please complete the attachment, it is a value chain analysis about Costco. I have attached the Costco 10K it is 75 pages, please get all the information from the 10K and state which page the info. came from.A.
Internal analysis: ( Chapter 3 and 4)
1.
The company’s strengths and weaknesses SW (OT):
a. Perform a value chain analysis and conclude with a statement on how the company’s various
components of its value chain are adding value to the firm? ( use the following chart)
Value chain activity
Primary Activity:
Inbound logistics (distribution
facilities, material control systems,
warehouse layouts)
Operations (efficient work flow
design, quality control systems)
Outbound logistics (consolidation
of goods, efficient scheduling,
finished goods processing)
Marketing and Sales (motivated
sales people, innovative advertising
& promotion, effective pricing,
proper ID of customer segments &
distribution channels)
Service (ability to solicit customer
feedback & respond)
Secondary (or support):
Procurement (win-win relationships
with suppliers, reduced
dependence on single supplier)
How does your company create value for
the customer? What challenges does it have
in its value chain?
Opportunity or Threat
Technology development (state of
the art hardware & software,
innovative culture & qualified
personnel)
Human resource management
(effective recruitment, incentive &
retention mechanisms)
General Administration (effective
planning systems to establish goals
& strategies, access to capital,
effective top management
communication, relationships with
diverse stakeholders)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 3, 2017
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
(State or other jurisdiction of
incorporation or organization)
91-1223280
(I.R.S. Employer Identification No.)
999 Lake Drive, Issaquah, WA 98027
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (425) 313-8100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on
which registered
Common Stock, $.01 Par Value
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☒ NO ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). YES ☒ NO ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Non-accelerated filer ☐ (Do not check if a smaller company)
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 Act). YES ☐ NO ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 12, 2017 was $74,963,307,820.
The number of shares outstanding of the registrant’s common stock as of October 10, 2017 was 436,989,606.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on January 30, 2018, are incorporated by reference into Part III
of this Form 10-K.
Table of Contents
COSTCO WHOLESALE CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 3, 2017
TABLE OF CONTENTS
Page
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
3
8
15
16
16
16
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
17
18
19
30
32
32
32
33
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
33
33
34
34
34
Exhibits, Financial Statement Schedules
Form 10-K Summary
Signatures
34
36
37
PART IV
Item 15.
Item 16.
2
Table of Contents
INFORMATION RELATING TO 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
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, modernization of information systems, and the demand for our products and services. Forwardlooking statements may also be identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,”
“opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Such forward-looking
statements involve risks and uncertainties that may cause actual events, results, or performance to differ materially from those indicated by such
statements, including, without limitation, the factors set forth in the section titled “Item 1A-Risk Factors”, and other factors noted in the section
titled “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the consolidated financial
statements and related notes in Item 8 of this Report. Forward-looking statements speak only as of the date they are made, and we do not
undertake to update them, except as required by law.
PART I
Item 1—Business
Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983, in Seattle, Washington. We are principally
engaged in the operation of membership warehouses in the United States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan,
Australia, Spain, France, Iceland and through majority-owned subsidiaries in Taiwan and Korea. Costco operated 741, 715, and 686 warehouses
worldwide at September 3, 2017, August 28, 2016, and August 30, 2015, respectively. Our common stock trades on the NASDAQ Global Select
Market, under the symbol “COST.”
We report on a 52/53-week fiscal year, consisting of thirteen, four-week periods and ending on the Sunday nearest the end of August. The first
three quarters consist of three periods each, and the fourth quarter consists of four periods (five weeks in the thirteenth period in a 53-week year).
The material seasonal impact in our operations is increased net sales and earnings during the winter holiday season. References to 2017 relate to
the 53-week fiscal year ended September 3, 2017. References to 2016 and 2015 relate to the 52-week fiscal years ended August 28, 2016, and
August 30, 2015, respectively.
General
We operate membership warehouses based on the concept that offering our members low prices on a limited selection of nationally branded and
private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. When combined
with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service
warehouse facilities, these volumes and turnover enable us to operate profitably at significantly lower gross margins (net sales less merchandise
costs) than most other retailers. We generally sell inventory before we are required to pay for it, even while taking advantage of early payment
discounts when available.
We buy most of our merchandise directly from manufacturers and route it to cross-docking consolidation points (depots) or directly to our
warehouses. Our depots receive large shipments from manufacturers and quickly ship these goods to individual warehouses. This process creates
freight volume and handling efficiencies, eliminating many costs associated with traditional multiple-step distribution channels.
3
Table of Contents
Item 1—Business (Continued)
Our average warehouse space is approximately 145,000 square feet, with newer units slightly larger. Floor plans are designed for economy and
efficiency in the use of selling space, the handling of merchandise, and the control of inventory. Because shoppers are attracted principally by the
quality of merchandise and low prices, our warehouses are not elaborate. By strictly controlling the entrances and exits of our warehouses and
using a membership format, we have inventory losses (shrinkage) well below those of typical retail operations.
Our warehouses on average operate on a seven-day, 70-hour week. Gasoline operations generally have extended hours. Because the hours of
operation are shorter than other retailers, and due to other efficiencies inherent in a warehouse-type operation, labor costs are lower relative to the
volume of sales. Merchandise is generally stored on racks above the sales floor and displayed on pallets containing large quantities, reducing
labor required. In general, with variations by country, our warehouses accept certain credit, including the Costco co-branded card, and debit cards,
cash, and checks.
Our strategy is to provide our members with a broad range of high-quality merchandise at prices we believe are consistently lower than elsewhere.
We seek to limit items to fast-selling models, sizes, and colors. We carry an average of approximately 3,800 active stock keeping units (SKUs)
per warehouse in our core warehouse business, significantly less than other broadline retailers. Many consumable products are offered for sale in
case, carton, or multiple-pack quantities only.
In keeping with our policy of member satisfaction, we generally accept returns of merchandise. On certain electronic items, we typically have a 90day return policy and provide, free of charge, technical support services, as well as an extended warranty. Additional third-party warranty coverage
is sold on certain electronic items.
We offer merchandise in the following categories:






Foods (including dry foods, packaged foods, and groceries)
Sundries (including snack foods, candy, alcoholic and nonalcoholic beverages, and cleaning supplies)
Hardlines (including major appliances, electronics, health and beauty aids, hardware, and garden and patio)
Fresh Foods (including meat, produce, deli, and bakery)
Softlines (including apparel and small appliances)
Ancillary (including gas stations and pharmacy)
Ancillary businesses within or next to our warehouses provide expanded products and services, encouraging members to shop more frequently.
These businesses include our gas stations, pharmacy, optical dispensing centers, food courts, and hearing-aid centers. We sell gasoline in all
countries except Korea and France, with the number of warehouses with gas stations varying significantly by country. We operated 536, 508, and
472 gas stations at the end of 2017, 2016, and 2015, respectively.
Our online businesses, which include e-commerce, business delivery, and travel, vary by country. In the U.S. and Canada, we offer all of our
online businesses. We operate e-commerce websites in all countries except Japan, Australia, Spain, Iceland, and France. Online businesses
provide our members additional products and services, many not found in our warehouses. Net sales for our online business were approximately
4% of our total net sales in 2017 and 2016, respectively, and 3% in 2015.
We have direct buying relationships with many producers of national brand-name merchandise. We do not obtain a significant portion of
merchandise from any one supplier. We generally have not experienced difficulty in obtaining sufficient quantities of merchandise and believe that
if one or more of our current sources of supply became unavailable, we would be able to obtain alternative sources without substantial disruption of
our business. We also purchase private-label merchandise, as long as quality and member demand are comparable and the value to our members
is significant.
4
Table of Contents
Item 1—Business (Continued)
Certain financial information for our segments and geographic areas is included in Note 11 to the consolidated financial statements included in
Item 8 of this Report.
Membership
Our members may utilize their memberships at any of our warehouses worldwide. Gold Star memberships are available to individuals; Business
memberships are limited to businesses, including individuals with a business license, retail sales license or comparable evidence. Business
members have the ability to add additional cardholders (add-ons). Add-ons are not available for Gold Star members. Effective June 1, 2017, we
increased our annual membership fees in the U.S. and Canada for Gold Star (individual), Business and Business add-on by $5 to $60 per year.
The Executive membership fee increased from $110 to $120 (annual membership fee of $60, plus Executive upgrade of $60), and the maximum
annual 2% reward, which is earned on qualified purchases and can be redeemed only at Costco warehouses, increased from $750 to $1,000. Our
annual membership fees in our Other International operations vary by country. All paid memberships include a free household card.
Our member renewal rate was 90% in the U.S. and Canada and 87% on a worldwide basis in 2017. The majority of members renew within six
months following their renewal date. Therefore, our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen
months prior to the reporting date.
Our membership was made up of the following (in thousands):
2017
Gold Star
Business, including add-ons
Total paid members
Household cards
Total cardholders
2016
2015
38,600
10,800
36,800
10,800
34,000
10,600
49,400
40,900
47,600
39,100
44,600
36,700
90,300
86,700
81,300
Paid cardholders (except Business add-ons) are eligible to upgrade to an Executive membership in the U.S., Canada, Mexico and the U.K. for an
additional annual fee, which varies by country. Executive members have access to additional savings and benefits on various business and
consumer services (except in Mexico), such as auto and home insurance, the Costco auto purchase program and check printing services. The
services are generally provided by third-parties and vary by state and country. Executive members represented 38% of paid members at the end
o f 2017. Executive members generally spend more than other members, and the percentage of our net sales attributable to these members
continues to increase.
Labor
Our employee count was as follows:
Full-time employees
Part-time employees
Total employees
2017
2016
2015
133,000
98,000
126,000
92,000
117,000
88,000
231,000
218,000
205,000
Approximately 15,600 employees are union employees. We consider our employee relations to be very good.
5
Table of Contents
Item 1—Business (Continued)
Competition
Our industry is highly competitive, based on factors such as price, merchandise quality and selection, location, convenience, distribution strategy,
and customer service. We compete on a worldwide basis with global, national, and regional wholesalers and retailers, including supermarkets,
supercenters, internet retailers, gasoline stations, hard discounters, department and specialty stores, and operators selling a single category or
narrow range of merchandise. Wal-Mart, Target, Kroger, and Amazon.com are among our significant general merchandise retail competitors. We
also compete with warehouse club operations (primarily Wal-Mart’s, Sam’s Club and BJ’s Wholesale Club), and nearly every major U.S. and
Mexico metropolitan area has multiple club operations.
Intellectual Property
We believe that, to varying degrees, our trademarks, trade names, copyrights, proprietary processes, trade secrets, patents, trade dress, domain
names and similar intellectual property add significant value to our business and are important to our success. We have invested significantly in
the development and protection of our well-recognized brands, including the Costco Wholesale® trademarks and our private-label brand, Kirkland
Signature®. We believe that Kirkland Signature products are high quality products, offered to our members at prices that are generally lower than
those for similar national brand products and that they help lower costs, differentiate our merchandise offerings from other retailers, and generally
earn higher margins. We expect to continue to increase the sales penetration of our private label items.
We rely on trademark and copyright laws, trade-secret protection, and confidentiality, license and other agreements with our suppliers, employees
and others to protect our intellectual property rights. The availability and duration of trademark registrations vary by country; however, trademarks
are generally valid and may be renewed indefinitely as long as they are in use and their registrations are properly maintained.
Available Information
Our U.S. internet website is www.costco.com. We make available through the Investor Relations section of that site, free of charge, our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5, and any
amendments to those reports, as soon as reasonably practicable after filing such materials with, or furnishing such documents to, the Securities
and Exchange Commission (SEC). The information found on our website is not part of this or any other report filed with or furnished to the SEC. In
addition, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington,
DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers, such as the
Company, that file electronically with the SEC at www.sec.gov.
We have adopted a code of ethics for senior financial officers pursuant to Section 406 of the Sarbanes-Oxley Act. Copies of the code are available
free of charge by writing to Secretary, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, WA 98027. If the Company makes any
amendments to this code (other than technical, administrative, or non-substantive amendments) or grants any waivers, including implicit waivers,
from this code to the CEO, chief financial officer or principal accounting officer and controller, we will disclose (on our website or in a Form 8-K
report filed with the SEC) the nature of the amendment or waiver, its effective date, and to whom it applies.
6
Table of Contents
Item 1—Business (Continued)
Executive Officers of the Registrant
The executive officers of Costco, their position, and ages are listed below. All executive officers have 25 or more years of service with the
Company.
Name
W. Craig Jelinek
Richard A. Galanti
Franz E. Lazarus
John D. McKay
Paul G. Moulton
James P. Murphy
Joseph P. Portera
Timothy L. Rose
Ron M. Vachris
Dennis R. Zook
Position
President and Chief Executive Officer. Mr. Jelinek has been President and
Chief Executive Officer since January 2012 and a director since February
2010. He was President and Chief Operating Officer from February 2010 to
December 2011. Prior to that he was Executive Vice President, Chief
Operating Officer, Merchandising since 2004.
Executive Vice President and Chief Financial Officer. Mr. Galanti has been
a director since January 1995.
Executive Vice President, Administration. Mr. Lazarus was Senior Vice
President, Administration-Global Operations from 2006 to September 2012.
Executive Vice President, Chief Operating Officer, Northern Division. Mr.
McKay was Senior Vice President, General Manager, Northwest Region
from 2000 to March 2010.
Executive Vice President, Chief Information Officer. Mr. Moulton was
Executive Vice President, Real Estate Development from 2001 until March
2010.
Executive Vice President, Chief Operating Officer, International. Mr. Murphy
was Senior Vice President, International, from 2004 to October 2010.
Executive Vice President, Chief Operating Officer, Eastern and Canadian
Divisions. Mr. Portera has held these positions since 1994, and has been
the Chief Diversity Officer since 2010.
Executive Vice President, Ancillary Businesses, Manufacturing, and
Business Centers. Mr. Rose was Senior Vice President, Merchandising,
Food and Sundries and Private Label from 1995 to December 2012.
Executive Vice President, Chief Operating Officer, Merchandising. Mr.
Vachris was Senior Vice President, Real Estate Development, from August
2015 to June 2016, and Senior Vice President, General Manager, Northwest
Region from 2010 to July 2015.
Executive Vice President, Chief Operating Officer, Southwest Division and
Mexico.
7
Executive
Officer
Since
Age
1995
65
1993
61
2012
70
2010
60
2001
66
2011
64
1994
65
2013
65
2016
52
1993
68
Table of Contents
Item 1A—Risk Factors
The risks described below could materially and adversely affect our business, financial condition and results of operations. We could also be
affected by additional risks that apply to all companies operating in the U.S. and globally, as well as other risks that are not presently known to us
or that we currently consider to be immaterial. These Risk Factors should be carefully reviewed in conjunction with Management’s Discussion and
Analysis of Financial Condition and Results of Operations in Item 7 and our consolidated financial statements and related notes in Item 8 of this
Report.
Business and Operating Risks
We are highly dependent on the financial performance of our U.S. and Canadian operations.
Our financial and operational performance is highly dependent on our U.S. and Canadian operations, which comprised 87% and 85% of net sales
and operating income in 2017, respectively. Within the U.S., we are highly dependent on our California operations, which comprised 30% of U.S.
net sales in 2017. Our California market, in general, has a larger percentage of higher volume warehouses as compared to our other domestic
markets. Any substantial slowing or sustained decline in these operations could materially adversely affect our business and financial results.
Declines in financial performance of our U.S. operations, particularly in California, and our Canadian operations could arise from, among other
things: slow growth or declines in comparable warehouse sales (comparable sales); negative trends in operating expenses, including increased
labor, healthcare and energy costs; failing to meet targets for warehouse openings; cannibalizing existing locations with new warehouses; shifts in
sales mix toward lower gross margin products; changes or uncertainties in economic conditions in our markets, including higher levels of
unemployment and depressed home values; and failing to consistently provide high quality and innovative new products to retain our existing
member base and attract new members.
We may be unsuccessful implementing our growth strategy, including expanding our business in existing markets and new markets,
which could have an adverse impact on our business, financial condition and results of operations.
Our growth is dependent, in part, on our ability to acquire property and build or lease new warehouses and regional depots. We compete with other
retailers and businesses for suitable locations. Local land use and other regulations restricting the construction and operation of our warehouses
and depots, as well as local community actions opposed to the location of our warehouses or depots at specific sites and the adoption of local
laws restricting our operations and environmental regulations, may impact our ability to find suitable locations, and increase the cost of sites and
of constructing, leasing and operating our warehouses and depots. We also may have difficulty negotiating leases or purchase agreements on
acceptable terms. In addition, certain jurisdictions have enacted or proposed laws and regulations that would prevent or restrict the operation or
expansion plans of certain large retailers and warehouse clubs, including us, within their jurisdictions. Failure to effectively manage these and other
similar factors may affect our ability to timely build or lease and operate new warehouses and depots, which could have a material adverse effect
on our future growth and profitability.
We seek to expand in existing markets to attain a greater overall market share. A new warehouse may draw members away from our existing
warehouses and adversely affect their comparable sales performance and member traffic.
We intend to continue to open warehouses in new markets. Associated risks include difficulties in attracting members due to a lack of familiarity
with us, attracting members of other wholesale club operators, our lack of familiarity with local member preferences, and seasonal differences in
the market. Entry into new markets may bring us into competition with new competitors or with existing competitors with a large, established
market presence. We cannot ensure that new warehouses and new websites will be profitably deployed and, as a result, future profitability could
be delayed or otherwise materially adversely affected.
8
Table of Contents
Item 1A—Risk Factors (Continued)
Our failure to maintain membership loyalty and brand recognition could adversely affect our results of operations.
Membership loyalty and growth are essential to our business model. 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. Damage to our brands or reputation
may negatively impact comparable sales, diminish member trust, and reduce member renewal rates and, accordingly, net sales and membership
fee revenue, negatively impacting our results of operations.
We sell many products under our Kirkland Signature brand. Maintaining consistent product quality, competitive pricing, and availability of these
products is essential to developing and maintaining member loyalty. These products also generally carry higher margins than national brand
products carried in our warehouses and represent a growing portion of our overall sales. If the Kirkland Signature brand experiences a loss of
member acceptance or confidence, our sales and gross margin results could be adversely affected.
Disruptions in our merchandise distribution could adversely affect sales and member satisfaction.
We depend on the orderly operation of the merchandise receiving and distribution process, primarily through our depots. Although we believe that
our receiving and distribution process is efficient, unforeseen disruptions in operations due to fires, tornadoes and hurricanes, earthquakes or other
catastrophic events, labor issues or other shipping problems may result in delays in the delivery of merchandise to our warehouses, which could
adversely affect sales and the satisfaction of our members.
We rely extensively on information technology to process transactions, compile results, and manage our businesses. Failure or
disruption of our primary and back-up systems could adversely affect our businesses. A failure to adequately update our existing
systems and implement new systems could harm our businesses and adversely affect our results of operations.
Given the very high volume of transactions we process each year it is important that we maintain uninterrupted operation of our business-critical
computer systems. Our systems, including our back-up systems, are subject to damage or interruption from power outages, computer and
telecommunications failures, computer viruses, internal or external security breaches, catastrophic events such as fires, earthquakes, tornadoes
and hurricanes, and errors by our employees. If our systems are damaged or cease to function properly, we may have to make significant
investments to fix or replace them, and we may suffer interruptions in our operations in the interim. Any material interruption in these systems
could have a material adverse effect on our business and results of operations.
We are currently making, and will continue to make, significant technology investments to improve or replace critical information systems and
processing capabilities. Failure to monitor and choose the right investments and implement them at the right pace would be harmful. The risk of
system disruption is increased when significant system changes are undertaken, although we believe that our change management process will
mitigate this risk. Excessive technological change could impact the effectiveness of adoption, and could make it more difficult for us to realize
benefits. Targeting the wrong opportunities, failing to make the best investments, or making an investment commitment significantly above or
below our needs could result in the loss of our competitive position and adversely impact our financial condition and results of operations.
Additionally, the potential problems and interruptions associated with implementing technology initiatives could disrupt or reduce the efficiency of
our operations. These initiatives might not provide the anticipated benefits or may provide them on a delayed schedule or at a higher cost.
If we do not maintain the privacy and security of member-related and other business information, we could damage our reputation with
members, incur substantial additional costs, and become subject to litigation.
We receive, retain, and transmit personal information about our members and entrust that information to third-party business associates, including
cloud service providers that perform activities for us. Our
9
Table of Contents
Item 1A—Risk Factors (Continued)
warehouse and online businesses depend upon the secure transmission of encrypted confidential information over public networks, including
information permitting cashless payments. A compromise of our security systems or those of our business associates, that results in our
members’ information being obtained by unauthorized persons, could adversely affect our reputation with our members and others, as well as our
operations, results of operations, financial condition and liquidity, and could result in litigation against us or the imposition of penalties. In addition,
a breach could require that we expend significant additional resources related to the security of information systems and could disrupt our
operations.
The use of data by our business and our business associates is regulated at the national and state or local level in all of our operating
countries. Privacy and information-security laws and regulations change, and compliance with them may result in cost increases due to necessary
systems changes and the development of new processes. If we or those with whom we share information fail to comply with these laws and
regulations, our reputation could be damaged, possibly resulting in lost future business, and we could be subjected to additional legal risk as a
result of non-compliance.
Our security measures may be undermined due to the actions of outside parties, employee error, internal or external malfeasance, or otherwise,
and, as a result an unauthorized party may obtain access to our data systems and misappropriate business and personal information. Because the
techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may not immediately
produce signs of intrusion, we may be unable to anticipate these techniques, timely discover or counter them, or implement adequate preventative
measures. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation, and
potentially have an adverse effect on our business.
We are subject to payment-related risks.
We accept payments using a variety of methods, including cash and checks, a select variety of credit and debit cards, and our proprietary cash
card. As we offer new payment options to our members, we may be subject to additional rules, regulations, compliance requirements, and higher
fraud losses. For certain payment methods, we pay interchange and other related card acceptance fees, along with additional transaction
processing fees. We rely on third parties to provide payment transaction processing services, including the processing of credit and debit cards,
and our proprietary cash card, and it could disrupt our business if these companies become unwilling or unable to provide these services to us. We
are also subject to payment card association and network operating rules, including data security rules, certification requirements and rules
governing electronic funds transfers, which could change over time. For example, we are subject to Payment Card Industry Data Security
Standards (“PCI DSS”), which contain compliance guidelines and standards with regard to our security surrounding the physical and electronic
storage, processing and transmission of individual cardholder data. In addition, if our internal systems are breached or compromised, we may be
liable for card re-issuance costs, subject to fines and higher transaction fees and lose our ability to accept credit and/or debit card payments from
our members, and our business and operating results could be adversely affected.
We might sell products that cause unexpected illness or injury to our members, harm to our reputation, and expose us to litigation.
If our merchandise offerings, such as food and prepared food products for human consumption, drugs, children’s products, pet products, and
durable goods, do not meet or are perceived not to meet applicable safety standards or our members’ expectations regarding safety, we could
experience lost sales, increased costs, litigation or reputational harm. The sale of these items involves the risk of health-related illness or injury to
our members. Such illnesses or injuries could result from tampering by unauthorized third parties, product contamination or spoilage, including the
presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, manufacturing, storage, handling and
transportation phases, or faulty design. Our vendors are generally contractually required to comply with product safety laws, and we are dependent
on them to ensure that the products we buy comply with all safety standards. While we are subject to governmental inspection and regulations and
work to comply in all material respects
10
Table of Contents
Item 1A—Risk Factors (Continued)
with applicable laws and regulations, we cannot be sure that consumption or use of our products will not cause a health-related illness or injury in
the future or that we will not be subject to claims, lawsuits, or government investigations relating to such matters resulting in costly product recalls
and other liabilities that could adversely affect our business and results of operations. Even if a product liability claim is unsuccessful or is not
fully pursued, negative publicity could adversely affect our reputation with existing and potential members and our corporate and brand image, and
these effects could be long term.
We may not timely identify or effectively respond to consumer trends, which could negatively affect our relationship with our members,
the demand for our products and services, and our market share.
It is difficult to consistently and successfully predict the products and services that our members will desire. Our success depends, in part, on our
ability to identify and respond to trends in demographics and consumer preferences. Failure to identify timely or effectively respond to changing
consumer tastes, preferences (including those relating to sustainability of product sources and animal welfare) and spending patterns could
negatively affect our relationship with our members, the demand for our products and services and our market share. If we are not successful at
predicting our sales trends and adjusting our purchases accordingly, we may have excess inventory, which could result in additional markdowns
and reduce our operating performance. This could have an adverse effect on net sales, gross margin and operating income.
If we do not successfully develop and maintain a relevant multichannel experience for our members, our results of operations could be
adversely impacted.
Multichannel retailing is rapidly evolving and we must keep pace with changing member expectations and new developments by our competitors.
Our members are increasingly using mobile phones, tablets, computers, and other devices to shop and to interact with us through social media.
We are making technology investments in our websites and mobile applications. If we are unable to make, improve, or develop relevant memberfacing technology in a timely manner, our ability to compete and our results of operations could be adversely affected.
Inability to attract, train and retain highly qualified employees could adversely impact our business, financial condition and results of
operations.
Our success depends on the continued contributions of members of our senior management and other key operations, merchandising and
administrative personnel. Failure to identify and implement a succession plan for key senior management could negatively impact the business.
We must attract, train and retain a large and growing number of qualified employees, while controlling related labor costs and maintaining our core
values. Our ability to control labor and benefit costs is subject to numerous internal and external factors, including regulatory changes, prevailing
wage rates, and healthcare and other insurance costs. We compete with other retail and non-retail businesses for these employees and invest
significant resources in training and motivating them. There is no assurance that we will be able to attract or retain highly qualified employees in
the future, which could have a material adverse effect on our business, financial condition and results of operations.
We may incur property, casualty or other losses not covered by our insurance.
We are predominantly self-insured, with insurance coverage for certain catastrophic risks, for employee health care benefits, workers’
compensation, general liability, property damage, directors’ and officers’ liability, vehicle liability and inventory loss. The types and amounts of
insurance may vary from time to time based on our decisions with respect to risk retention and regulatory requirements. The occurrence of
significant claims, a substantial rise in costs to maintain our insurance or the failure to maintain adequate insurance coverage could have an
adverse impact on our financial condition and results of operations.
11
Table of Contents
Item 1A—Risk Factors (Continued)
We are primarily self-insured as it relates to property damage, due to the substantial premiums required for insurance coverage over physical
losses caused by certain natural disasters, as well as the limitations on available coverage for such losses. Although we maintain specific
coverages for losses from physical damages in excess of certain amounts to guard against catastrophic losses, we still bear the risk of losses
incurred as a result of any physical damage to, or the destruction of, any warehouses, depots, manufacturing or home office facilities, loss or
spoilage of inventory, and business interruption caused by any such events to the extent they are below catastrophic levels of coverage, as well
as any losses to the extent they exceed our aggregate limits of applicable coverages. Such losses could materially impact our cash flow and
results of operations.
Market and Other External Risks
We face strong competition from other retailers and warehouse club operators, which could adversely affect our business, financial
condition and results of operations.
The retail business is highly competitive. We compete for members, employees, sites, products and services and in other important respects with
a wide range of local, regional and national wholesalers and retailers, both in the United States and in foreign countries, including other warehouse
club operators, supermarkets, supercenters, internet retailers, gasoline stations, hard discounters, and department and specialty stores. Such
retailers and warehouse club operators compete in a variety of ways, including merchandise pricing, selection and availability, services, location,
convenience, store hours, and the attractiveness and ease of use of websites and mobile applications. The evolution of retailing in online and
mobile channels has improved the ability of customers to comparison shop with digital devices, which has enhanced competition. Some
competitors may have greater financial resources, better access to merchandise and greater market penetration than we do. Our inability to
respond effectively to competitive pressures, changes in the retail markets and member expectations could result in lost market share and
negatively affect our financial results.
General economic factors, domestically and internationally, may adversely affect our business, financial condition, and results of
operations.
Higher energy and gasoline costs, inflation, levels of unemployment, healthcare costs, consumer debt levels, foreign-currency exchange rates,
unsettled financial markets, weaknesses in housing and real estate markets, reduced consumer confidence, changes and uncertainties related to
government fiscal and tax policies including increased duties, tariffs, or other restrictions, sovereign debt crises, and other economic factors could
adversely affect demand for our products and services, require a change in product mix, or impact the cost of or ability to purchase inventory.
Prices of certain commodity products, including gasoline and other food products, are historically volatile and are subject to fluctuations arising
from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations, taxes and
periodic delays in delivery. Rapid and significant changes in commodity prices and our ability and desire to pass them through to our members
may affect our sales and profit margins. These factors could also increase our merchandise costs and selling, general and administrative
expenses, and otherwise adversely affect our operations and financial results. General economic conditions can also be affected by significant
events like the outbreak of war or acts of terrorism.
Vendors may be unable to supply us with quality merchandise at competitive prices in a timely manner or may fail to adhere to our high
standards, resulting in adverse effects on our business, merchandise inventories, sales, and profit margins.
We depend heavily on our ability to purchase quality merchandise in sufficient quantities at competitive prices. As the quantities we require
continue to grow, we have no assurances of continued supply, appropriate pricing or access to new products, and any vendor has the ability to
change the terms upon which they sell to us or discontinue selling to us. Member demands may lead to out-of-stock positions of our merchandise
leading to loss of sales and profits.
12
Table of Contents
Item 1A—Risk Factors (Continued)
We buy from numerous domestic and foreign manufacturers and importers. Our inability to acquire suitable merchandise on acceptable terms or
the loss of key vendors could negatively affect us. We may not be able to develop relationships with new vendors, and products from alternative
sources, if any, may be of a lesser quality or more expensive than those from existing vendors. Because of our efforts to adhere to high quality
standards for which available supply may be limited, particularly for certain food items, the large volume we demand may not be consistently
available.
Our suppliers (and those they depend upon for materials and services) are subject to risks, including labor disputes, union organizing activities,
financial liquidity, inclement weather, natural disasters, supply constraints, and general economic and political conditions that could limit their
ability to timely provide us with acceptable merchandise. For these or other reasons, one or more of our suppliers might not adhere to our quality
control, legal, regulatory, labor, environmental or animal welfare standards. These deficiencies may delay or preclude delivery of merchandise to
us and might not be identified before we sell such merchandise to our members. This failure could lead to recalls and litigation, and otherwise
damage our reputation and our brands, increase our costs, and otherwise adversely impact our business.
Fluctuations in foreign exchange rates may adversely affect our results of operations.
During 2017, our international operations, including Canada, generated 27% and 36% of our net sales and operating income, respectively. Our
international operations have accounted for an increasing portion of our warehouses, and we plan to continue international growth. To prepare our
consolidated financial statements, we must translate the financial statements of our international operations from local currencies into U.S. dollars
using exchange rates for the current period. Future fluctuations in currency exchange rates over time that are unfavorable to us may adversely
affect the financial performance of our Canadian and Other International operations and have a corresponding adverse period-over-period effect on
our results of operations. As we continue to expand internationally, our exposure to fluctuations in foreign exchange rates may increase.
We may pay for products we purchase for sale in our warehouses around the world with a currency other than the local currency of the country in
which the goods will be sold. Currency fluctuations may increase our cost of goods and may not be passed on to members. Consequently,
fluctuations in currency exchange rates may adversely affect our results of operations.
Natural disasters or other catastrophes could negatively affect our business, financial condition, and results of operations.
Natural disasters, such as hurricanes, typhoons or earthquakes, particularly in California or Washington state, where our centralized operating
systems and administrative personnel are located, could negatively affect our operations and financial performance. Such events could result in
physical damage to one or more of our properties, the temporary closure of one or more warehouses, depots, manufacturing or home office
facilities, the temporary lack of an adequate work force in a market, the temporary or long-term disruption in the supply of products from some
local or overseas suppliers, the temporary disruption in the transport of goods to or from overseas, delays in the delivery of goods to our
warehouses or depots within the countries in which we operate, and the temporary reduction in the availability of products in our warehouses.
Public health issues, whether occurring in the U.S. or abroad, could disrupt our operations, disrupt the operations of suppliers or members, or have
an adverse impact on consumer spending and confidence levels. These events could also reduce demand for our products or make it difficult or
impossible to procure products. We may be required to suspend operations in some or all of our locations, which could have a material adverse
effect on our business, financial condition and results of operations.
Factors associated with climate change could adversely affect our business.
We use natural gas, diesel fuel, gasoline, and electricity in our distribution and warehouse operations. U.S. and foreign government regulations
limiting carbon dioxide and other greenhouse gas emissions may result in increased compliance costs and legislation or regulation affecting energy
inputs that could materially affect
13
Table of Contents
Item 1A—Risk Factors (Continued)
our profitability. Climate change could affect our ability to procure needed commodities at costs and in quantities we currently experience. We also
sell a substantial amount of gasoline, the demand for which could be impacted by concerns about climate change and which could face increased
regulation. Climate change may be associated with extreme weather conditions, such as more intense hurricanes, thunderstorms, tornadoes, and
snow or ice storms, as well as rising sea levels.
Failure to meet market expectations for our financial performance could adversely affect the market price and volatility of our stock.
We believe that the price of our stock currently reflects high market expectations for our future operating results. Any failure to meet or delay in
meeting these expectations, including our warehouse and e-commerce comparable sales growth rates, membership renewal rates, new member
sign-ups, gross margin, earnings, earnings per share, new warehouse openings, or dividend or stock repurchase policies could cause the market
price of our stock to decline.
Legal and Regulatory Risks
Our international operations subject us to risks associated with the legislative, judicial, accounting, regulatory, political and economic
factors specific to the countries or regions in which we operate which could adversely affect our business, financial condition and
results of operations.
During 2017, we operated 227 warehouses in 10 countries outside of the U.S., and we plan to continue expanding our international operations.
Future operating results internationally could be negatively affected by a variety of factors, many similar to those we face in the U.S., certain of
which are beyond our control. These factors include political and economic conditions, regulatory constraints, currency regulations, policy changes
such as the U.K.’s vote to withdraw from the European Union, commonly known as “Brexit”, and other matters in any of the countries or regions in
which we operate, now or in the future. Other factors that may impact international operations include foreign trade, monetary and fiscal policies
and the laws and regulations of the U.S. and foreign governments, agencies and similar organizations, and risks associated with having major
facilities located in countries which have been historically less stable than the U.S. Risks inherent in international operations also include, among
others, the costs and difficulties of managing international operations, adverse tax consequences, and greater difficulty in enforcing intellectual
property rights.
Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting
matters could significantly affect our financial condition and results of operations.
Accounting principles and related pronouncements, implementation guidelines, and interpretations we apply to a wide range of matters that are
relevant to our business, including, but not limited to, revenue recognition, merchandise inventories, vendor rebates and other vendor
consideration, impairment of long-lived assets, self-insurance liabilities, and income taxes are highly complex and involve subjective assumptions,
estimates and judgments by our management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or
judgments by our management could significantly change our reported or expected financial performance.
Provisions for losses related to self-insured risks are generally based upon independent actuarially determined estimates. The assumptions
underlying the ultimate costs of existing claim losses can be highly unpredictable, which can affect the liability recorded for such claims. For
example, variability in health care cost inflation rates inherent in these claims can affect the amounts recognized. Similarly, changes in legal
trends and interpretations, as well as changes in the nature and method of how claims are settled can impact ultimate costs. Although our
estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, any changes could have a considerable
effect upon future claim costs and currently recorded liabilities and could materially impact our consolidated financial statements.
14
Table of Contents
Item 1A—Risk Factors (Continued)
We could be subject to additional income tax liabilities.
We compute our income tax provision based on enacted tax rates in the countries in which we operate. As tax rates vary among countries, a
change in earnings attributable to the various jurisdictions in which we operate could result in an unfavorable change in our overall tax provision.
Additionally, changes in the enacted tax rates, adverse outcomes in tax audits, including transfer pricing disputes, or any change in the
pronouncements relating to accounting for income taxes could have a material adverse effect on our financial condition and results of operations.
Significant changes in, or failure to comply with, federal, state, regional, local and international laws and regulations relating to the use,
storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters could
adversely impact our business, financial condition and results of operations.
We are subject to a wide variety of federal, state, regional, local and international laws and regulations relating to the use, storage, discharge and
disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters. Failure to comply with these laws could
result in harm to our members, employees or others, significant costs to satisfy environmental compliance, remediation or compensatory
requirements, or the imposition of severe penalties or restrictions on operations by governmental agencies or courts that could adversely affect our
business, financial condition and results of operations.
We are involved in a number of legal proceedings and audits and some of these outcomes could adversely affect our business, financial
condition and results of operations.
Our business requires compliance with many laws and regulations. Failure to achieve compliance could subject us to lawsuits and other
proceedings, and lead to damage awards, fines, penalties, and remediation costs. We are, or may become involved, in a number of legal
proceedings and audits including grand jury investigations, government and agency investigations, and consumer, employment, tort, unclaimed
property laws, and other litigation. We cannot predict with certainty the outcomes of these proceedings and other contingencies, including
environmental remediation and other proceedings commenced by governmental authorities. The outcome of some of these proceedings, audits,
unclaimed property laws, and other contingencies could require us to take, or refrain from taking, actions which could negatively affect our
operations or could require us to pay substantial amounts of money, adversely affecting our financial condition and results of operations.
Additionally, defending against these lawsuits and proceedings may involve significant expense and diversion of management ‘s attention and
resources.
Item 1B—Unresolved Staff Comments
None.
15
Table of Contents
Item 2—Properties
Warehouse Properties
At September 3, 2017 we operated 741 membership warehouses:
Lease Land
and/or
Building(1)
Own Land
and Building
United States and Puerto Rico
Canada
Mexico
United Kingdom
Japan
Korea
Taiwan
Australia
Spain
Iceland
France
Total
Total
416
85
37
22
12
6

6
2

1
98
12

6
14
7
13
3

1

514
97
37
28
26
13
13
9
2
1
1
587
154
741
_______________
(1) 102 of the 154 leases are land-only leases, where Costco owns the building.
The following schedule shows warehouse openings, net of closings and relocations, and expected openings through December 31, 2017:
United States
2013 and prior
2014
2015
2016
2017
2018 (expected through 12/31/2017)
Total
Other
International
Canada
Total
451
17
12
21
13
4
85
3
1
2
6
1
98
9
10
6
7

634
29
23
29
26
5
518
98
130
746
Total Warehouses
in Operation
634
663
686
715
741
746
At the end of fiscal 2017, our warehouses contained approximately 107.3 million square feet of operating floor space: 75.4 million in the U.S.; 13.5
million in Canada; and 18.4 million in Other International. We operate depots for the consolidation and distribution of most merchandise shipments
to the warehouses, and various processing, packaging, and other facilities to support ancillary and other businesses, including our online business.
We operate 24 depots, consisting of approximately 11.0 million square feet. Our executive offices are located in Issaquah, Washington, and we
maintain 18 regional offices in the U.S., Canada and Other International locations.
Item 3—Legal Proceedings
See discussion of Legal Proceedings in Note 10 to the consolidated financial statements included in Item 8 of this Report.
Item 4—Mine Safety Disclosures
Not applicable.
16
Table of Contents
PART II
Item 5—Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Dividend Policy
Our common stock is traded on the NASDAQ Global Select Market under the symbol “COST.” On October 10, 2017, we had 8,629 stockholders of
record. The following table shows the quarterly high and low closing prices of our common stock as reported by NASDAQ for each quarter during
the last two fiscal years and the quarterly cash dividend declared per share.
Cash
Dividends
Declared
Price Range
High
Low
2017:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2016:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
_______________
(1)
$
182.20
182.45
172.00
163.98
169.04
158.25
168.87
163.10
$
150.44
164.55
150.11
142.24
$
141.29
146.44
143.28
138.30
0.500
7.500
0.450
0.450
(1)
0.450
0.450
0.400
0.400
Includes a special cash dividend of $7.00 per share.
Payment of future dividends is subject to declaration by the Board of Directors. Factors considered in determining dividends include our
profitability and expected capital needs. Subject to these qualifications, we presently expect to continue to pay dividends on a quarterly basis.
Issuer Purchases of Equity Securities
The following table sets forth information on our common stock repurchase program activity for the fourth quarter of fiscal 2017 (dollars in millions,
except per share data):
Period
May 8—June 4, 2017
June 5—July 2, 2017
July 3—July 30, 2017
July 31—September 3, 2017
Total fourth quarter
_______________
Total Number of
Shares Purchased as
Part of Publicly
Announced Program(1)
Total Number of
Shares Purchased
Average Price Paid
per Share
92,000
573,000
451,000
396,000
$171.87
162.00
155.06
156.95
92,000
573,000
451,000
396,000
1,512,000
$159.21
1,512,000
Maximum Dollar Value
of Shares that May Yet
be Purchased under the
Program
(1) The repurchase program is conducted under a $4,000 authorization approved by our Board of Directors in April 2015, which expires in April 2019.
17
$2,973
$2,881
$2,811
$2,749
Table of Contents
Item 6—Selected Financial Data
The following table sets forth information concerning our consolidated financial condition, operating results, and key operating metrics. This
information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, included
in Item 7 of this Report, and our consolidated financial statements and notes thereto, included in Item 8 of this Report.
SELECTED FINANCIAL DATA
(dollars in millions, except per share data)
As of and for the year ended
Sept. 3, 2017
Aug. 28, 2016
Aug. 30, 2015
Aug. 31, 2014
Sept. 1, 2013
(53 weeks)
(52 weeks)
(52 weeks)
(52 weeks)
(52 weeks)
RESULTS OF OPERATIONS
Net sales
$
126,172
$
116,073
$
113,666
$
110,212
$
102,870
Membership fees
2,853
2,646
2,533
2,428
2,286
Gross margin(1) as a percentage of net sales
11.33%
11.35 %
11.09 %
10.66%
10.62%
Selling, general and administrative expenses as a
percentage of net sales
Operating income
10.26%
$
Net income attributable to Costco
4,111
10.40 %
$
3,672
10.07 %
$
3,624
9.89%
$
3,220
9.82%
$
3,053
2,679
2,350
2,377
2,058
2,039
Net income per diluted common share attributable to
Costco
6.08
5.33
5.37
4.65
4.63
Cash dividends declared per common share
8.90
1.70
6.51
1.33
8.17
Changes in comparable sales(2)
United States
4%
1%
3%
5%
6%
Canada
5%
(3)%
(5)%
2%
9%
Other International
2%
(3)%
(3)%
3%
1%
Total Company
4%
0%
1%
4%
6%
4%
4%
7%
6%
6%
Increase in Total Company comparable sales excluding the
impact of changes in foreign currency and gasoline prices
BALANCE SHEET DATA
Net property and equipment
$
Total assets
Long-term debt, excluding current portion
Costco stockholders’ equity
$
18,161
$
17,043
$
15,401
$
14,830
36,347
33,163
33,017
32,662
6,573
4,061
4,852
5,084
10,778
$
12,079
$
10,617
$
12,303
$
13,881
29,936
4,986
$
10,833
WAREHOUSE INFORMATION
Warehouses in Operation
Beginning of year
715
686
663
634
608
Opened
28
33
26
30
26
Closed due to relocation
(2)
(4)
(3)
(1)
End of year
0
741
715
686
663
634
49,400
47,600
44,600
42,000
39,000
MEMBERSHIP INFORMATION
Total paid members (000’s)
_____ __ __ ______
(1) Net sales less merchandise costs.
(2) Includes net sales from warehouses and websites operating for more than one year. For fiscal 2017, the prior year includes the comparable 53 weeks.
18
Table of Contents
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share,
share, membership fee, and warehouse count data)
OVERVIEW
We believe that the most important driver of our profitability is sales growth, particularly comparable sales growth. We define comparable sales as
sales from warehouses open for more than one year, including remodels, relocations and expansions, as well as online sales related to ecommerce websites operating for more than one year. Comparable sales growth is achieved through increasing shopping frequency from new and
existing members and the amount they spend on each visit (average ticket). Sales comparisons can also be particularly influenced by certain
factors that are beyond our control: fluctuations in currency exchange rates (with respect to the consolidation of the results of our international
operations); and changes in the cost of gasoline and associated competitive conditions (primarily impacting our U.S. and Canadian operations).
The higher our comparable sales exclusive of these items, the more we can leverage certain of our selling, general and administrative expenses,
reducing them as a percentage of sales and enhancing profitability. Generating comparable sales growth is foremost a question of making
available to our members the right merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long term.
Another substantial factor in sales growth is the health of the economies in which we do business, especially the United States. Sales growth and
gross margins are also impacted by our competition, which is vigorous and widespread, across a wide range of global, national and regional
wholesalers and retailers. While we cannot control or reliably predict general economic health or changes in competition, we believe that we have
been successful historically in adapting our business to these changes, such as through adjustments to our pricing and to our merchandise mix,
including increasing the penetration of our private label items.
Our philosophy is to provide our members with quality goods and services at the most competitive prices. We do not focus in the short term on
maximizing prices charged, but instead seek to maintain what we believe is a perception among our members of our “pricing authority” –
consistently providing the most competitive values. Our investments in merchandise pricing can, from time to time, include reducing prices on
merchandise to drive sales or meet competition and holding prices steady despite cost increases instead of passing the increases on to our
members, all negatively impacting near-term gross margin as a percentage of net sales (gross margin percentage). We believe that our gasoline
business draws members but it generally has a significantly lower gross margin percentage relative to our non-gasoline business. A higher
penetration of gasoline sales will generally lower our gross margin percentage. Rapidly changing gasoline prices may significantly impact our nearterm net sales growth. Generally, rising gasoline prices benefit net sales growth which, given the higher sales base, negatively impacts our gross
margin percentage but decreases our selling, general and administrative (SG&A) expenses as a percentage of net sales. A decline in gasoline
prices has the inverse effect. We operate our lower-margin gasoline business in all countries except Korea and France.
We also achieve sales growth by opening new warehouses. As our warehouse base grows, available and desirable potential sites become more
difficult to secure, and square footage growth becomes a comparatively less substantial component of growth. The negative aspects of such
growth, however, including lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouses
when openings occur in existing markets, are increasingly less significant relative to the results of our total operations. Our rate of square footage
growth is generally higher in foreign markets, due to the smaller base in those markets, and we expect that to continue. Our e-commerce business
growth both domestically and internationally has also increased our sales.
Our membership format is an integral part of our business model and has a significant effect on our profitability. This format is designed to
reinforce member loyalty and provide continuing fee revenue. The extent to which we achieve growth in our membership base, increase penetration
of our Executive members, and sustain high renewal rates, materially influences our profitability.
Our financial performance depends heavily on our ability to control costs. While we believe that we have achieved successes in this area
historically, some significant costs are partially outside our control, most
19
Table of Contents
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share,
share, membership fee, and warehouse count data) (Continued)
particularly health care and utility expenses. With respect to expenses relating to the compensation of our employees, our philosophy is not to
seek to minimize their wages and benefits. Rather, we believe that achieving our longer-term objectives of reducing employee turnover and
enhancing employee satisfaction requires maintaining compensation levels that are better than the industry average for much of our workforce.
This may cause us, for example, to absorb costs that other employers might seek to pass through to their workforces. Because our business is
operated on very low gross margins, modest changes in various items in the income statement, particularly merchandise costs and SG&A
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 11 to the consolidated
financial statements included in Item 8 of this Report). Certain countries in the Other International segment have relatively higher rates of square
footage growth, lower wages and benefit costs as a percentage of country sales, and/or less or no direct membership warehouse competition.
In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies relative to the U.S. dollar, which are
references 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. Fiscal year 2017 was a 53-week fiscal year ending on September 3, 2017, while 2016
and 2015 were 52-week fiscal years ending on August 28, 2016, and August 30, 2015, 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.
Highlights for fiscal year 2017 included:








We opened 26 net new warehouses in 2017: 13 in the U.S., six in Canada, and seven in our Other International segment, compared to 29 net
new warehouses in 2016;
Net sales increased 9% to $126,172, driven by a 4% increase in comparable sales, sales at new warehouses opened in 2016 and 2017, and
the benefit of one additional week of sales in 2017;
Membership fee revenue increased 8% to $2,853, primarily due to membership sign-ups at existing and new warehouses, an extra week of
membership fees in 2017, the annual fee increase, and executive membership upgrades;
Gross margin percentage decreased two basis points;
SG&A expenses as a percentage of net sales decreased 14 basis points, driven by lower costs associated with the co-branded credit card
arrangement in the U.S.;
Net income increased 14% to $2,679, or $6.08 per diluted share compared to $2,350, or $5.33 per diluted share in 2016. The 2017 results
were positively impacted by a $82 tax benefit, or $0.19 per diluted share, in connection with the special cash dividend paid to the Company’s
401(k) Plan participants and other net benefits of approximately $51, or $0.07 per diluted share, for non-recurring net legal and other matters;
In 2017, we re-paid long-term debt totaling $2,200 representing the aggregate principal balances of the 5.5% and 1.125% Senior Notes; we
issued $3,800 in aggregate principal amount of Senior Notes which funded a special cash dividend of $7.00 per share paid in May 2017
(approximately $3,100); and
In April 2017, the Board of Directors approved an increase in the quarterly cash dividend from $0.45 to $0.50 per share.
20
Table of Contents
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share,
share, membership fee, and warehouse count data) (Continued)
RESULTS OF OPERATIONS
Net Sales
2017
Net Sales
$
Changes in net sales:
U.S.
Canada
Other International
Total Company
Changes in comparable sales:
U.S.
Canada
Other International
Total Company
Increases in comparable sales excluding the impact of changes in foreign
currency and gasoline prices:
U.S.
Canada
Other International
Total Company
2016
126,172
$
2015
116,073
$
113,666
8%
10%
8%
9%
3%
(2)%
4%
2%
5%
(3)%
2%
3%
4%
5%
2%
4%
1%
(3)%
(3)%
0%
3%
(5)%
(3)%
1%
4%
4%
4%
4%
3%
8%
4%
4%
6%
8%
6%
7%
2017 vs. 2016
Net Sales
Net sales increased $10,099 or 9% during 2017, primarily due to a 4% increase in comparable sales, new warehouses opened in 2016 and 2017,
and the benefit of one additional week of sales in 2017. Changes in gasoline prices positively impacted net sales by approximately $785, or 68
basis points, due to an 8% increase in the average sales price per gallon. Changes in foreign currencies relative to the U.S. dollar negatively
impacted net sales by approximately $295, or 25 basis points, compared to 2016. The negative impact was driven by Other International
operations, partially offset by positive impacts attributable to our Canadian operations.
Comparable Sales
Comparable sales increased 4% during 2017 and were positively impacted by an increase in shopping frequency and, to a lesser extent, an
increased average ticket. The average ticket and comparable sales results were positively impacted by an increase in gasoline prices, offset by
decreases in foreign currencies relative to the U.S. dollar. Changes in comparable sales includes the negative impact of cannibalization
(established warehouses losing sales to our newly opened locations).
2016 vs. 2015
Net Sales
Net sales increased $2,407 or 2% during 2016. This was attributable to sales at new warehouses opened in 2015 and 2016. Comparable sales
were flat. Changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $2,690, or 237 basis points,
compared to 2015. The negative impact was primarily attributable to our Canadian operations and within certain of our Other International
21
Table of Contents
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share,
share, membership fee, and warehouse count data) (Continued)
operations. Changes in gasoline prices negatively impacted net sales by approximately $2,194, or 193 basis points, due to a 19% decrease in the
average sales price per gallon.
Comparable Sales
Comparable sales were flat during 2016, with an increase in shopping frequency offset by a decrease in the average ticket. The average ticket and
comparable sales results were negatively impacted by changes in foreign currencies relative to the U.S. dollar and a decrease in gasoline prices.
Changes in comparable sales includes the negative impact of cannibalization (established warehouses losing sales to our newly opened locations).
Membership Fees
2017
Membership fees
$
Membership fees increase
Membership fees as a percentage of net sales
2016
2,853
$
8%
2.26%
2015
2,646
$
4%
2.28%
2,533
4%
2.23%
2017 vs. 2016
The increase in membership fees was primarily due to membership sign-ups at existing and new warehouses, an extra week of membership fee
revenue, the annual fee increase (discussed below), and an increased number of upgrades to our higher-fee Executive Membership program. At
the end of 2017, our member renewal rates were 90% in the U.S. and Canada and 87% worldwide.
In the first fiscal quarter of 2017, we increased our annual membership fees in certain of our Other International operations. Effective June 1, 2017,
we also increased our annual membership fees in the U.S. and Canada for Gold Star (individual), Business and Business add-on by $5 to $60 and
for Executive Membership from$110 to $120 (annual membership fee of $60, plus the Executive upgrade of $60); and the maximum 2% reward
associated with Executive Membership increased from $750 to $1,000 annually. 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 membership fee revenues during 2017 of
approximately $23 and will positively impact the next several quarters. We expect these increases to positively impact membership fee revenue
by approximately $175 in fiscal 2018.
2016 vs. 2015
The increase in membership fees was primarily due to membership sign-ups at existing and new warehouses and increased upgrades to our
higher-fee Executive Membership program. These increases were partially offset by changes in foreign currencies relative to the U.S. dollar, which
negatively impacted fees by approximately $52 in 2016.
22
Table of Contents
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share,
share, membership fee, and warehouse count data) (Continued)
Gross Margin
2017
Net sales
$
Less merchandise costs
Gross margin
$
Gross margin percentage
2016
126,172
111,882
$
14,290
$
11.33%
2015
116,073
102,901
$
13,172
$
11.35%
113,666
101,065
12,601
11.09%
2017 vs. 2016
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 eight basis points due to increases in these categories other than fresh foods. 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 two basis points compared to 2016. Excluding the impact of gasoline price inflation on net sales, gross
margin as a percentage of adjusted net sales was 11.40%, an increase of five basis points. This increase was primarily due to amounts earned
under the co-branded credit card arrangement in the U.S. of 15 basis points and a benefit of three basis points from non-recurring legal settlements
and other matters. The improvement in terms in our current co-brand agreement as compared to the prior co-brand arrangement led to substantial
year over year benefits in fiscal 2017. Changes of comparable magnitude will not occur in subsequent years. These increases were partially offset
by a six basis point decrease in our core merchandise categories, primarily due to food and sundries as a result of a decrease in sales penetration.
The gross margin percentage was also negatively impacted by five basis points due to a LIFO benefit in 2016 and one basis point in warehouse
ancillary and other businesses. Changes in foreign currencies relative to the U.S. dollar had an immaterial impact on gross margin in 2017.
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), increased in our U.S. operations, due to amounts earned under the co-branded credit card
arrangement and non-recurring legal settlements and other matters as discussed above. These increases were partially offset by a decrease in
core merchandise categories, predominantly food and sundries as a result of a decrease in sales penetration, and a LIFO benefit in 2016. The
segment gross margin percentage in our Canadian operations increased, primarily due to increases in warehouse ancillary and other businesses,
primarily our pharmacy business, partially offset by a decrease in our core merchandise categories, largely fresh foods. The segment gross margin
percentage increased in our Other International operations due to increases across all core merchandise categories, except fresh foods.
2016 vs. 2015
The gross margin of our core merchandise categories, when expressed as a percentage of core merchandise sales, increased 13 basis points,
primarily due to increases in these categories other than fresh foods.
Total gross margin percentage increased 26 basis points compared to 2015. Excluding the impact of gasoline price deflation on net sales, gross
margin as a percentage of adjusted net sales was 11.14%, an increase of five basis points. A larger LIFO benefit in 2016 compared to 2015
positively contributed three basis points. The LIFO benefit resulted largely from lower costs for merchandise inventories, primarily in food and
sundries and gasoline. Our core merchandise categories positively contributed one basis point, primarily due to an increase in hardlines, partially
offset by food and sundries due to a decrease in sales penetration. Warehouse ancillary and other business gross margin positively contributed
one basis point, primarily due to hearing aids and e-commerce businesses, partially offset by our gasoline business. Changes in foreign currencies
relative to the U.S. dollar negatively impacted gross margin by approximately $286 in 2016.
23
Table of Contents
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share,
share, membership fee, and warehouse count data) (Continued)
Segment gross margin percentage increased in our U.S. operations predominantly due to a positive contribution from our core merchandise
categories, primarily hardlines and softlines, and the LIFO benefit discussed above. The segment gross margin percentage in our Canadian
operations decreased, primarily due to a decrease in all core merchandise categories, except hardlines, partially offset by increases in warehouse
ancillary and other businesses, primarily pharmacy and e-commerce businesses. The segment gross margin percentage in Other International
operations decreased in all merchandise categories, except fresh foods, which was higher.
Selling, General and Administrative Expenses
2017
SG&A expenses
$
2016
12,950
$
10.26%
SG&A expenses as a percentage of net sales
2015
12,068
$
10.40%
11,445
10.07%
2017 vs. 2016
SG&A expenses as a percentage of net sales decreased 14 basis points compared to 2016. Excluding the impact of gasoline price inflation on net
sales, SG&A expenses as a percentage of adjusted net sales was 10.33%, a decrease of seven basis points. Operating costs related to
warehouses, ancillary, and other businesses, which includes e-commerce and travel, were lower by nine basis points, primarily due to lower costs
associated with the co-branded credit card arrangement in the U.S. of 18 basis points. The improvement in terms in our current co-brand
agreement as compared to the prior co-brand arrangement led to substantial year over year benefits in fiscal 2017. Changes of comparable
magnitude will not occur in subsequent years. This was partially offset by higher payroll and employee benefit expenses of 11 basis points,
primarily in our U.S. operations. Central operating costs were higher by one basis point, primarily due to increased costs associated with our
information systems modernization, including increased depreciation for projects placed in service, incurred by our U.S. operations. Stock
compensation expense was also higher by one basis point. Changes in foreign currencies relative to the U.S. dollar had an immaterial impact in
2017.
2016 vs. 2015
SG&A expenses as a percentage of net sales increased 33 basis points compared to 2015. Excluding the negative impact of gasoline price
deflation on net sales, SG&A expenses as a percentage of adjusted net sales were 10.20%, an increase of 13 basis points. This was largely due
to: higher central operating costs of six basis points, predominantly due to costs associated with our information systems modernization, including
increased depreciation for projects placed in service, incurred by our U.S. operations; and higher stock compensation expense of four basis points,
due to appreciation in the trading price of our stock at the time of grant. Charges for non-recurring legal and regulatory matters during 2016
negatively impacted SG&A expenses by two basis points. Operating costs related to warehouses, ancillary, and other businesses, which includes
e-commerce and travel, were higher by one basis point due to higher payroll and employee benefit costs, primarily health care, in our U.S.
operations. This increase was partially offset by lower payroll expense as a percentage of net sales in our Canadian operations. Changes in foreign
currencies relative to the U.S. dollar decreased our SG&A expenses by approximately $211 in 2016.
Preopening Expenses
2017
Preopening expenses
$
2016
82
$
2015
78
$
65
Warehouse openings, including relocations
United States
Canada
Other International
Total warehouse openings, including relocations
24
15
6
7
25
2
6
14
1
11
28
33
26
Table of Contents
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share,
share, membership fee, and warehouse count data) (Continued)
Preopening expenses include costs for startup operations related to new warehouses, including relocations, development in new international
markets, and expansions at existing warehouses. In 2017, we entered into two new international markets, Iceland and France. Preopening
expenses vary due to the number of warehouse openings, the timing of the opening relative to our year-end, whether the warehouse is owned or
leased, and whether the opening is in an existing, new, or international market.
Interest Expense
2017
Interest expense
$
2016
134
$
2015
133
$
124
Interest expense primarily relates to Senior Notes issued by the Company (described in further detail under the heading “Cash Flows from
Financing Activities” and in Note 4 to the consolidated financial statements included in Item 8 of this Report).
Interest Income and Other, Net
2017
2016
2015
Interest income
$
$
41
28
11
$
Foreign-currency transaction gains (losses), net
Other, net
Interest income and other, net
50
(5)
17
50
47
7
$
62
$
80
$
104
2017 vs. 2016
Foreign-currency transaction gains (losses), net include the revaluation or settlement of monetary assets and liabilities and mark-to-market
adjustments for forward foreign-exchange contracts by our Canadian and Other International operations. See Derivatives and Foreign Currency
sections in Item 8, Note 1 of this Report.
2016 vs. 2015
The decrease in interest income in 2016 is attributable to lower average cash and investment balances, due in part to the payment of the
outstanding principal balance and interest on the 0.65% Senior Notes in the second quarter of 2016.
Provision for Income Taxes
2017
Provision for income taxes
$
Effective tax rate
2016
1,325
$
32.8%
2015
1,243
$
34.3%
1,195
33.2%
In 2017 and 2015, our provision was favorably impacted by net tax benefits of $104 and $68, respectively, primarily due to tax benefits recorded in
connection with the May 2017 and February 2015 special cash dividends paid to employees through our 401(K) Retirement Plan of $82 and $57,
respectively. These dividends are deductible for U.S. income tax purposes.
25
Table of Contents
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share,
share, membership fee, and warehouse count data) (Continued)
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our significant sources and uses of cash and cash equivalents:
2017
Net cash provided by operating activities
$
Net cash used in investing activities
Net cash used in financing activities
2016
6,726
(2,366)
(3,218)
$
2015
3,292
(2,345)
(2,419)
$
4,285
(2,480)
(2,324)
Our primary sources of liquidity are cash flows generated from warehouse operations, cash and cash equivalents and short-term investments.
Cash and cash equivalents and short-term investments were $5,779 and $4,729 at the end of 2017 and 2016, respectively. Of these balances,
approximately $1,255 and $1,071 represented unsettled credit and debit card receivables, respectively. These receivables generally settle within
four days. Cash and cash equivalents were positively impacted by changes in exchange rates of $25 and $50 in 2017 and 2016, respectfully, and
negatively impacted by $418 in 2015.
We have not provided for U.S. deferred taxes on cumulative undistributed earnings of certain non-U.S. consolidated subsidiaries, including the
remaining undistributed earnings of our Canadian operations, because our subsidiaries have invested or will invest the undistributed earnings
indefinitely, or the earnings if repatriated would not result in an adverse tax consequence. Although we have historically asserted that certain nonU.S. undistributed earnings will be permanently reinvested, we may repatriate such earnings to the extent we can do so without an adverse tax
consequence. If we determine that such earnings are no longer indefinitely reinvested, deferred taxes, to the extent required and applicable, are
recorded at that time. During 2017, we changed our position regarding an additional portion of the undistributed earnings of our Canadian
operations, as we determined such earnings could be repatriated without adverse tax consequences. Subsequent to the end of 2017, we
repatriated a portion of our undistributed earnings in our Canadian operations without adverse tax consequences.
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 have no
current plans to repatriate for use in the U.S. cash and cash equivalents and short-term investments held by non-U.S. consolidated subsidiaries
whose earnings are considered indefinitely reinvested. Cash and cash equivalents and short-term investments held at these subsidiaries with
earnings considered to be indefinitely reinvested totaled $1,463 at September 3, 2017.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $6,726 in 2017, compared to $3,292 in 2016. Our cash flow provided by operations is primarily
derived from net sales and membership fees. Cash flow used in operations generally consists of payments to our merchandise vendors,
warehouse operating costs including payroll and employee benefits, utilities, and credit and debit card processing fees. Cash used in operations
also includes payments for income taxes. The increase in net cash provided by operating activities for 2017 when compared to 2016 was primarily
due to accelerated vendor payments of approximately $1,700 made in the last week of fiscal 2016, in advance of implementing our modernized
accounting system.
Cash Flows from Investing Activities
Net cash used in investing activities totaled $2,366 in 2017, compared to $2,345 in 2016. Cash flow used in investing activities is primarily related
to funding warehouse expansion and remodeling. Net cash flows from investing activities also includes purchases and maturities of short-term
investments.
26
Table of Contents
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share,
share, membership fee, and warehouse count data) (Continued)
Capital Expenditure Plans
Our primary requirement for capital is acquiring land, buildings, and equipment for new and remodeled warehouses. To a lesser extent, capital is
required for initial warehouse operations, our information systems, and working capital. We opened 26 new warehouses and relocated 2
warehouses in 2017 and plan to open up to 24 new warehouses and relocate up to six warehouses in 2018. In 2017 we spent $2,502 on capital
expenditures, and it is our current intention to spend approximately $2,500 to $2,700 during fiscal 2018. These expenditures are expected to be
financed with cash from operations, existing cash and cash equivalents, and short-term investments. There can be no assurance that current
expectations will be realized and plans are subject to change upon further review of our capital expenditure needs.
Cash Flows from Financing Activities
Net cash used in financing activities totaled $3,218 in 2017, compared to $2,419 in 2016. The primary uses of cash in 2017 were related to
dividend payments, predominantly the special dividend paid in May 2017, and the repayments of debt totaling $2,200 representing the aggregate
principal balances of the 5.5% and 1.125% Senior Notes. Net cash used in financing activities in 2016 includes a $1,200 repayment of our 0.65%
Senior Notes in December 2015.
In May 2017, we issued $3,800 in aggregate principal amount of Senior Notes. The proceeds received were net of a discount and used to pay the
special cash dividend and a portion of the redemption of the 1.125% Senior Notes.
Stock Repurchase Programs
During 2017 and 2016, we repurchased 2,998,000 and 3,184,000 shares of common stock, at average prices of $157.87 and $149.90, totaling
approximately $473 and $477, respectively. The remaining amount available to be purchased under our approved plan was $2,749 at the end of
2017. These amounts may differ from the stock repurchase balances in the accompanying consolidated statements of cash flows due to changes
in unsettled stock repurchases at the end of each fiscal year. Purchases are made from time-to-time, as conditions warrant, in the open market or
in block purchases and pursuant to plans under SEC Rule 10b5-1. Repurchased shares are retired, in accordance with the Washington Business
Corporation Act.
Dividends
Cash dividends paid in 2017 totaled $8.90 per share, which included a special cash dividend of $7.00 per share, as compared to $1.70 per share in
2016. In April 2017, our Board of Directors increased our quarterly cash dividend from $0.45 to $0.50 per share.
Bank Credit Facilities and Commercial Paper Programs
We maintain bank credit facilities for working capital and general corporate purposes. At September 3, 2017, we had borrowing capacity under
these facilities of $833, including a $400 revolving line of credit entered into by our U.S. operations in June 2017 with an expiration date of one
year. The Company currently has no plans to draw upon the new revolving line of credit. Our international operations maintain $349 of the total
borrowing capacity under bank credit facilities, of which $166 is guaranteed by the Company. There were no outstanding short-term borrowings
under the bank credit facilities at the end of 2017 and 2016.
The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $181. The outstanding standby letters of credit
under these facilities at the end of 2017 totaled $103 and expire within one year. The bank credit facilities have various expiration dates, all within
one year, and we generally intend to renew these facilities prior to their expiration. 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 then outstanding.
27
Table of Contents
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share,
share, membership fee, and warehouse count data) (Continued)
Contractual Obligations
At September 3, 2017, our commitments to make future payments under contractual obligations were as follows:
Payments Due by Fiscal Year
Contractual obligations
2018
Purchase obligations (merchandise)(1)
Long-term debt(2)
Operating leases (3)
Construction and land obligations
Capital lease obligations (4)
Purchase obligations (equipment, services
and other)(5)
Other(6)
$
Total
_______________
$
2019 to 2020
8,029
230
216
584
32
$
6
2,060
429
80
65
541
38
9,670
2021 to 2022
$
117
17
$
2,774
2023 and thereafter

2,588
345
4
66
$
42
13
$
3,058

2,650
2,123

582
Total
$

72
$
5,427
8,035
7,528
3,113
668
745
700
140
$
20,929
(1)
(2)
(3)
(4)
(5)
Includes only open merchandise purchase orders.
Includes contractual interest payments and excludes deferred issuance costs.
Operating lease obligations exclude amounts for common area maintenance, taxes, and insurance and have been reduced by $112 to reflect sub-lease income.
Includes build-to-suit lease obligations and contractual interest payments.
The amounts exclude certain services negotiated at the individual warehouse or regional level that are not significant and generally contain clauses allowing for
cancellation without significant penalty.
(6) Includes asset retirement obligations, deferred compensation obligations and current liabilities for unrecognized tax contingencies. The total amount excludes $35 of noncurrent unrecognized tax contingencies and $29 of other obligations due to uncertainty regarding the timing of future cash payments.
Off-Balance Sheet Arrangements
In the opinion of management, we have no off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or
future effect on our financial condition or financial statements other than operating leases, included in the table above and discussed in Note 1 and
Note 5 to the consolidated financial statements included in Item 8 of this Report.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP) requires
that we make estimates and judgments, including those related to revenue recognition, merchan…
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