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, 2019February 16, 2020
or
|
| |
☐ | 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, 2019March 4, 2020 was 439,789,186.441,579,952.
COSTCO WHOLESALE CORPORATION
INDEX TO FORM 10-Q
|
| | |
| | Page |
PART I | | |
Item 1. | | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| | |
PART II | | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
| | |
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.
3
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.
4
COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS 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.
3
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.
4
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.
54
COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITYBALANCE 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.
65
COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(amounts in millions) (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) |
| Amount |
|
BALANCE AT SEPTEMBER 2, 2018 | 438,189 |
| | $ | 4 |
| | $ | 6,107 |
| | $ | (1,199 | ) | | $ | 7,887 |
| | $ | 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 |
|
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 |
| | $ | 5,800 |
| | $ | (1,014 | ) | | $ | 5,988 |
| | $ | 10,778 |
| | $ | 301 |
| | $ | 11,079 |
| |
Net income | — |
| | — |
| | — |
| | — |
| | 2,091 |
| | 2,091 |
| | 35 |
| | 2,126 |
| |
Foreign-currency translation adjustment and other, net | — |
| | — |
| | — |
| | (24 | ) | | — |
| | (24 | ) | | 2 |
| | (22 | ) | |
Stock-based compensation | — |
| | — |
| | 434 |
| | — |
| | — |
| | 434 |
| | — |
| | 434 |
| |
Release of vested RSUs, including tax effects | 2,735 |
| | — |
| | (217 | ) | | — |
| | — |
| | (217 | ) | | — |
| | (217 | ) | |
Repurchases of common stock | (1,337 | ) | | — |
| | (19 | ) | | — |
| | (214 | ) | | (233 | ) | | — |
| | (233 | ) | |
Cash dividend declared and other | — |
| | — |
| | 3 |
| | — |
| | (689 | ) | | (686 | ) | | (34 | ) | | (720 | ) | |
BALANCE AT May 13, 2018 | 438,602 |
| | $ | 4 |
| | $ | 6,001 |
| | $ | (1,038 | ) | | $ | 7,176 |
| | $ | 12,143 |
| | $ | 304 |
| | $ | 12,447 |
| |
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.
6
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 | |
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 | |
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.
7
COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in millions)
| | | 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.
8
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-brandednationally 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 772785 warehouses worldwide: 535546 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, two2 in Spain, and one1 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-ownedwholly 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-companyintercompany 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 20192020 is a 52 week52-week year ending on September 1, 2019.August 30, 2020. References to the thirdsecond quarter of 20192020 and 20182019 relate to the 12 week12-week fiscal quarters ended May 12,February 16, 2020, and February 17, 2019, and May 13, 2018, respectively. References to the first thirty-six weekshalf of 20192020 and 20182019 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.
Revenue RecognitionLeases
The Company recognizes salesleases 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 amountthen-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 collectedfirst 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. Thedate 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 merchandiseproperty. Certain leases provide for periodic rent increases based on price indices or service beforethe 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 atwill 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.
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 requiresrequired recognition on the balance sheet offor the rights and obligations created by leases with terms greater than twelve12 months. The standard isCompany adopted ASC 842 using the modified retrospective transition method and elected to use the effective for fiscal years and interimdate 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 atelected the beginningpackage of its first quarter of fiscal 2020 and utilizepractical expedients permitted under the transition option, which allowsguidance, 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 inexisting 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 periodCompany elected the practical expedient allowing aggregation of adoption and does not require applicationnon-lease components with related lease components when evaluating accounting treatment for all classes of underlying assets.
Adoption of the guidancenew standard resulted in an initial increase to comparative periods. The primary effectassets and liabilities of adoption will be recording$2,632 related to recognition of operating lease right-of-use assets and correspondingoperating lease obligations for current operating leases. Although the Company continues to evaluate the effect toas 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 asbalance 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
rates as of the adoption date. The adoption is not expected to have a material impact to the Company'scondensed consolidated statements of income
orand cash flows.
The Company is reviewing current accounting policies and related disclosures, and evaluating changesFor more information on the Company's lease arrangements refer to
business processes, systems and controls to support adoptionNote 5.
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, 20181, 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 weekshalf 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 | |
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 |
|
Note 3—Fair Value Measurement
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tablestable below presentpresents 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, $152February 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, immaterial1, 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 2between levels during the third quarterfirst 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 recordedmeasured 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 quarterfirst half of 2020 or first thirty-six weeks of 2019 and 2018.2019.
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. |
|
| | | | | | | |
| 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 | % |
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. |
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 thirdsecond 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 thirdsecond quarter and first thirty-six weekshalf of 20192020 and 20182019 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,
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.
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 underand the Seventh Plan on January 24, 2019 and future forfeited shares from grants under the Seventh Planprevious 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, 15,649,000February 16, 2020, 13,535,000 shares were available to be granted as RSUs, and the following awards were outstanding:
6,307,0005,133,000 time-based RSUs that vest upon continued employment over specified periods of time;
78,00030,000 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
150,000123,000 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 weekshalf 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-vestednonvested 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 |
|
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 |
|
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.
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 alCorp. (Case No. 19ST-CV-10017 Los Angeles3:19-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 conditionsconditions. 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 claimsArizona. Claims against the Company in state courts in New Jersey and Oklahoma have been dismissed. The Company is defending all of these matters.
The Company and its CEO and CFO are defendants in putative class actions brought on behalf of shareholders who acquired Company stock between June 6 and October 25, 2018. Johnson v. Costco
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 expects16. On November 26, the court entered an order dismissing the consolidated actionamended 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.
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 FranceChina 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-segmentIntersegment 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. Operationsoperations because those costs generally come under the responsibility of the Company's U.S. management team.
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 |
|
19 |
| | | | | | | | | | | | | | | |
| 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 |
|
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 businesssmall-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 inmaintain 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 20182019 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-brandednationally branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. When combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, these volumes and turnover enable us to operate profitably at significantly lower gross margins (net sales less merchandise costs) than most other retailers.
We 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 onlineand sales related to e-commerce websites operating for more than one year. Comparable sales growth is achieved through increasing shopping frequency from new and existing members and the amount they spend on each visit (average ticket). Sales comparisons can also be particularly influenced by certain factors that are beyond our control: fluctuations in currency exchange rates (with respect to the consolidation of the results of our international operations); 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. SalesNet sales growth and
gross margins are also impacted by our competition, which is vigorous and widespread, across a wide range of global, national and
regional wholesalers and retailers, 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 labelprivate-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. ChangingRapidly 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.
OurThe 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 controlcontrolling 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 operatedoperates 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.
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/orand 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 relatesare 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 thirdsecond quarters of 20192020 and 20182019 relate to the 12 week12-week fiscal quarters ended May 12,February 16, 2020, and February 17, 2019, and May 13, 2018, respectively. References to the first thirty-six weekshalf of 20192020 and 20182019 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 itemsHighlights for the thirdsecond quarter of 20192020 as compared to the thirdsecond quarter of 20182019 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 thirdsecond 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 six31 basis points, primarily duein 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 six22 basis points, primarily due to the impactleveraging 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-dividendcash dividend of $0.65 per share, an increase from $0.57, which was paid on May 24, 2019; andFebruary 21, 2020.
On April 26, 2019, the Board of Directors authorized a new share repurchase program in the amount of $4,000.
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 weekshalf of 2019,2020, respectively, compared to the thirdsecond quarter and first thirty-six weekshalf of 2018.2019. These increases were attributable to an increase in comparable sales of 6%9% and 7% in the thirdsecond quarter and first thirty-six weekshalf of 2019,2020, respectively, and sales at the 2316 net new warehouses opened since the end of the thirdsecond quarter of 2018.2019.
During the thirdsecond 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 126three basis points, compared to the first thirty-six weekshalf 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.
Comparable Sales
Comparable sales increased 6%9% and 7% in the thirdsecond quarter and first thirty-six weekshalf 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.
Comparable sales for the third secondquarter and first thirty-six weekshalf of 20192020 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 thirdsecond quarter and first thirty-six weekshalf of 2019, respectively.2020. This was primarily due to sign-upssignups at existing and new warehouses andwarehouses. At the fee increase (discussed below). Renewalend of the secondquarter of 2020, our member renewal rates arewere 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 21decreased 15 basis points with increasesprimarily 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 six31 basis points compared to the thirdsecond quarter of 2018.2019. Excluding the impactsimpact 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 increasea decrease of five22 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, dueshift in sales penetration to increased spending by Executive Members. Warehousecertain 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
U.S. and Canadian operations, primarily due to warehouse ancillary and other businesses, partially offset by increasesdecreases 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.
Year-to-date Results
The gross margin of core merchandise categories, when expressed as a percentage of core merchandise sales, increased eightdecreased six basis points. This was attributable to increasesa decrease in food and sundries and hardlinesfresh foods, which was driven primarily by initial operating losses from our new poultry processing plant, partially offset by decreasesan increase in softlines.
Total gross margin percentage decreased eight basis pointsone basis-point compared to the first thirty-six weekshalf 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 fourtwo basis points from the first thirty-six weekshalf of 2018.2019. This was primarily due to a 15 basis pointnine basis-point increase in our warehouse ancillary and other businesses, predominantly our gasoline business. Thisas 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 duerelated 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 marginThese 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 increaseddecreased in our U.S. operations, primarily due to core merchandise categories, partially offset by our warehouse ancillary and other businesses, predominantlyas 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 six22 basis points compared to the thirdsecond quarter of 2018.2019. Excluding the impactsimpact 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 increasea decrease of five13 basis points compared to the prior year. Operating costsCosts 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 towith lower SG&A as a percentage of net sales. This decrease was partially offset by the wage increases of ourand bonding leave benefits for U.S. and Canadian hourly employees that went into effecteffective in June 2018. Central operating costs were higher by two basis points and stockMarch 2019. Stock compensation expense was higherlower by onethree 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 weekshalf of 2018.2019. Excluding the impactsimpact 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 pointsflat despite the wage increases and operating costsbonding leave benefits for U.S. and Canadian hourly employees discussed above. Costs related to warehouse ancillaryoperations and other businesses, which includesinclude e-commerce and travel, were lower by onetwo 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.
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 weekshalf 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.
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 quarterfirst 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 adiscrete net benefit of $73tax benefits, which largely related to U.S. taxation of deemed foreign dividends, net of losses of current year foreignexcess tax credits, which impactedbenefits from stock compensation, the effective tax rate. The tax rate was 26.2% and 26.1% for the first thirty-six weekshalf 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, werequirements. 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 weekshalf of 2019,2020, compared to $4,220$1,958 in the first thirty-six weekshalf 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, andsuppliers, warehouse operating costs, including payroll and employee benefits, utilities, and debitcredit and creditdebit 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.
Cash Flows from Investing Activities
Net cash used in investing activities totaled $1,945$1,100 in the first thirty-six weekshalf of 20192020, compared to $1,852$1,171 in the first thirty-six weekshalf of 2018,2019, and is primarily related to capital expenditures. Net cash from investing activities also includes purchases and maturities of short-term investments.
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 weekshalf 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 weekshalf of 20192020 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 andrealized; 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 weekshalf of 20192020, compared to $1,014$749 in the first thirty-six weekshalf 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 weekshalf 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 weekshalf of 20192020 and 2018,2019, we repurchased 903,000262,000 and 1,337,000711,000 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 thirdsecond quarter of 20192020 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 thirdsecond quarter of 20192020 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.
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 Aboutabout 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, 2019February 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 Overover 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 thirdsecond quarter of fiscal 20192020 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.
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.
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 thirdsecond quarter of 20192020 (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.
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 |
| | | | | | | | | | |
| | | | | | 10-Q | | 2/17/2019 | | 3/13/2019 |
| | | | | | | | | | |
| | | | | | 8-K | | | | 4/30/2019 |
| | | | | | | | | | |
| | | | x | | | | | | |
| | | | | | | | | | |
| | | | | | 8-K | | | | 1/29/2020 |
| | | | | | | | | | |
| | | | x | | | | | | |
| | | | | | | | | | |
| | | | 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, 2019March 11, 2020 | By | | /s/ W. CRAIG JELINEK |
Date | | | W. Craig Jelinek President, Chief Executive Officer and Director |
| | | |
June 5, 2019March 11, 2020 | By | | /s/ RICHARD A. GALANTI |
Date | | | Richard A. Galanti Executive Vice President, Chief Financial Officer and Director |