			$	4			$	6,218			$	(1,280	)		$	8,916		$	13,858		$	325	$	14,183

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

Table of Contents

COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(amounts in millions) (unaudited)



	24 Weeks Ended February 16, 2020
	Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests			Total Equity
	Shares (000s)		Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests			Total Equity
BALANCE AT SEPTEMBER 1, 2019	439,625		$	4	$	6,417		$	(1,436	)	$	10,258		$	15,243		$	341		$	15,584
Net income	—		—		—			—			1,775			1,775			28			1,803
Foreign-currency translation adjustment and other, net	—		—		—			156			—			156			16			172
Stock-based compensation	—		—		420			—			—			420			—			420
Release of vested restricted stock units (RSUs), including tax effects	2,259		—		(327		)	—			—			(327		)	—			(327		)
Repurchases of common stock	(262	)	—		(4		)	—			(75		)	(79		)	—			(79		)
Cash dividend declared	—		—		—			—			(574		)	(574		)	—			(574		)
BALANCE AT FEBRUARY 16, 2020	441,622		$	4	$	6,506		$	(1,280	)	$	11,384		$	16,614		$	385		$	16,999

	24 Weeks Ended February 17, 2019
	Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests			Total Equity
	Shares (000s)		Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests			Total Equity
BALANCE AT SEPTEMBER 2, 2018	438,189		$	4	$	6,107		$	(1,199	)	$	7,887		$	12,799		$	304		$	13,103
Net income	—		—		—			—			1,656			1,656			22			1,678
Foreign-currency translation adjustment and other, net	—		—		—			(81		)	—			(81		)	(1		)	(82		)
Stock-based compensation	—		—		391			—			—			391			—			391
Release of vested RSUs, including tax effects	2,511		—		(270		)	—			—			(270		)	—			(270		)
Repurchases of common stock	(711	)	—		(10		)	—			(141		)	(151		)	—			(151		)
Cash dividend declared and other	—		—		—			—			(486		)	(486		)	—			(486		)
BALANCE AT FEBRUARY 17, 2019	439,989		$	4	$	6,218		$	(1,280	)	$	8,916		$	13,858		$	325		$	14,183

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

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COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in millions)

(unaudited)


	36 Weeks Ended						24 Weeks Ended
	May 12, 2019			May 13, 2018			February 16, 2020			February 17, 2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income including noncontrolling interests	$	2,594		$	2,126		$	1,803		$	1,678
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization	1,019			1,006			758			683
Non-cash lease expense							77			0
Stock-based compensation	482			431			419			389
Other non-cash operating activities, net	10			(3		)	14			6
Deferred income taxes	(33		)	(21		)	1			(27		)
Changes in operating assets and liabilities:
Merchandise inventories	(409		)	(828		)	(394		)	(449		)
Accounts payable	0			1,160			(537		)	(684		)
Other operating assets and liabilities, net	400			349			580			362
Net cash provided by operating activities	4,063			4,220			2,721			1,958
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments	(753		)	(679		)	(636		)	(457		)
Maturities and sales of short-term investments	800			743			777			621
Additions to property and equipment	(1,989		)	(1,913		)	(1,260		)	(1,317		)
Other investing activities, net	(3		)	(3		)	19			(18		)
Net cash used in investing activities	(1,945		)	(1,852		)	(1,100		)	(1,171		)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in bank payments outstanding	166			(23		)	(17		)	262
Repayments of long-term debt	(89		)	(58		)	(1,200		)	(89		)
Tax withholdings on stock-based awards	(271		)	(217		)	(327		)	(270		)
Repurchases of common stock	(195		)	(238		)	(77		)	(149		)
Cash dividend payments	(752		)	(439		)	(573		)	(501		)
Other financing activities, net	(5		)	(39		)	(34		)	(2		)
Net cash used in financing activities	(1,146		)	(1,014		)	(2,228		)	(749		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(14		)	(23		)	9			(13		)
Net change in cash and cash equivalents	958			1,331			(598		)	25
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR	6,055			4,546			8,384			6,055
CASH AND CASH EQUIVALENTS END OF PERIOD	$	7,013		$	5,877		$	7,786		$	6,080

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the first thirty-six weeks of year for:
Cash paid during the first half of the year for:
Interest	$	72		$	81		$	60		$	68
Income taxes, net	$	780		$	779		$	380		$	677
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Cash dividend declared, but not yet paid	$	285		$	250		$	287		$	251

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

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COSTCO WHOLESALE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

Note 1—Summary of Significant Accounting Policies

Description of Business

Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries operate membership warehouses based on the concept that offering members low prices on a limited selection of ~~nationally-branded~~nationally branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. For the period ended ~~May 12, 2019,~~February 16, 2020, Costco operated ~~772~~785 warehouses worldwide: ~~535~~546 in the United States (U.S.) located in 44 states, Washington, D.C., and Puerto Rico, 100 in Canada, 39 in Mexico, 2829 in the United Kingdom (U.K.), 26 in Japan, 16 in Korea, 13 in Taiwan, 11 in Australia, ~~two~~2 in Spain, and ~~one~~1 each in Iceland, France and ~~France.~~China. The Company operates e-commerce websites in the U.S., Canada, Mexico, U.K., Korea, Taiwan, Japan, and ~~Taiwan.~~Australia.

Basis of Presentation

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

These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (U.S. GAAP) for complete financial statements. Therefore, the interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report filed on Form 10-K for the fiscal year ended September ~~2, 2018.~~1, 2019.

Fiscal Year End

The Company operates on a 52/53 week fiscal year basis, with the fiscal year ending on the Sunday closest to August 31. Fiscal ~~2019~~2020 is a ~~52 week~~52-week year ending on ~~September 1, 2019.~~August 30, 2020. References to the ~~third~~second quarter of ~~2019~~2020 and ~~2018~~2019 relate to the ~~12 week~~12-week fiscal quarters ended ~~May 12,~~February 16, 2020, and February 17, 2019, ~~and May 13, 2018,~~ respectively. References to the first ~~thirty-six weeks~~half of ~~2019~~2020 and ~~2018~~2019 relate to the 3624 weeks ended ~~May 12,~~February 16, 2020, and February 17, 2019, ~~and May 13, 2018,~~ respectively.

Use of Estimates

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

Table of Contents

~~Revenue Recognition~~Leases

The Company ~~recognizes sales~~leases land and/or buildings at warehouses and certain other office and distribution facilities. Leases generally contain one or more of the following options, which the Company can exercise at the end of the initial term: (a) renew the lease for a defined number of years at the ~~amount~~then-fair market rental rate or rate stipulated in the lease agreement; (b) purchase the property at the then-fair market value; or (c) a right of ~~consideration collected~~first refusal in the event of a third-party offer.

Some leases include free-rent periods and step-rent provisions, which are recognized on a straight-line basis over the original term of the lease and any extension options that the Company is reasonably certain to exercise from the ~~member, which includes gross shipping fees where applicable, and is net of sales taxes collected and remitted to government agencies and returns. The~~date the Company reserves for estimated returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The Company records, on a gross basis, a refund liability and an asset for recovery, which are included in other current liabilities and other current assets, respectively, in the condensed consolidated balance sheets.

~~Merchandise Sales~~ - The Company offers merchandise in the following core merchandise categories: food and sundries, hardlines, softlines, and fresh foods. The Company also provides expanded products and services through warehouse ancillary and other businesses. The majority of revenue from merchandise sales is recognized at the point of sale. Revenue generated through e-commerce or special orders is recognized upon shipment to the member to the extent there is no installation provided as a part of the contract. For merchandise shipped directly to the member, shipping and handling costs are expensed as incurred as fulfillment costs and included in merchandise costs in the condensed consolidated statements of income. In certain ancillary businesses, revenue is deferred until the member picks up merchandise at the warehouse. Deferred sales are included in other current liabilities in the condensed consolidated balance sheets.

~~Principal Versus Agent~~ - ~~The Company is the principal for the majority of its transactions and recognizes revenue on a gross basis. The Company is the principal when it~~ has control of the ~~merchandise~~property. Certain leases provide for periodic rent increases based on price indices or ~~service before~~the greater of minimum guaranteed amounts or sales volume. Our leases do not contain any material residual value guarantees or material restrictive covenants.

The Company determines at inception whether a contract is or contains a lease. The Company initially records right-of-use (ROU) assets and lease obligations for its finance and operating leases based on the discounted future minimum lease payments over the term. As the rate implicit in the Company’s leases is not easily determinable, the present value of the sum of the lease payments is calculated by using the Company’s incremental borrowing rate. The rate is determined using a portfolio approach based on the rate of interest the Company would pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The Company uses quoted interest rates from financial institutions to derive the incremental borrowing rate. The lease term is defined as the noncancelable period of the lease plus any options to extend when it is transferred to the member, which generally is established when Costco is primarily responsible for merchandising decisions, maintains the relationship with the member, including assurance of member service and satisfaction, and has pricing discretion.

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

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

Cash Cards - The Company sells and otherwise provides proprietary cash cards that do not expire and are redeemable at the warehouse or online for merchandise or membership. Revenue from cash cards is recognized upon redemption, and estimated breakage is recognized based on redemption data. The Company accounts for outstanding cash card balances as a cash card liability, net of estimated breakage and as of May 12, 2019, and September 2, 2018, the liability was not material.

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

~~Table of Contents~~

option.

Recent Accounting Pronouncements Adopted

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, providing for changes in the recognition of revenue from contracts with customers. The guidance requires disclosures sufficient to describe the nature, amount, timing, and uncertainty of revenue and cash flows. The Company adopted the standard in the first quarter of 2019, using the modified retrospective approach, and recorded a cumulative effect adjustment of~~$16 as an increase to retained earnings, which is included in cash dividend declared and other in the condensed consolidated statements of equity.~~

The standard impacted the presentation and timing of certain revenue transactions. Specifically, the changes included gross presentation of the Company’s estimate of merchandise returns reserve and the related recoverable assets, recognizing cash card breakage over the period of redemption, and accelerating the recognition of certain e-commerce and special-order sales. Additionally, the Company’s evaluation under the standard of its status as a principal in certain vendor arrangements resulted in the recognition of additional sales on a gross basis.

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

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

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

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

~~_______________~~


~~(1)~~	~~Net sales less merchandise costs.~~

~~For related disaggregated revenue disclosures, see~~ ~~Note 10~~.

~~Recent Accounting Pronouncements Not Yet Adopted~~

~~In February 2016, the FASB issued~~ ASU 2016-02 - Leases (ASC 842), which ~~requires~~required recognition on the balance sheet offor the rights and obligations created by leases with terms greater than ~~twelve~~12 months. The ~~standard is~~Company adopted ASC 842 using the modified retrospective transition method and elected to use the effective ~~for fiscal years and interim~~date of September 2, 2019, as the date of initial application. Consequently, the comparative periods ~~within those years beginning after December 15, 2018,~~presented continue to be in accordance with ~~early adoption permitted.~~ ASC 840, Leases, previously in effect.

The Company ~~plans to adopt this guidance at~~elected the ~~beginning~~package of ~~its first quarter of fiscal 2020 and utilize~~practical expedients permitted under the transition ~~option, which allows~~guidance, allowing the Company to carry forward conclusions related to: (a) whether expired or existing contracts contain leases; (b) lease classification; and (c) initial direct costs for ~~a cumulative-effect adjustment in~~existing leases. The Company has elected not to record operating lease right-of-use assets or lease liabilities associated with leases with durations of 12 months or less. Lastly, the ~~period~~Company elected the practical expedient allowing aggregation of ~~adoption and does not require application~~non-lease components with related lease components when evaluating accounting treatment for all classes of underlying assets.

Adoption of the ~~guidance~~new standard resulted in an initial increase to ~~comparative periods. The primary effect~~assets and liabilities of ~~adoption will be recording~~$2,632 related to recognition of operating lease right-of-use assets and ~~corresponding~~operating lease obligations ~~for current operating leases. Although the Company continues to evaluate the effect to~~as of September 2, 2019. Other line item impacts in the Company's condensed consolidated ~~financial statements and disclosures, management currently estimates total assets and liabilities will increase by approximately $2,500 to $3,000 upon adoption. This estimate could change as~~balance sheet were not material. The standard did not materially impact the ~~Company continues to progress with implementation and will also fluctuate based on the lease portfolio, discount rates and currency exchange~~

~~Table of Contents~~

~~rates as of the adoption date. The adoption is not expected to have a material impact to the Company's~~condensed consolidated statements of income orand cash flows. ~~The Company is reviewing current accounting policies and related disclosures, and evaluating changes~~For more information on the Company's lease arrangements refer to ~~business processes, systems and controls to support adoption~~Note 5.

Table of ~~the new standard, which includes implementing a new lease accounting system.~~Contents

Note 2—Investments

The Company's investments were as follows:


May 12, 2019:	Cost Basis		Unrealized Loss, Net			Recorded Basis
February 16, 2020:								Cost Basis		Unrealized Gains, Net		Recorded Basis
Available-for-sale:
Government and agency securities	$	860	$	(3	)	$	857	$	523	$	6	$	529
Held-to-maturity:
Certificates of deposit	297					297		400				400
Total short-term investments	$	1,157	$	(3	)	$	1,154	$	923	$	6	$	929



September 1, 2019:	Cost Basis		Unrealized Gains, Net		Recorded Basis
Available-for-sale:
Government and agency securities	$	716	$	6	$	722
Held-to-maturity:
Certificates of deposit	338				338
Total short-term investments	$	1,054	$	6	$	1,060

September 2, 2018: Cost
Basis Unrealized
Loss, Net Recorded
Basis
Available-for-sale:
Government and agency securities $ 912
$ (14 ) $ 898
Held-to-maturity:
Certificates of deposit 306

306
Total short-term investments $ 1,218
$ (14 ) $ 1,204

Gross unrecognized holding gains and losses on available-for-sale securities were not material for the periods ended ~~May 12, 2019,~~February 16, 2020, and September ~~2, 2018~~1, 2019. At ~~May 12, 2019,~~February 16, 2020, and September ~~2, 2018,~~1, 2019, available-for-sale securities that were in ana continuous unrealized-loss position were not material.

There were no sales of available-for-sale securities during the first ~~thirty-six weeks~~half of 2020 or 2019. ~~Proceeds from sales of available-for-sale securities were $39 during the first thirty-six weeks of 2018. Gross realized gains and losses for these sales were not material.~~

The maturities of available-for-sale and held-to-maturity securities at ~~May 12, 2019,~~February 16, 2020, are as follows:



	Available-For-Sale				Held-To-Maturity
	Cost Basis		Fair Value		Held-To-Maturity
Due in one year or less	$	196	$	197	$	400
Due after one year through five years	327		332		0
Total	$	523	$	529	$	400

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

1211

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Note 3—Fair Value Measurement

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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


May 12, 2019:	Level 1		Level 2
						Level 2
						February 16, 2020			September 1, 2019
Investment in government and agency securities⁽¹⁾	$	0	$	1,009		$	666		$	766
Forward foreign-exchange contracts, in asset position⁽²⁾	0		7			6			15
Forward foreign-exchange contracts, in (liability) position⁽²⁾	0		(3		)	(6		)	(4		)
Total	$	0	$	1,013		$	666		$	777

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

_______________


(1)	At ~~May 12, 2019, $152~~February 16, 2020, $137 cash and cash equivalents and ~~$857~~$529 short-term investments are included in the accompanying condensed consolidated balance sheets. At September ~~2, 2018, immaterial~~1, 2019, $44 cash and cash equivalents and ~~$898~~$722 short-term investments are included in the accompanying condensed consolidated balance sheets.


(2)	The asset and ~~the~~ liability values are included in other current assets and other current liabilities, respectively, in the accompanying condensed consolidated balance sheets.


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

~~During and at the periods ended May 12, 2019,~~At February 16, 2020, and September ~~2, 2018,~~1, 2019, the Company did not hold any Level 1 or 3 financial assets or liabilities that were measured at fair value on a recurring basis. There were no transfers ~~in or out of Level 1 or 2~~between levels during the ~~third quarter~~first half of 2020 or ~~the first thirty-six weeks of 2019 or 2018.~~2019.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Assets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as financial assets ~~recorded~~measured at amortized cost and long-lived nonfinancial assets. These assets are measured at fair value if determined to be impaired. There were no fair value adjustments to these items during the ~~third quarter~~first half of 2020 or ~~first thirty-six weeks of 2019 and 2018.~~2019.

~~Table of Contents~~

Note 4—Debt

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



	February 16, 2020		September 1, 2019
1.70% Senior Notes due December 2019	$	0	$	1,200
1.75% Senior Notes due February 2020	500		500
2.15% Senior Notes due May 2021	1,000		1,000
2.25% Senior Notes due February 2022	500		500
2.30% Senior Notes due May 2022	800		800
2.75% Senior Notes due May 2024	1,000		1,000
3.00% Senior Notes due May 2027	1,000		1,000
Other long-term debt	824		852
Total long-term debt	5,624		6,852
Less unamortized debt discounts and issuance costs	25		29
Less current portion⁽¹⁾	500		1,699
Long-term debt, excluding current portion	$	5,099	$	5,124

_______________


(1)	Net of unamortized debt discounts and issuance costs.

Table of Contents

May 12, 2019 September 2, 2018
1.70% Senior Notes due December 2019 $ 1,200
$ 1,200
1.75% Senior Notes due February 2020 500
500
2.15% Senior Notes due May 2021 1,000
1,000
2.25% Senior Notes due February 2022 500
500
2.30% Senior Notes due May 2022 800
800
2.75% Senior Notes due May 2024 1,000
1,000
3.00% Senior Notes due May 2027 1,000
1,000
Other long-term debt 529
613
Total long-term debt 6,529
6,613
Less unamortized debt discounts and issuance costs 31
36
Less current portion 1,699
90
Long-term debt, excluding current portion $ 4,799
$ 6,487

The estimated fair value of Senior Notes is valued using Level 2 inputs. Other long-term debt consists of Guaranteed Senior Notes issued by the Company's Japan subsidiary, ~~and are~~ valued using Level 3 inputs. The fair value of the Company's long-term debt, including the current portion, was approximately ~~$6,519~~$5,772 and ~~$6,492~~$6,997 at ~~May 12, 2019,~~February 16, 2020, and September ~~2, 2018,~~1, 2019, respectively.

In December 2019, the Company paid the outstanding principal balance and interest on the 1.70% Senior Notes. Subsequent to the end of the quarter, on February 18, 2020, the Company paid the outstanding principal balance and interest on the 1.75% Senior Notes. Existing cash and cash equivalents and short-term investments were used to satisfy these obligations.

Note 5—Leases

The tables below present information regarding the Company's lease assets and liabilities:



	February 16, 2020
Assets
Operating lease right-of-use assets	$	2,596
Finance lease assets⁽¹⁾	523
Total lease assets	$	3,119
Liabilities
Current
Operating⁽²⁾	$	168
Finance⁽²⁾	18
Long-term
Operating	2,446
Finance⁽³⁾	544
Total lease liabilities	$	3,176

_______________


(1)	Included in net property and equipment in the accompanying condensed consolidated balance sheets.


(2)	Included in other current liabilities in the accompanying condensed consolidated balance sheets.


(3)	Included in other long-term liabilities in the accompanying condensed consolidated balance sheets.



	February 16, 2020
Weighted-average remaining lease term (years)
Operating leases	22
Finance leases	19
Weighted-average discount rate
Operating leases	2.24	%
Finance leases	7.24	%

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The components of lease expense, excluding short-term lease costs and sublease income which were not material, were as follows:



	12 Weeks Ended		24 Weeks Ended
	February 16, 2020		February 16, 2020
Operating lease costs⁽¹⁾	$	51	$	102
Finance lease costs:
Amortization of lease assets⁽¹⁾	4		8
Interest on lease liabilities⁽²⁾	8		15
Variable lease costs⁽³⁾	22		36
Total lease costs	$	85	$	161

_______________


(1)	Generally included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income.


(2)	Included in interest expense in the accompanying condensed consolidated statements of income.


(3)	Included in selling, general and administrative expenses and merchandise costs in the accompanying condensed consolidated statements of income. Amount excludes property taxes, which were immaterial.

Supplemental cash flow information related to leases was as follows:



	24 Weeks Ended
	February 16, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows — operating leases	$	93
Operating cash flows — finance leases	15
Financing cash flows — finance leases	34
Leased assets obtained in exchange for operating lease liabilities	47
Leased assets obtained in exchange for finance lease liabilities	167

As of February 16, 2020, future minimum payments during the next five fiscal years and thereafter are as follows:



	Operating Leases⁽¹⁾		Finance Leases
2020	$	120	$	23
2021	220		47
2022	212		47
2023	219		51
2024	194		47
Thereafter	2,462		723
Total⁽²⁾	3,427		938
Less amount representing interest	813		376
Present value of lease liabilities	$	2,614	$	562

_______________


(1)	Operating lease payments have not been reduced by future sublease income of $101.


(2)	Excludes $185 of lease payments for leases that have been signed but not commenced.

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As of September 1, 2019, future minimum payments, net of sub-lease income of $105, under noncancelable operating leases with terms of at least one year and capital leases reported under ASC 840 were as follows:



	Operating Leases		Capital Leases
2020	$	239	$	51
2021	229		53
2022	202		38
2023	193		39
2024	181		39
Thereafter	2,206		544
Total	$	3,250	764
Less amount representing interest			343
Net present value of minimum lease payments			$	421

Note 5—6—Equity

Dividends

The Company’s current quarterly dividend ~~rate~~ is $0.65 per share, compared to $0.57 in the ~~third~~second quarter of ~~2018.~~2019. On ~~April 26, 2019,~~January 23, 2020, the Board of Directors declared a quarterly dividend in the amount of $0.65 per share, which was paid on ~~May 24, 2019.~~February 21, 2020.

Stock Repurchase Programs

Stock repurchase activity during the ~~third~~second quarter and first ~~thirty-six weeks~~half of ~~2019~~2020 and ~~2018~~2019 is summarized below:



	Shares Repurchased (000s)	Average Price per Share		Total Cost
Second quarter of 2020	162	$	301.50	$	49
First half of 2020	262	$	299.40	$	79

Second quarter of 2019	561	$	208.72	$	117
First half of 2019	711	$	213.08	$	151

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

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

These amounts may differ from the stock repurchase balances in the accompanying condensed consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of a quarter. On April 26, 2019, the Board of Directors authorized a new share repurchase program in the amount of $4,000, which expires in April 2023. This authorization revoked previously authorized but unused amounts, totaling $2,237. The remaining amount available for stock repurchases under the approved plan was ~~$3,995~~$3,864 at ~~May 12,~~

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~~2019.~~February 16, 2020. Purchases are made from ~~time-to-time,~~time to time, as conditions warrant, in the open market or in block purchases and pursuant to plans under SEC Rule 10b5-1.

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Note 6—7—Stock-Based Compensation

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

Summary of Restricted Stock Unit Activity

At ~~May 12, 2019, 15,649,000~~February 16, 2020, 13,535,000 shares were available to be granted as RSUs, and the following awards were outstanding:

~~6,307,000~~5,133,000 time-based RSUs that vest upon continued employment over specified periods of time;

~~78,000~~30,000 performance-based RSUs, granted to executive officers of the Company, for which the performance targets have been met. The awards vest upon continued employment over specified periods of time; and

~~150,000~~123,000 performance-based RSUs, granted to executive officers of the Company, subject to achievement of performance targets for fiscal ~~2019,~~2020, as determined by the Compensation Committee of the Board of Directors after the end of the fiscal year. These awards are included in the table below and the Company recognized compensation expense for these awards as it is currently deemed probable that the targets will be achieved.

The following table summarizes RSU transactions during the first ~~thirty-six weeks~~half of ~~2019:~~2020:



	Number of Units (in 000s)		Weighted-Average Grant Date Fair Value
Outstanding at September 1, 2019	6,496		$	167.55
Granted	2,252		294.08
Vested and delivered	(3,351	)	188.91
Forfeited	(111	)	193.02
Outstanding at February 16, 2020	5,286		$	207.40

Number of
Units
(in 000’s)

Weighted-Average
Grant Date Fair
Value
Outstanding at September 2, 2018 7,578
$ 140.85
Granted 2,792
224.00
Vested and delivered (3,707 ) 155.64
Forfeited (128 ) 163.68
Outstanding at May 12, 2019 6,535
$ 167.55

The remaining unrecognized compensation cost related to ~~non-vested~~nonvested RSUs at ~~May 12, 2019,~~February 16, 2020, was ~~$817,~~$913, and the weighted-average period over which this cost will be recognized is 1.7 years.

Summary of Stock-Based Compensation

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



	12 Weeks Ended				24 Weeks Ended
	February 16, 2020		February 17, 2019		February 16, 2020		February 17, 2019
Stock-based compensation expense	$	118	$	119	$	419	$	389
Less recognized income tax benefit	21		23		87		84
Stock-based compensation expense, net	$	97	$	96	$	332	$	305

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

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Note 7—8—Taxes

~~Income Taxes~~

The effective tax rate for the third quarter and first thirty-six weeks of 2019 was favorably impacted by the reduction in the U.S. federal corporate tax rate from 35% to 21%, which was in effect for the entire third quarter and first thirty-six weeks of 2019, as compared to a higher blended rate effective for the third quarter and first thirty-six weeks of 2018. The effective tax rate for the first thirty-six weeks of 2019 included discrete net tax benefits of $165. During the third quarter of 2019, the Company recognized a net benefit of $73 related to U.S. taxation of deemed foreign dividends, net of losses of current year foreign tax credits, which impacted the effective tax rate. The tax rate for the first thirty-six weeks of 2019 was 26.8%, excluding the discrete benefits, but including the impact of the lost foreign tax credits.

Other Taxes

The Company is undergoing multiple examinations for ~~value added,~~value-added, sales-based, payroll, product, import or other non-income taxes in various jurisdictions. In certain cases, the Company has received assessments from the authorities. In September 2019, the Company received an assessment related to a product tax audit covering multiple years. The Company recorded the charge in fiscal 2019 and is protesting the assessment. No adjustments have been made to this estimate in the first half of 2020. Other possible losses or range of possible losses associated with these matters are either immaterial or an estimate of the possible loss or range of loss cannot be made at this time. If certain matters or a group of matters were to be decided adversely to the Company, it could result in a charge that might be material to the results of an individual fiscal quarter or year.

Note 8—9—Net Income per Common and Common Equivalent Share

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



	12 Weeks Ended				24 Weeks Ended
	February 16, 2020		February 17, 2019		February 16, 2020		February 17, 2019
Net income attributable to Costco	$	931	$	889	$	1,775	$	1,656
Weighted average basic shares	442,021		440,284		441,920		439,721
RSUs	1,706		2,053		1,784		2,814
Weighted average diluted shares	443,727		442,337		443,704		442,535

Anti-dilutive RSUs	—		1,667		—		—

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

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Note 9—10—Commitments and Contingencies

LegalProceedings

The Company is involved in a number of claims, proceedings and litigation arising from its business and property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. There may be exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss (taking into account where applicable indemnification arrangements concerning suppliers and insurers) and the accrued amount, if any, thereof, and adjusts the amount as appropriate. As of the date of this Report, the Company has recorded immaterial accruals with respect to certain matters described below, in addition to other immaterial accruals for matters not described below. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot, in the Company's view, be reasonably estimated because, among other things: (i) the remedies or penalties sought are indeterminate or unspecified; (ii) the legal and/or factual theories are not well developed; and/or (iii) the matters involve complex or novel legal theories or a large number of parties.

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The Company is a defendant in a class action alleging violation of California Wage Order 7-2001 for failing to provide seating to member service assistants who act as greeters in the Company’s California warehouses. Canela v. Costco Wholesale Corp., et al. (Case No. 5:13-CV-03598, N.D. Cal. filed July 1, 2013). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys’ fees. The Company filed an answer denying the material allegations of the complaint. The action ~~in the district court~~ has been stayed pending review by the Ninth Circuit of the order certifying a class. In January 2019, an employee brought similar claims for relief concerning Costco employees engaged at member services counters in California. Rodriguez v. Costco Wholesale Corp. (Case No. RG19001310, Alameda Superior Court filed Jan. 4, 2019). The Company filed an answer denying the material allegations of the complaint. In December 2018, a depot employee raised similar claims, alleging that depot employees in California did not receive suitable seating or appropriate workplace temperature conditions. Lane v. Costco Wholesale Corp. (Dec. 6, 2018 Notice to California Labor and Workforce Development Agency). The Company filed an answer denying the material allegations of the complaint. In October the parties reached an agreement to settle the seating claims on a class basis, which received court approval in February 2020.

In January 2019, a former seasonal employee filed a class action, alleging failure to provide California seasonal employees meal and rest breaks, proper wage statements, and appropriate wages. Jadan v. Costco Wholesale Corp. (Case No. 19-CV-340438 Santa Clara Superior Court filed Jan. 3, 2019). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys’ fees. OnIn October the parties reached an agreement on a class settlement, which is subject to court approval.

In March ~~25,~~ 2019, employees filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide meal and rest periods and itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Relief is sought under the California Labor Code, including civil penalties and attorneys' fees.Nevarez v. Costco Wholesale Corp. (Case No. 2:19-cv-03454 C.D. Cal. filed Mar. 25, 2019). The Company filed an answer denying the material allegations of the complaint. In May 2019, an employee filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Rough v. Costco Wholesale Corp. (Case No. 2:19-cv-01340 E.D. Cal. filed May 28, 2019). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. ~~Nevarez, et ano.,~~ In June 2019, an employee filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide meal and rest periods, itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Martinez v. Costco Wholesale ~~Corp., et al~~Corp. (Case No. ~~19ST-CV-10017 Los Angeles~~3:19-cv-05624 N.D. Cal. filed June 11, 2019). The Company filed an answer denying the material allegations of the complaint. In August 2019, Rough filed a companion case in state court seeking penalties under the California Labor Code Private Attorneys General Act. Rough v. Costco Wholesale Corp. (Case No. FCS053454, Sonoma County Superior Court, filed ~~Mar. 25,~~August 23, 2019). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. In September 2019, an employee re-filed a class action against the Company alleging claims under California law for failure to pay wages, to provide meal and rest periods and itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Mosley v. Costco Wholesale Corp. (Case No. 2:19-cv-07935, C.D. Cal. filed Sept. 12, 2019). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees.

In December 2017, the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases filed against various defendants by counties, cities, hospitals, Native American tribes, ~~and~~ third-party payors, and others concerning the impacts of opioid abuse. In re National Prescription Opiate Litigation ~~(MDL~~(MDL No. 2804) (N.D. Ohio). Included are federal cases that name the Company, including actions filed by ~~a number of~~ counties and cities in Michigan, New Jersey, Oregon, Virginia and South Carolina, a third-party payor in Ohio, and class actions filed in thirty-eight states on behalf of infants born with opioid-related medical ~~conditions~~conditions. In 2019 similar actions were commenced against the Company in ~~New York, California, Illinois, Kentucky, Maryland, West Virginia, Ohio,~~state courts in Utah and ~~Missouri. Similar claims~~Arizona. Claims against the Company in state courts in New Jersey and Oklahoma have been dismissed. The Company is defending all of these matters.

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

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Wholesale Corp., et al. ~~(W.D.~~(W.D. Wash. filed Nov. 5, 2018);Chen v. Costco Wholesale Corp., et al. ~~(W.D.~~(W.D. Wash. filed Dec. 11, 2018). The complaints allege violations of the federal securities laws stemming from the Company’s disclosures concerning internal control over financial reporting. They seek unspecified damages, equitable relief, interest, and costs and attorneys’ fees. On January 30, 2019, an order was entered consolidating the actions, and a consolidated amended complaint was filed on April ~~16, 2019. The Company expects~~16. On November 26, the court entered an order dismissing the consolidated ~~action~~amended complaint and granting the plaintiffs leave to ~~be vigorously defended.~~file a further amended complaint within 90 days.

Members of the Board of Directors, one other individual, and the Company are defendants in a shareholder derivative action related to the internal controls and related disclosures identified in the putative class actions, alleging that the individual defendants breached their fiduciary duties. Wedekind v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, Richard Libenson, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. ~~(W.D.~~(W.D. Wash. filed Dec. 11, 2018). The complaint seeks unspecified damages, disgorgement of compensation, corporate governance changes, and costs and attorneys' fees. Because the complaint is derivative in nature, it does not seek monetary damages from the Company, which is a nominal defendant. By agreement among the parties the action has been stayed pending further proceedings in the class actions. Similar actions were filed in King County Superior Court on February 20, 2019,Elliott v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, Richard Libenson, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-04824-7), ~~and~~ April 16, 2019, Brad Shuman, et ano. v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-10460-1), and June 12, 2019, Rahul Modi v.Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-15514-1). These actions have also been stayed.

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

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

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Note ~~10—~~11—Segment Reporting

The Company and its subsidiaries are principally engaged in the operation of membership warehouses in the U.S., Canada, Mexico, U.K., Japan, Korea, Australia, Spain, Iceland, France and ~~France~~China and through a majority-owned subsidiary in Taiwan. Reportable segments are largely based on management’s organization of the operating segments for operational decisions and assessments of financial performance, which consider geographic locations. The material accounting policies of the segments are as described in the notes to the consolidated financial statements included in the Company's Annual Report filed on Form 10-K for the fiscal year ended September ~~2, 2018,~~1, 2019, and Note 1 above. ~~Inter-segment~~Intersegment net sales and expenses have been eliminated in computing total revenue and operating income. Certain operating expenses, predominantly stock-based compensation, are incurred on behalf of the Company's Canadian and Other International ~~Operations,~~operations, but are included in the U.S. ~~Operations~~operations because those costs generally come under the responsibility of the Company's U.S. management team.

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



	United States Operations		Canadian Operations		Other International Operations		Total
12 Weeks Ended February 16, 2020
Total revenue	$	28,523	$	5,231	$	5,318	$	39,072
Operating income	821		202		243		1,266
12 Weeks Ended February 17, 2019
Total revenue	$	25,872	$	4,792	$	4,732	$	35,396
Operating income	812		198		193		1,203
24 Weeks Ended February 16, 2020
Total revenue	$	55,588	$	10,358	$	10,166	$	76,112
Operating income	1,456		430		441		2,327
Total assets	33,575		4,470		10,737		48,782
24 Weeks Ended February 17, 2019
Total revenue	$	51,422	$	9,769	$	9,274	$	70,465
Operating income	1,372		412		368		2,152
Total assets	30,033		4,250		8,516		42,799
52 Weeks Ended September 1, 2019
Total revenue	$	111,751	$	21,366	$	19,586	$	152,703
Operating income	3,063		924		750		4,737
Total assets	32,162		4,369		8,869		45,400

United States
Operations Canadian
Operations Other
International
Operations Total
12 Weeks Ended May 12, 2019
Total revenue $ 25,536
$ 4,792
$ 4,412
$ 34,740
Operating income 736
213
173
1,122
Depreciation and amortization 260
32
44
336
Additions to property and equipment 500
38
134
672
12 Weeks Ended May 13, 2018
Total revenue $ 23,475
$ 4,647
$ 4,239
$ 32,361
Operating income 682
210
175
1,067
Depreciation and amortization 242
31
54
327
Additions to property and equipment 468
42
75
585
36 Weeks Ended May 12, 2019
Total revenue $ 76,958
$ 14,561
$ 13,686
$ 105,205
Operating income 2,108
625
541
3,274
Depreciation and amortization 764
100
155
1,019
Additions to property and equipment 1,428
209
352
1,989
Net property and equipment 14,020
1,917
4,538
20,475
Total assets 30,416
4,637
8,699
43,752
36 Weeks Ended May 13, 2018

Total revenue $ 69,975
$ 14,163
$ 13,027
$ 97,165
Operating income 1,818
652
564
3,034
Depreciation and amortization 756
94
156
1,006
Additions to property and equipment 1,323
156
434
1,913
Net property and equipment 12,924
1,829
4,425
19,178
Total assets 27,062
4,248
8,295
39,605
52 Weeks Ended September 2, 2018
Total revenue $ 102,286
$ 20,689
$ 18,601
$ 141,576
Operating income 2,787
939
754
4,480
Depreciation and amortization 1,078
135
224
1,437
Additions to property and equipment 2,046
268
655
2,969
Net property and equipment 13,353
1,900
4,428
19,681
Total assets 28,207
4,303
8,320
40,830

Disaggregated Revenue

The following table summarizes net sales by merchandise category:

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



	12 Weeks Ended				24 Weeks Ended
	February 16, 2020		February 17, 2019		February 16, 2020		February 17, 2019
Foods and Sundries	$	14,984	$	13,966	$	29,516	$	27,607
Hardlines	6,774		5,770		12,617		11,610
Fresh Foods	5,079		4,690		9,655		8,983
Softlines	4,504		4,224		8,801		8,347
Ancillary	6,915		5,978		13,903		12,392
Total Net Sales	$	38,256	$	34,628	$	74,492	$	68,939

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

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

FORWARD-LOOKING STATEMENTS

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

This management discussion should be read in conjunction with the management discussion included in our fiscal ~~2018~~2019 Annual Report on Form 10-K, previously filed with the SEC.

OVERVIEW

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

We believe that the most important driver of our profitability is increasing net sales, ~~growth,~~ particularly comparable sales growth. We define comparable sales as net sales from warehouses open for more than one year, including remodels, relocations and expansions, ~~as well as online~~and sales related to e-commerce websites operating for more than one year. Comparable sales growth is achieved through increasing shopping frequency from new and existing members and the amount they spend on each visit (average ticket). Sales comparisons can also be particularly influenced by certain factors that are beyond our control: fluctuations in currency exchange rates (with respect to the consolidation of the results of our international operations); and changes in the cost of gasoline and associated competitive ~~conditions;~~conditions (primarily impacting our U.S. and ~~changes from the revenue recognition standard.~~Canadian operations). The higher our comparable sales exclusive of these items, the more we can leverage certain of our selling, general and administrative (SG&A) expenses, reducing them as a percentage of sales and enhancing profitability. Generating comparable sales growth is foremost a question of making available to our members the right merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long term. Another substantial factor in net sales growth is the health of the economies in which we do business, including the effects of inflation or deflation, especially the United States. ~~Sales~~Net sales growth and

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gross margins are also impacted by our competition, which is vigorous and widespread, across a wide range of global, national and

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

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

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

~~Our~~The membership format is an integral part of our business and has a significant effect on our profitability. This format is designed to reinforce member loyalty and provide continuing fee revenue. The extent to which we achieve growth in our membership base, increase the penetration of our Executive members, and sustain high renewal rates materially influences our profitability. Our paid membership growth rate may be adversely impacted when warehouse openings occur in existing markets as compared to new markets.

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

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Our operating model is generally the same across our U.S., Canada, and Other International operating segments (see Note 1011 to the condensed consolidated financial statements included in Part I, Item 1, of this Report). Certain countries in the Other International segment have relatively higher rates of square footage growth, lower wages and benefits costs as a percentage of country sales, ~~and/or~~and less or no direct membership warehouse competition.

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

Our fiscal year ends on the Sunday closest to August 31. References to the ~~third~~second quarters of ~~2019~~2020 and ~~2018~~2019 relate to the ~~12 week~~12-week fiscal quarters ended ~~May 12,~~February 16, 2020, and February 17, 2019, ~~and May 13, 2018,~~ respectively. References to the first ~~thirty-six weeks~~half of ~~2019~~2020 and ~~2018~~2019 relate to the 3624 weeks ended ~~May 12,~~February 16, 2020, and February 17, 2019, ~~and May 13, 2018,~~ respectively. Certain percentages presented are calculated using actual results prior to rounding. Unless otherwise noted, references to net income relate to net income attributable to Costco.

~~Key items~~Highlights for the ~~third~~second quarter of ~~2019~~2020 as compared to the ~~third~~second quarter of ~~2018~~2019 include:

Net sales increased 7%10% to ~~$33,964,~~$38,256, driven by an increase in comparable sales of 6%9% and sales at 2316 net new warehouses opened since the end of the ~~third~~second quarter of ~~2018;~~2019;

Membership fee revenue increased 5%6% to ~~$776,~~$816, primarily due to sign-ups at existing and new ~~warehouses and the annual fee increase in the U.S. and Canada in June 2017;~~warehouses;

Gross margin percentage decreased ~~six~~31 basis points, primarily ~~due~~in our core merchandise categories driven by a shift in sales penetration to ~~the impact of the new revenue recognition standard on net sales;~~certain lower-margin warehouse ancillary and other businesses;

SG&A expenses as a percentage of net sales decreased ~~six~~22 basis points, primarily due to ~~the impact~~leveraging increased sales and a shift in sales penetration to certain warehouse ancillary and other businesses with lower SG&A as a percentage of ~~the new revenue recognition standard on~~ net sales;

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

Net income increased ~~21%~~5% to ~~$906,~~$931, or ~~$2.05~~$2.10 per diluted share, compared to ~~$750,~~$889, or ~~$1.70~~$2.01 per diluted share in ~~2018;~~2019; and

On ~~April 26, 2019,~~January 23, 2020, our Board of Directors declared a quarterly ~~cash-dividend~~cash dividend of $0.65 per share, ~~an increase from $0.57,~~ which was paid on ~~May 24, 2019; and~~February 21, 2020.

~~On April 26, 2019, the Board of Directors authorized a new share repurchase program in the amount of $4,000.~~

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RESULTS OF OPERATIONS

Net Sales


	12 Weeks Ended						36 Weeks Ended						12 Weeks Ended						24 Weeks Ended
	May 12, 2019			May 13, 2018			May 12, 2019			May 13, 2018			February 16, 2020			February 17, 2019			February 16, 2020			February 17, 2019
Net Sales	$	33,964		$	31,624		$	102,903		$	95,020		$	38,256		$	34,628		$	74,492		$	68,939
Changes in net sales
Changes in net sales:
U.S	9		%	11		%	10		%	11		%	10		%	9		%	8		%	11		%
Canada	3		%	14		%	3		%	14		%	9		%	1		%	6		%	3		%
Other international	4		%	17		%	5		%	18		%
Other International													12		%	4		%	9		%	6		%
Total Company	7		%	12		%	8		%	12		%	10		%	7		%	8		%	9		%
Changes in comparable sales:
U.S	7		%	10		%	9		%	9		%	9		%	7		%	7		%	9		%
Canada	1		%	11		%	1		%	10		%	9		%	0		%	6		%	1		%
Other international	2		%	12		%	2		%	13		%
Other International													8		%	1		%	6		%	2		%
Total Company	6		%	10		%	7		%	10		%	9		%	5		%	7		%	7		%
Changes in comparable sales excluding the impact of changes in foreign currency and gasoline prices⁽¹⁾:
U.S	6		%	8		%	7		%	7		%	8		%	7		%	7		%	8		%
Canada	5		%	5		%	6		%	4		%	7		%	6		%	6		%	6		%
Other international	7		%	6		%	6		%	7		%
Other International													7		%	5		%	6		%	5		%
Total Company	6		%	7		%	7		%	7		%	8		%	7		%	6		%	7		%

_______________


(1)	Excludes the impact of the revenue recognition standard for the periods ended ~~May 12,~~February 17, 2019. ~~See Item 1~~ ~~Note 1~~.

Net Sales

Net sales increased ~~$2,340~~$3,628 or 7%10%, and ~~$7,883~~$5,553 or 8% during the ~~third~~ secondquarter and first ~~thirty-six weeks~~half of ~~2019,~~2020, respectively, compared to the ~~third~~second quarter and first ~~thirty-six weeks~~half of ~~2018.~~2019. These increases were attributable to an increase in comparable sales of 6%9% and 7% in the ~~third~~second quarter and first ~~thirty-six weeks~~half of ~~2019,~~2020, respectively, and sales at the 2316 net new warehouses opened since the end of the ~~third~~second quarter of ~~2018.~~2019.

During the ~~third~~second quarter of 2020, changes in gasoline prices positively impacted net sales by $320, or 92 basis points, due to a 9% increase in the average sales price per gallon. Foreign currencies relative to the U.S. dollar also positively impacted net sales by approximately $85, or 25 basis points, compared to the second quarter of 2019, attributable to our Canadian and Other International operations.

During the first half of 2020, changes in gasoline prices positively impacted net sales by approximately $198, or 29 basis points, due to a 3% increase in the average price per gallon. Changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately ~~$427,~~19, or 135 basis points, compared to the third quarter of 2018, attributable to our Other International and Canadian operations. The new revenue recognition standard positively impacted net sales by $346, or 110 basis points. Gasoline prices had a slight positive impact on net sales.

~~During the first thirty-six weeks of 2019, changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $1,199, or 126~~three basis points, compared to the first ~~thirty-six weeks~~half of ~~2018,~~2019, attributable to our ~~Canadian and~~ Other International operations. The new revenue recognition standard positively impacted net sales by $865, or 91 basis points. Changes in gasoline prices also positively impacted net sales by approximately $240, or 25 basis points, due to a 2% increase in the average price per gallon.

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Comparable Sales

Comparable sales increased 6%9% and 7% in the ~~third~~second quarter and first ~~thirty-six weeks~~half of ~~2019,~~2020, respectively, and were positively impacted by increases in shopping frequency and average ticket. Comparable sales were also positively impacted by the shift in timing of the Thanksgiving holiday to the second quarter of 2020.

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Comparable sales for the ~~third~~ secondquarter and first ~~thirty-six weeks~~half of ~~2019~~2020 were negatively impacted by cannibalization (established warehouses losing sales to our newly opened locations).

Membership Fees


	12 Weeks Ended						36 Weeks Ended						12 Weeks Ended						24 Weeks Ended
	May 12, 2019			May 13, 2018			May 12, 2019			May 13, 2018			February 16, 2020			February 17, 2019			February 16, 2020			February 17, 2019
Membership fees	$	776		$	737		$	2,302		$	2,145		$	816		$	768		$	1,620		$	1,526
Membership fees as a percentage of net sales	2.29		%	2.33		%	2.24		%	2.26		%	2.13		%	2.22		%	2.17		%	2.21		%
Total paid members as of quarter end (000's)	53,100			50,900			—			—
Total cardholders as of quarter end (000's)	97,200			93,000			—			—
Total paid members (000s)													55,300			52,700			—			—
Total cardholders (000s)													100,900			96,300			—			—

Membership fees increased ~~5% and 7%~~6% in both the ~~third~~second quarter and first ~~thirty-six weeks~~half of ~~2019, respectively.~~2020. This was primarily due to ~~sign-ups~~signups at existing and new ~~warehouses and~~warehouses. At the ~~fee increase (discussed below). Renewal~~end of the secondquarter of 2020, our member renewal rates ~~are~~were 91% in the U.S. and Canada and 88% worldwide.

As previously reported, in fiscal 2017 we increased our membership fees in the U.S. and Canada. We account for membership fee revenue on a deferred basis, recognized ratably over the one-year membership period. These fee increases had a positive impact on revenues during the third quarter and first thirty-six weeks of 2019 of approximately $11 and $72, respectively.

Gross Margin


	12 Weeks Ended						36 Weeks Ended						12 Weeks Ended						24 Weeks Ended
	May 12, 2019			May 13, 2018			May 12, 2019			May 13, 2018			February 16, 2020			February 17, 2019			February 16, 2020			February 17, 2019
Net sales	$	33,964		$	31,624		$	102,903		$	95,020		$	38,256		$	34,628		$	74,492		$	68,939
Less merchandise costs	30,233			28,131			91,576			84,481			34,056			30,720			66,289			61,343
Gross margin	$	3,731		$	3,493		$	11,327		$	10,539		$	4,200		$	3,908		$	8,203		$	7,596
Gross margin percentage	10.99		%	11.05		%	11.01		%	11.09		%	10.98		%	11.29		%	11.01		%	11.02		%

Quarterly Results

The gross margin of our core merchandise categories (food and sundries, hardlines, softlines, and fresh foods), when expressed as a percentage of core merchandise sales (rather than total net sales), ~~increased 21~~decreased 15 basis points ~~with increases~~primarily in ~~all core merchandise categories.~~fresh foods and hardlines. The decrease in fresh foods was driven primarily by initial operating losses from our new poultry processing plant while hardlines decreased primarily due to timing of the Thanksgiving holiday, which shifted lower-margin activity into the current quarter as compared to the prior year second quarter. These decreases were partially offset by an increase in softlines. This measure eliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses.

Total gross margin percentage decreased ~~six~~31 basis points compared to the ~~third~~second quarter of ~~2018.~~2019. Excluding the ~~impacts~~impact of ~~the new revenue recognition standard and~~ gasoline price inflation on net sales, gross margin as a percentage of adjusted net sales was ~~11.10%~~11.07%, ~~an increase~~a decrease of ~~five~~22 basis points. This was primarily due to a ~~nine basis point increase across most core merchandise categories, partially offset by the Executive Membership 2% reward program, which negatively impacted gross margin by three basis points, due~~shift in sales penetration to ~~increased spending by Executive Members. Warehouse~~certain lower-margin warehouse ancillary businesses, and ~~other businesses decreased by one basis point.~~losses from our poultry processing plant discussed above.

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

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U.S. and Canadian operations, primarily due to ~~warehouse ancillary and other businesses, partially offset by increases~~decreases in ~~our core merchandise categories. The segment gross margin percentage in our Canadian operations decreased, primarily due to~~ our core merchandise categories. The segment gross margin percentage in our Other International operations ~~decreased,~~increased, primarily ~~due to the Executive Membership 2% reward program which was recently introduced~~ in ~~Korea, and~~ our core merchandise categories.

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Year-to-date Results

The gross margin of core merchandise categories, when expressed as a percentage of core merchandise sales, ~~increased eight~~decreased six basis points. This was attributable to ~~increases~~a decrease in ~~food and sundries and hardlines~~fresh foods, which was driven primarily by initial operating losses from our new poultry processing plant, partially offset by ~~decreases~~an increase in softlines.

Total gross margin percentage decreased ~~eight basis points~~one basis-point compared to the first ~~thirty-six weeks~~half of ~~2018.~~2019. Excluding the impacts of gasoline price inflation ~~and the new revenue recognition standard~~ on net sales, gross margin as a percentage of adjusted net sales was ~~11.13%~~11.04%, an increase of ~~four~~two basis points from the first ~~thirty-six weeks~~half of ~~2018.~~2019. This was primarily due to a ~~15 basis point~~nine basis-point increase in our warehouse ancillary and other businesses, ~~predominantly our gasoline business. This~~as well as a six basis-point increase ~~was partially offset by decreases of four basis points in our core merchandise categories and four basis points due~~related to an adjustment in the first quarter of 2019 to our estimate of breakage on rewards earned under our co-branded credit card program. ~~Executive Membership 2% reward program negatively impacted gross margin~~These increases were partially offset by ~~three basis points,~~a 14 basis-point decrease in our core merchandise categories, primarily due to ~~increased spending by Executive Members.~~losses from our poultry processing plant discussed above.

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

Selling, General and Administrative Expenses


	12 Weeks Ended						36 Weeks Ended						12 Weeks Ended						24 Weeks Ended
	May 12, 2019			May 13, 2018			May 12, 2019			May 13, 2018			February 16, 2020			February 17, 2019			February 16, 2020			February 17, 2019
SG&A expenses	$	3,371		$	3,155		$	10,310		$	9,613		$	3,743		$	3,464		$	7,475		$	6,939
SG&A expenses as a percentage of net sales	9.92		%	9.98		%	10.02		%	10.12		%	9.78		%	10.00		%	10.03		%	10.06		%

Quarterly Results

SG&A expenses as a percentage of net sales decreased ~~six~~22 basis points compared to the ~~third~~second quarter of ~~2018.~~2019. Excluding the ~~impacts~~impact of ~~the new revenue recognition standard and~~ gasoline price inflation on net sales, SG&A expenses as a percentage of adjusted net sales was ~~10.03%~~9.87%, ~~an increase~~a decrease of ~~five~~13 basis points compared to the prior year. ~~Operating costs~~Costs related to warehouse operations and other businesses, which include e-commerce and travel, decreased 10 basis points, primarily due to leveraging increased sales and a shift in sales penetration to certain warehouse ancillary and other businesses ~~which includes e-commerce and travel, increased two basis points, primarily due to~~with lower SG&A as a percentage of net sales. This decrease was partially offset by the wage increases ~~of our~~and bonding leave benefits for U.S. and Canadian hourly employees ~~that went into effect~~effective in ~~June 2018. Central operating costs were higher by two basis points and stock~~March 2019. Stock compensation expense was ~~higher~~lower by ~~one~~three basis ~~point.~~points.

Year-to-date Results

SG&A expenses as a percentage of net sales decreased 10three basis points compared to the first ~~thirty-six weeks~~half of ~~2018.~~2019. Excluding the ~~impacts~~impact of gasoline price inflation ~~and the new revenue recognition standard~~ on net sales, SG&A expenses as a percentage of adjusted net sales was ~~10.13%, an increase of one basis point. Stock compensation expense was higher by two basis points~~flat despite the wage increases and ~~operating costs~~bonding leave benefits for U.S. and Canadian hourly employees discussed above. Costs related to warehouse ~~ancillary~~operations and other businesses, which ~~includes~~include e-commerce and travel, were lower by ~~one~~two basis ~~point.~~points, predominantly in our U.S. operations, due to leveraging increased sales. This decrease was offset by higher central operating costs of two basis points related to maintaining, upgrading and expanding our technology capabilities.

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Preopening Expense


	12 Weeks Ended				36 Weeks Ended				12 Weeks Ended				24 Weeks Ended
	May 12, 2019		May 13, 2018		May 12, 2019		May 13, 2018		February 16, 2020		February 17, 2019		February 16, 2020		February 17, 2019
Preopening expenses	$	14	$	8	$	45	$	37	$	7	$	9	$	21	$	31
Warehouse openings, including relocations
United States	1		0		9		7		0		2		3		8
Canada	0		0		2		1		0		0		1		2
Other International	2		2		2		2		0		0		0		0
Total warehouse openings, including relocations	3		2		13		10		0		2		4		10

Preopening expenses include startup costs related to new warehouses and relocations, developments in new international markets, new manufacturing and distribution facilities, and expansions at existing warehouses. Preopening expenses vary due to the number of warehouse openings, the timing of the openings relative to our quarter-end, whether the warehouse is owned or leased, and whether the opening is in an existing, new or international market. For the remainder of fiscal ~~2019,~~2020, we expect to open 1315 warehouses, including two relocations.

Interest Expense

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



	12 Weeks Ended				24 Weeks Ended
	February 16, 2020		February 17, 2019		February 16, 2020		February 17, 2019
Interest expense	$	34	$	34	$	72	$	70

Interest expense is primarily related to Senior Notes. ~~In October 2018 we repaid a Guaranteed Senior Note issued by our Japanese subsidiary.~~

Interest Income and Other, Net


	12 Weeks Ended				36 Weeks Ended				12 Weeks Ended				24 Weeks Ended
	May 12, 2019		May 13, 2018		May 12, 2019		May 13, 2018		February 16, 2020		February 17, 2019		February 16, 2020		February 17, 2019
Interest income	$	27	$	16	$	81	$	45	$	30	$	33	$	62	$	54
Foreign-currency transaction gains, net	3		20		6		10		8		8		4		3
Other, net	6		5		17		15		7		5		14		11
Interest income and other, net	$	36	$	41	$	104	$	70	$	45	$	46	$	80	$	68

Interest income decreased for the second quarter of 2020 due to lower interest rates, and increased for the ~~third quarter and~~ first ~~thirty-six weeks~~half of ~~2019,~~2020 due to ~~higher interest rates and~~ higher average cash and investment balances. Foreign-currency transaction gains, net, include the revaluation or settlement of monetary assets and liabilities by our Canadian and Other International operations and mark-to-market adjustments for forward foreign-exchange contracts. See Derivatives and Foreign Currency sections in Item 8, Note 1 of our Annual Report on Form 10-K, for the fiscal year ended September ~~2, 2018.~~1, 2019.

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Provision for Income Taxes


	12 Weeks Ended						36 Weeks Ended						12 Weeks Ended						24 Weeks Ended
	May 12, 2019			May 13, 2018			May 12, 2019			May 13, 2018			February 16, 2020			February 17, 2019			February 16, 2020			February 17, 2019
Provision for income taxes	$	207		$	309		$	679		$	867		$	330		$	314		$	532		$	472
Effective tax rate	18.5		%	28.8		%	20.7		%	29.0		%	25.9		%	25.8		%	22.8		%	21.9		%

The effective tax rate for the ~~third quarter~~first half of 2020 and first thirty-six weeks of 2019 was favorably impacted by the reduction in the U.S. federal corporate tax rate from 35% to 21%, which was in effect for the entire third quarter and first thirty-six weeks of 2019, as compared to a higher blended rate effective for the third quarter and first thirty-six weeks of 2018. The effective tax rate for the first thirty-six weeks of 2019 included discrete net tax benefits of ~~$165. During~~$79 and $90, respectively. Excluding the ~~third quarter of 2019, we recognized a~~discrete net ~~benefit of $73~~tax benefits, which largely related to ~~U.S. taxation of deemed foreign dividends, net of losses of current year foreign~~excess tax ~~credits, which impacted~~benefits from stock compensation, the ~~effective tax rate. The~~ tax rate was 26.2% and 26.1% for the first ~~thirty-six weeks~~half of 2020 and 2019, ~~was 26.8%, excluding the discrete benefits, but including the impact of the lost foreign tax credits.~~respectively.

LIQUIDITY AND CAPITAL RESOURCES

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


	36 Weeks Ended						24 Weeks Ended
	May 12, 2019			May 13, 2018			February 16, 2020			February 17, 2019
Net cash provided by operating activities	$	4,063		$	4,220		$	2,721		$	1,958
Net cash used in investing activities	(1,945		)	(1,852		)	(1,100		)	(1,171		)
Net cash used in financing activities	(1,146		)	(1,014		)	(2,228		)	(749		)

Our primary sources of liquidity are cash flows generated from warehouse operations, cash and cash equivalents, and short-term ~~investment balances.~~investments. Cash and cash equivalents and short-term investments were ~~$8,167~~$8,715 and ~~$7,259~~$9,444 at ~~May 12, 2019,~~February 16, 2020, and September ~~2, 2018,~~1, 2019, respectively. Of these balances, ~~approximately $1,460 and $1,348 represented~~ unsettled credit and debit card receivables represented approximately $1,385 and $1,434 at February 16, 2020, and September 1, 2019, respectively. These receivables generally settle within four days. Cash and cash equivalents were positively impacted by foreign-exchange rate changes of $9 and negatively impacted by $13 in the first half of 2020 and 2019, respectively.

Management believes that our cash position and operating cash flows will be sufficient to meet our liquidity and capital requirements for the foreseeable future. We believe that our U.S. current and projected asset position is sufficient to meet our U.S. liquidity ~~requirements and, beginning in the second quarter of fiscal 2018, we~~requirements. We no longer consider earnings after ~~fiscal~~ 2017 of our non-U.S. consolidated subsidiaries to be indefinitely reinvested.

Cash Flows from Operating Activities

Net cash provided by operating activities totaled ~~$4,063~~$2,721 in the first ~~thirty-six weeks~~half of ~~2019,~~2020, compared to ~~$4,220~~$1,958 in the first ~~thirty-six weeks~~half of ~~2018.~~2019. Cash provided by operations is primarily derived from net sales and membership fees. Cash used in operations generally consists of payments to merchandise ~~vendors, and~~suppliers, warehouse operating costs, including payroll and employee benefits, utilities, and ~~debit~~credit and ~~credit~~debit card processing fees. Cash used in operations also includes payments for income taxes. Changes in our net investment in merchandise inventories (the difference between merchandise inventories and accounts payable) is impacted by several factors, including how fast ~~our~~ inventory is sold, ~~the~~ payment terms with our ~~vendors,~~suppliers, and the amount of ~~payables we pay~~ early payments to obtain ~~favorable~~ discounts from ~~our vendors.~~suppliers.

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Cash Flows from Investing Activities

Net cash used in investing activities totaled ~~$1,945~~$1,100 in the first ~~thirty-six weeks~~half of ~~2019~~2020, compared to ~~$1,852~~$1,171 in the first ~~thirty-six weeks~~half of ~~2018,~~2019, and is primarily related to capital expenditures. Net cash from investing activities also includes purchases and maturities of short-term investments.

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Capital Expenditure Plans

Our primary requirements for capital are acquiring land, buildings, and equipment for new and remodeled warehouses. Capital is also required for information systems, manufacturing and distribution facilities, initial warehouse operations, and working capital. In the first ~~thirty-six weeks~~half of ~~2019,~~2020, we spent ~~$1,989~~$1,260 on capital expenditures, and it is our current intention to spend approximately ~~$2,800 to $3,100~~$3,000 during fiscal ~~2019.~~2020. We opened 13four new warehouses, including ~~three relocations,~~one relocation, in the first ~~thirty-six weeks~~half of ~~2019~~2020 and plan to open 1315 additional new warehouses, including two relocations, in the remainder of fiscal ~~2019.~~2020. There can be no assurance that current expectations will be ~~realized and~~realized; plans are subject to change upon further review of our capital expenditure needs.

Cash Flows from Financing Activities

Net cash used in financing activities totaled ~~$1,146~~$2,228 in the first ~~thirty-six weeks~~half of ~~2019~~2020, compared to ~~$1,014~~$749 in the first ~~thirty-six weeks~~half of ~~2018.~~2019. Cash flow used in financing activities was primarily related to the $1,200 repayment of our 1.70% Senior Notes, payment of dividends, and withholding taxes on stock-based ~~awards, and repurchases of common stock.~~awards. Dividends totaling ~~$752~~$573 were paid during the first ~~thirty-six weeks~~half of ~~2019,~~2020, of which ~~$250~~$286 related to the dividend declared in August ~~2018.~~2019. Subsequent to the end of the quarter, on February 18, 2020, the Company paid the outstanding principal balance of $500 and associated interest on the 1.75% Senior Notes using cash and cash equivalents and short-term investments.

Stock Repurchase Programs

~~On April 26, 2019, the Board of Directors authorized a new share repurchase program in the amount of $4,000, which expires in April 2023.~~ During the first ~~thirty-six weeks~~half of ~~2019~~2020 and ~~2018,~~2019, we repurchased ~~903,000~~262,000 and ~~1,337,000~~711,000 shares of common stock, at an average price per share of ~~$215.94~~$299.40 and ~~$174.30,~~$213.08, respectively, totaling approximately ~~$195~~$79 and ~~$233,~~$151, respectively. These amounts may differ from the stock repurchase balances in the accompanying condensed consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of a quarter. Purchases are made from ~~time-to-time,~~time to time, as conditions warrant, in the open market or in block purchases, ~~and~~ pursuant to plans under SEC Rule 10b5-1. Repurchased shares are retired, in accordance with the Washington Business Corporation Act.

Dividends

On ~~April 26, 2019,~~January 23, 2020, our Board of Directors declared a quarterly dividend of $0.65 per share payable to shareholders of record on ~~May 10, 2019.~~February 7, 2020. The dividend was paid subsequent to the end of the quarter on ~~May 24, 2019.~~February 21, 2020.

Bank Credit Facilities and Commercial Paper Programs

We maintain bank credit facilities for working capital and general corporate purposes. At ~~May 12, 2019,~~February 16, 2020, we had borrowing capacity under these facilities of ~~$880,~~$875, including a $400 revolving line of credit, which expires in June ~~2019. The Company currently has no plans to draw upon this facility but intends to renew it.~~2020. Our international operations maintain ~~$353~~$362 of the borrowing capacity under bank credit facilities, of which $146 is guaranteed by the Company. There were no outstanding short-term borrowings under the bank credit facilities at the end of the ~~third~~second quarter of ~~2019~~2020 or at the end of ~~fiscal 2018.~~2019.

The Company has letter of credit facilities, for commercial and standby letters of credit, totaling ~~$234.~~$225. The outstanding commitments under these facilities at the end of the ~~third~~second quarter of ~~2019~~2020 totaled ~~$162,~~$150, most of which were standby letters of credit with expiration dates within one year. The bank credit facilities have various expiration dates, most of which are within one year, and we generally intend to renew these facilities. The amount of borrowings available at any time under our bank credit facilities is reduced by the amount of standby and commercial letters of credit outstanding.

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Contractual Obligations

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

Critical Accounting Estimates

The preparation of our consolidated financial statements in accordance with U.S. GAAP requires that we make estimates and judgments. We base these on historical experience and on assumptions that we believe to be reasonable. Our critical accounting policies are discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K, for the fiscal year ended September ~~2, 2018.~~1, 2019. There have been no material changes to the critical accounting policies previously disclosed in that Report.

Recent Accounting Pronouncements

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

Item 3—Quantitative and Qualitative Disclosures ~~About~~about Market Risk

Our direct exposure to financial market risk results from fluctuations in foreign currency exchange rates and interest rates. There have been no material changes to our market risks as disclosed in our Annual Report on Form 10-K, for the fiscal year ended September ~~2, 2018.~~1, 2019.

Item 4—Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of ~~May 12, 2019~~February 16, 2020, and based on their evaluation have concluded the disclosure controls and procedures were ~~not~~ effective as of that ~~date due to a material weakness in internal control over financial reporting that was disclosed in our Annual Report on Form 10-K for the fiscal year ended September 2, 2018.~~date.

Changes in Internal Control ~~Over~~over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the ~~third~~second quarter of fiscal ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial ~~reporting except as described below.~~reporting.

~~Remediation~~

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

~~Table of Contents~~

PART II—OTHER INFORMATION

Item 1—Legal Proceedings

See discussion of Legal Proceedings in Note 910 to the condensed consolidated financial statements included in Part I, Item 1 of this Report.

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Item 1A—Risk Factors

In addition to the other information set forth in the Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K, for the fiscal year ended September ~~2, 2018.~~1, 2019. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K.

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

The following table sets forth information on our common stock repurchase program activity for the ~~third~~second quarter of ~~2019~~2020 (amounts in millions, except share and per share data):

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

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



Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs⁽¹⁾	Maximum Dollar Value of Shares that May Yet be Purchased Under the Programs⁽¹⁾
November 25, 2019 — December 22, 2019	40,000	$	295.58	40,000	$	3,901
December 23, 2019 — January 19, 2020	61,000	296.01		61,000	3,883
January 20, 2020 — February 16, 2020	61,000	310.88		61,000	3,864
Total second quarter	162,000	$	301.50	162,000

_______________


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

Item 3—Defaults Upon Senior Securities

None.

Item 4—Mine Safety Disclosures

Not applicable.

Item 5—Other Information

None.

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Item 6—Exhibits

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



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

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

~~3.2~~	~~Bylaws as amended of Costco Wholesale Corporation~~		~~8-K~~		~~4/30/2019~~

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

~~32.1~~3.2	Bylaws as amended of Costco Wholesale Corporation		8-K		1/29/2020

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

32.1	Section 1350 Certifications	x

101.INS	Inline XBRL Instance Document	x

101.SCH	Inline XBRL Taxonomy Extension Schema Document	x

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document	x

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document	x

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document	x

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document	x

104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)	x

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.



	COSTCO WHOLESALE CORPORATION (Registrant)

~~June 5, 2019~~March 11, 2020	By	/s/ W. CRAIG JELINEK
Date		W. Craig Jelinek President, Chief Executive Officer and Director

~~June 5, 2019~~March 11, 2020	By	/s/ RICHARD A. GALANTI
Date		Richard A. Galanti Executive Vice President, Chief Financial Officer and Director

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	May 12, 2019			September 2, 2018
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	7,013		$	6,055
Short-term investments	1,154			1,204
Receivables, net	1,704			1,669
Merchandise inventories	11,304			11,040
Other current assets	1,110			321
Total current assets	22,285			20,289
PROPERTY AND EQUIPMENT
Land	6,310			6,193
Buildings and improvements	16,644			16,107
Equipment and fixtures	7,858			7,274
Construction in progress	1,412			1,140
	32,224			30,714
Less accumulated depreciation and amortization	(11,749		)	(11,033		)
Net property and equipment	20,475			19,681
OTHER ASSETS	992			860
TOTAL ASSETS	$	43,752		$	40,830
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable	$	11,331		$	11,237
Accrued salaries and benefits	2,888			2,994
Accrued member rewards	1,160			1,057
Deferred membership fees	1,761			1,624
Current portion of long-term debt	1,699			90
Other current liabilities	3,993			2,924
Total current liabilities	22,832			19,926
LONG-TERM DEBT, excluding current portion	4,799			6,487
OTHER LIABILITIES	1,301			1,314
Total liabilities	28,932			27,727
COMMITMENTS AND CONTINGENCIES
EQUITY
Preferred stock $0.01 par value; 100,000,000 shares authorized; no shares issued and outstanding	0			0
Common stock $0.01 par value; 900,000,000 shares authorized; 439,811,000 and 438,189,000 shares issued and outstanding	4			4
Additional paid-in capital	6,307			6,107
Accumulated other comprehensive loss	(1,321		)	(1,199		)
Retained earnings	9,496			7,887
Total Costco stockholders’ equity	14,486			12,799
Noncontrolling interests	334			304
Total equity	14,820			13,103
TOTAL LIABILITIES AND EQUITY	$	43,752		$	40,830



	12 Weeks Ended May 12, 2019
	Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests			Total Equity
	Shares (000’s)		Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests			Total Equity
BALANCE AT FEBRUARY 17, 2019	439,989		$	4	$	6,218		$	(1,280	)	$	8,916		$	13,858		$	325		$	14,183
Net income	—		—		—			—			906			906			10			916
Foreign-currency translation adjustment and other, net	—		—		—			(41		)	—			(41		)	(1		)	(42		)
Stock-based compensation	—		—		93			—			—			93			—			93
Release of vested restricted stock units (RSUs), including tax effects	14		—		(1		)	—			—			(1		)	—			(1		)
Repurchases of common stock	(192	)	—		(3		)	—			(41		)	(44		)	—			(44		)
Cash dividend declared and other	—		—		—			—			(285		)	(285		)	—			(285		)
BALANCE AT MAY 12, 2019	439,811		$	4	$	6,307		$	(1,321	)	$	9,496		$	14,486		$	334		$	14,820

	12 Weeks Ended May 13, 2018
	Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests			Total Equity
	Shares (000’s)		Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Costco Stockholders’ Equity			Noncontrolling Interests			Total Equity
BALANCE AT FEBRUARY 18, 2018	438,883		$	4	$	5,920		$	(897	)	$	6,727		$	11,754		$	299		$	12,053
Net income	—		—		—			—			750			750			12			762
Foreign-currency translation adjustment and other, net	—		—		—			(141		)	—			(141		)	(8		)	(149		)
Stock-based compensation	—		—		86			—			—			86			—			86
Release of vested RSUs, including tax effects	9		—		(1		)	—			—			(1		)	—			(1		)
Repurchases of common stock	(290	)	—		(5		)	—			(50		)	(55		)	—			(55		)
Cash dividend declared and other	—		—		1			—			(251		)	(250		)	1			(249		)
BALANCE AT May 13, 2018	438,602		$	4	$	6,001		$	(1,038	)	$	7,176		$	12,143		$	304		$	12,447



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

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



September 2, 2018:	Cost Basis		Unrealized Loss, Net			Recorded Basis
Available-for-sale:
Government and agency securities	$	912	$	(14	)	$	898
Held-to-maturity:
Certificates of deposit	306					306
Total short-term investments	$	1,218	$	(14	)	$	1,204



	May 12, 2019		September 2, 2018
1.70% Senior Notes due December 2019	$	1,200	$	1,200
1.75% Senior Notes due February 2020	500		500
2.15% Senior Notes due May 2021	1,000		1,000
2.25% Senior Notes due February 2022	500		500
2.30% Senior Notes due May 2022	800		800
2.75% Senior Notes due May 2024	1,000		1,000
3.00% Senior Notes due May 2027	1,000		1,000
Other long-term debt	529		613
Total long-term debt	6,529		6,613
Less unamortized debt discounts and issuance costs	31		36
Less current portion	1,699		90
Long-term debt, excluding current portion	$	4,799	$	6,487



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

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



	Number of Units (in 000’s)		Weighted-Average Grant Date Fair Value
Outstanding at September 2, 2018	7,578		$	140.85
Granted	2,792		224.00
Vested and delivered	(3,707	)	155.64
Forfeited	(128	)	163.68
Outstanding at May 12, 2019	6,535		$	167.55