SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☒||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended August 29, 2021
|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)
|(State or other jurisdiction of|
incorporation or organization)
| ||(I.R.S. Employer Identification No.)|
999 Lake Drive, Issaquah, WA 98027
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (425) 313-8100
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading Symbol|| ||Name of each exchange on|
|Common Stock, $.01 Par Value||COST||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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer ||☒||Accelerated filer ||☐|
|Non-accelerated filer ||☐||Smaller reporting company ||☐|
|Emerging growth company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
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 14, 2021 was $155,810,963,274.
The number of shares outstanding of the registrant’s common stock as of September 28, 2021, was 441,823,811.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on January 20, 2022, are incorporated by reference into Part III of this Form 10-K.
COSTCO WHOLESALE CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 29, 2021
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, and the demand for our products and services. Forward-looking statements may also be identified by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. Such forward-looking statements involve risks and uncertainties that may cause actual events, results, or performance to differ materially from those indicated by such statements, 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 these statements, except as required by law.
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, Korea, Australia, Spain, France, Iceland, China, and through a majority-owned subsidiary in Taiwan. Costco operated 815, 795, and 782 warehouses worldwide at August 29, 2021, August 30, 2020, and September 1, 2019, respectively. The Company operates e-commerce websites in the U.S., Canada, Mexico, U.K., Korea, Taiwan, Japan, and Australia. 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 2021, 2020, and 2019 relate to the 52-week fiscal years ended August 29, 2021, August 30, 2020, and September 1, 2019, respectively.
We operate membership warehouses and e-commerce websites based on the concept that offering our members low prices on a limited selection of nationally-branded and private-label products in a wide range of 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.
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 warehouses. This process creates freight volume and handling efficiencies, lowering costs associated with traditional multiple-step distribution channels. For our e-
commerce operations we ship merchandise through our depots, our logistics operations for big and bulky items, as well as through drop-ship and other delivery arrangements with our suppliers.
Our average warehouse space is approximately 146,000 square feet, with newer units being 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 and using a membership format, we believe our inventory losses (shrinkage) are 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 cards, including Costco co-branded cards, debit cards, cash and checks, co-brand cardholder rebates, Executive member 2% reward certificates and our proprietary stored-value card (shop card).
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 most items to fast-selling models, sizes, and colors. We carry less than 4,000 active stock keeping units (SKUs) per warehouse in our core warehouse business, significantly less than other broadline retailers. We average anywhere from 9,000 to 11,000 SKUs online, some of which are also available in our warehouses. 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 90-day 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 and services in the following categories:
Core Merchandise Categories (or core business):
•Foods and Sundries (including sundries, dry grocery, candy, cooler, freezer, deli, liquor, and tobacco)
•Non-Foods (previously Hardlines and Softlines; including major appliances, electronics, health and beauty aids, hardware, garden and patio, sporting goods, tires, toys and seasonal, office supplies, automotive care, postage, tickets, apparel, small appliances, furniture, domestics, housewares, special order kiosk, and jewelry)
•Fresh Foods (including meat, produce, service deli, and bakery)
Warehouse Ancillary (includes gasoline, pharmacy, optical, food court, hearing aids, and tire installation) and Other Businesses (includes e-commerce, business centers, travel, and other)
Warehouse ancillary businesses operate primarily within or next to our warehouses, encouraging members to shop more frequently. The number of warehouses with gas stations varies significantly by country, and we have no gasoline business in Korea or China. We operated 636 gas stations at the end of 2021. Net sales for our gasoline business represented approximately 9% of total net sales in 2021.
Our other businesses sell products and services that complement our warehouse operations (core and warehouse ancillary businesses). Our e-commerce operations give members convenience and a broader selection of goods and services. Net sales for e-commerce represented approximately 7% of total net sales in 2021. This figure does not consider other services we offer online in certain countries such as business delivery, travel, same-day grocery, and various other services. Our business centers carry items tailored specifically for food services, convenience stores and offices, and offer walk-in shopping and deliveries. Business centers are included in our total warehouse count. Costco Travel offers vacation
packages, hotels, cruises, and other travel products exclusively for Costco members (offered in the U.S., Canada, and the U.K.).
We have direct buying relationships with many producers of brand-name merchandise. We do not obtain a significant portion of merchandise from any one supplier. The COVID-19 pandemic created unprecedented supply constraints, including disruptions and delays that have impacted and could continue to impact the flow and availability of certain products. When sources of supply become unavailable, we seek alternative sources. We also purchase and manufacture private-label merchandise, as long as quality and member demand are high and the value to our members is significant.
Certain financial information for our segments and geographic areas is included in Note 12 to the consolidated financial statements included in Item 8 of this Report.
Our members may utilize their memberships at all of our warehouses and websites. Gold Star memberships are available to individuals; Business memberships are limited to businesses, including individuals with a business license, retail sales license or comparable document. Business members may add additional cardholders (affiliates), to which the same annual fee applies. Affiliates are not available for Gold Star members. Our annual fee for these memberships is $60 in our U.S. and Canadian operations and varies in other countries. All paid memberships include a free household card.
Our member renewal rate was 91% in the U.S. and Canada and 89% worldwide at the end of 2021. The majority of members renew within six months following their renewal date. Our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. Our membership counts include active memberships as well as memberships that have not renewed within the 12 months prior to the reporting date. At the end of 2020, we standardized our membership count methodology globally to be consistent with the U.S. and Canada, which resulted in the addition to the count of approximately 2.0 million total cardholders for 2020, of which 1.3 million were paid members. The change did not impact 2019. Membership fee income and the renewal rate calculations were not affected. Our membership was made up of the following (in thousands):
|Gold Star||50,200 ||46,800 ||42,900 |
|Business, including affiliates||11,500 ||11,300 ||11,000 |
|Total paid members||61,700 ||58,100 ||53,900 |
|Household cards||49,900 ||47,400 ||44,600 |
| Total cardholders||111,600 ||105,500 ||98,500 |
Paid cardholders (except affiliates) are eligible to upgrade to an Executive membership in the U.S. and Canada, for an additional annual fee of $60. Executive memberships are also available in Mexico, the U.K., Japan, Korea, and Taiwan, for which the additional annual fee varies. Executive members earn a 2% reward on qualified purchases (generally up to a maximum reward of $1,000 per year), which can be redeemed only at Costco warehouses. This program also offers (except in Mexico and Korea), access to additional savings and benefits on various business and consumer services, such as auto and home insurance, the Costco auto purchase program, and check printing. These services are generally provided by third parties and vary by state and country. Executive members totaled 25.6 million and represented 55% of paid members (excluding affiliates) in the U.S. and Canada and 17% of paid members (excluding affiliates) in our Other International operations at the end of 2021. They generally shop more frequently and spend more than other members.
Our Code of Ethics requires that we “Take Care of Our Employees,” which is fundamental to the obligation to “Take Care of Our Members.” We must also carefully control our selling, general and administrative (SG&A) expenses, so that we can sell high quality goods and services at low prices. Compensation and benefits for employees is our largest expense after the cost of merchandise and is carefully monitored.
At the end of 2021, we employed 288,000 employees worldwide. The large majority (approximately 95%) is employed in our membership warehouses and distribution channels and approximately 17,000 employees are represented by unions. We also utilize seasonal employees during peak periods. The total number of employees by segment is:
|Number of Employees|
|United States||192,000 ||181,000 ||167,000 |
|Canada||47,000 ||46,000 ||42,000 |
|Other International||49,000 ||46,000 ||45,000 |
|Total employees||288,000 ||273,000 ||254,000 |
We believe that our warehouses are among the most productive in the retail industry, owing in substantial part to the commitment and efficiency of our employees. We seek to provide them not merely with employment but careers. Many attributes of our business contribute to the objective; the more significant include: competitive compensation and benefits for those working in our membership warehouses and distributions channels; a commitment to promoting from within; and maintaining a ratio of at least 50% of our employee base being full-time employees. These attributes contribute to what we consider, especially for the industry, a high retention rate. In 2021, in the U.S. that rate was above 90% for employees who have been with us for at least one year.
The commitment to “Take Care of Our Employees” is also the foundation of our approach to diversity, equity and inclusion and creating an inclusive and respectful workplace. In 2021, we added training and communication for managers on topics of race, bias and equity, and greater visibility of our employee demographics. Embracing differences is important to the growth of our Company. It leads to more opportunities, innovation, and employee satisfaction and connects us to the communities where we do business.
Costco is firmly committed to helping protect the health and safety of our members and employees and to serving our communities. In response to the COVID-19 pandemic and its associated challenges, we began providing premium pay to the majority of our hourly employees in March 2020 and continued for a full year through February 2021, at which time a portion of the premium was built permanently into our hourly wage scales in the U.S. In fall 2020, we also began offering employees additional paid time off to attend to child care and schooling needs through the 2021 school year. As the global effect of coronavirus (COVID-19) continues to evolve, we are closely monitoring the changing situation and complying with public health guidance.
For more detailed information regarding our programs and initiatives, see “Employees” within our Sustainability Commitment (located on our website). This report and other information on our website are not incorporated by reference into and do not form any part of this Annual Report.
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. Walmart, Target, Kroger, and Amazon are among our significant general merchandise retail competitors in the U.S. We also compete with other warehouse clubs including Walmart’s Sam’s Club and BJ’s Wholesale Club, and many of the major metropolitan areas in the U.S. and certain of our Other International locations have multiple clubs.
We believe that, to varying degrees, our trademarks, trade names, copyrights, proprietary processes, trade secrets, 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, offered at prices that are generally lower than national brands, and help lower costs, differentiate our merchandise offerings, 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. 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 registrations are maintained.
Our U.S. 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. The SEC maintains a 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, 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.
Information about our Executive Officers
The executive officers of Costco, their position, and ages are listed below. All have over 25 years of service with the Company.
|W. Craig Jelinek||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.||1995||69|
|Richard A. Galanti||Executive Vice President and Chief Financial Officer. Mr. Galanti has been a director since January 1995.||1993||65|
|Jim C. Klauer||Executive Vice President, Chief Operating Officer, Northern Division. Mr. Klauer was Senior Vice President, Non-Foods and E-commerce Merchandise, from 2013 to January 2018.||2018||59|
|Patrick J. Callans||Executive Vice President, Administration. Mr. Callans was Senior Vice President, Human Resources and Risk Management, from 2013 to December 2018.||2019||59|
|Russ D. Miller||Executive Vice President, Chief Operating Officer, Southern Division and Mexico. Mr. Miller was Senior Vice President, Western Canada Region, from 2001 to January 2018.||2018||64|
|James P. Murphy||Executive Vice President, Chief Operating Officer, International. Mr. Murphy was Senior Vice President, International, from 2004 to October 2010.||2011||68|
|Joseph P. Portera||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.||1994||69|
|Timothy L. Rose||Executive Vice President, Ancillary Businesses, Manufacturing, and Business Centers. Mr. Rose was Senior Vice President, Merchandising, Foods and Sundries and Private Label, from 1995 to December 2012. ||2013||69|
|Yoram Rubanenko||Executive Vice President, Northeast and Southeast Regions. Mr. Rubanenko was Senior Vice President and General Manager, Southeast Region, from 2013 to September 2021, and Vice President, Regional Operations Manager for the Northeast Region, from 1998 to 2013.||2021||57|
|Ron M. Vachris||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.||2016||56|
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 86% and 81% of net sales and operating income in 2021, respectively. Within the U.S., we are highly dependent on our California operations, which comprised 28% of U.S. net sales in 2021. 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.
We may be unsuccessful implementing our growth strategy, including expanding our business in existing markets and new markets, and integrating acquisitions, 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 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 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. 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, member traffic, and profitability.
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 lesser 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 e-commerce websites will be profitable and future profitability could be delayed or otherwise materially adversely affected.
We have made and may continue to make investments and acquisitions to improve the speed, accuracy and efficiency of our supply chains and delivery channels. The effectiveness of these investments can be less predictable than opening new locations and might not provide the anticipated benefits or desired rates of return.
Our failure to maintain membership growth, loyalty and brand recognition could adversely affect our results of operations.
Membership loyalty and growth are essential to our business. The extent to which we achieve growth in our membership base, increase the penetration of Executive membership, 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 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 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 merchandise distribution or processing, packaging, manufacturing, and other facilities could adversely affect sales and member satisfaction.
We depend on the orderly operation of the merchandise receiving and distribution process, primarily through our depots. We also rely upon processing, packaging, manufacturing and other facilities to support our business, which includes the production of certain private-label items. Although we believe that our operations are efficient, disruptions due to fires, tornadoes, hurricanes, earthquakes, pandemics or other extreme weather conditions or catastrophic events, labor issues or other shipping problems may result in delays in the production and delivery of merchandise to our warehouses, which could adversely affect sales and the satisfaction of our members. Our e-commerce business depends heavily on third-party and in-house logistics providers and that business is negatively affected when these providers are unable to provide services in a timely fashion.
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 environmental, social and governance practices) 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, or we may experience out-of-stock positions and delivery delays, which could result in higher costs, both of which would reduce our operating performance. This could have an adverse effect on net sales, gross margin and operating income.
Availability and performance of our information technology (IT) systems are vital to our business. Failure to successfully execute IT projects and have IT systems available to our business would adversely impact our operations.
IT systems play a crucial role in conducting our business. These systems are utilized to process a very high volume of transactions, conduct payment transactions, track and value our inventory and produce reports critical for making business decisions. Failure or disruption of these systems could have an adverse impact on our ability to buy products and services from our suppliers, produce goods in our manufacturing plants, move the products in an efficient manner to our warehouses and sell products to our members. We are undertaking large technology and IT transformation projects. The failure of these
projects could adversely impact our business plans and potentially impair our day to day business operations. Given the high volume of transactions we process, it is important that we build strong digital resiliency to prevent disruption from events such as power outages, computer and telecommunications failures, viruses, internal or external security breaches, errors by employees, and catastrophic events such as fires, earthquakes, tornadoes and hurricanes. Any debilitating failure of our critical IT systems, data centers and backup systems would require significant investments in resources to restore IT services and may cause serious impairment in our business operations including loss of business services, increased cost of moving merchandise and failure to provide service to our members. We are currently making substantial investments in maintaining and enhancing our digital resiliency and failure or delay in these projects could be costly and harmful to our business. Failure to deliver IT transformation efforts efficiently and effectively could result in the loss of our competitive position and adversely impact our financial condition and results of operations.
We are required to maintain the privacy and security of personal and business information amidst multiplying threat landscapes and in compliance with privacy and data protection regulations globally. Failure to do so could damage our business, including our reputation with members, suppliers and employees, cause us to incur substantial additional costs, and become subject to litigation and regulatory action.
Increased security threats and more sophisticated cyber misconduct pose a risk to our systems, networks, products and services. We rely upon IT systems and networks, some of which are managed by third parties, in connection with virtually all of our business activities. Additionally, we collect, store and process sensitive information relating to our business, members, suppliers and employees. Operating these IT systems and networks, and processing and maintaining this data, in a secure manner, is critical to our business operations and strategy. Increased remote work due to the COVID-19 pandemic has also increased the possible attack surfaces. Threats designed to gain unauthorized access to systems, networks and data, both ours and third parties with whom we work, are increasing in frequency and sophistication. Cybersecurity attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crimes and advanced persistent threats. Phishing attacks have emerged as particularly prominent, including as vectors for ransomware attacks, which have increased in breadth and frequency. While we train our employees as part of our security efforts, that training cannot be completely effective. These threats pose a risk to the security of our systems and networks and the confidentiality, integrity, and availability of our data. It is possible that our IT systems and networks, or those managed by third parties such as cloud providers or suppliers that otherwise host confidential information, could have vulnerabilities, which could go unnoticed for a period of time. While our cybersecurity and compliance efforts seek to mitigate such risks, there can be no guarantee that the actions and controls we and our third-party service providers have implemented and are implementing, will be sufficient to protect our systems, information or other property.
The potential impacts of a material cybersecurity attack include reputational damage, litigation, government enforcement actions, penalties, disruption to systems, unauthorized release of confidential or otherwise protected information, corruption of data, diminution in the value of our investment in IT systems and increased cybersecurity protection and remediation costs. This could adversely affect our competitiveness, results of operations and financial condition and, critically in light of our business model, loss of member confidence. Further, the insurance coverage we maintain and indemnification arrangements with third-parties may be inadequate to cover claims, costs, and liabilities relating to cybersecurity incidents. In addition, data we collect, store and process is subject to a variety of U.S. and international laws and regulations, such as the European Union's General Data Protection Regulation, California Consumer Privacy Act, Health Insurance Portability and Accountability Act, and other emerging privacy and cybersecurity laws across the various states and around the globe, which may carry significant potential penalties for noncompliance.
We are subject to payment-related risks.
We accept payments using a variety of methods, including select credit and debit cards, cash and checks, co-brand cardholder rebates, Executive member 2% reward certificates, and our shop 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 acceptance fees, along with additional transaction processing fees. We rely on third parties to provide payment transaction processing services for credit and debit cards and our shop card. It could disrupt our business if these parties become unwilling or unable to provide these services to us. We are also subject to evolving payment card association and network operating rules, including data security rules, certification requirements and rules governing electronic funds transfers. For example, we are subject to Payment Card Industry Data Security Standards, which contain compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data. 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 card payments from our members, and our business and operating results could be adversely affected.
We might sell products that cause illness or injury to our members, harm to our reputation, and expose us to litigation.
If our merchandise, including 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 or labeling standards or our members' expectations, we could experience lost sales, increased costs, litigation or reputational harm. The sale of these items involves the risk of 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 suppliers 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 safety and other standards. While we are subject to governmental inspection and regulations and work to comply in all material respects with applicable laws and regulations, we cannot be sure that consumption or use of our products will not cause illness or injury 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.
If we do not successfully develop and maintain a relevant omnichannel experience for our members, our results of operations could be adversely impacted.
Omnichannel 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, particularly in the wake of COVID-19. We are making investments in our websites and mobile applications. If we are unable to make, improve, or develop relevant member-facing 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 our employees, including members of our senior management and other key operations, IT, merchandising and administrative personnel. Failure to identify and implement a succession plan for senior management could negatively impact our 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 the continuing impacts of the pandemic, 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.
Claims for employee health care benefits, workers’ compensation, general liability, property damage, directors’ and officers’ liability, vehicle liability, inventory loss, and other exposures are funded predominantly through self-insurance. Insurance coverage is maintained for certain risks to limit exposures arising from very large losses. The types and amounts of insurance may vary from time to time based on our decisions with respect to risk retention and regulatory requirements. Significant claims or events, regulatory changes, a substantial rise in costs of health care or 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.
Although we maintain specific coverages for catastrophic property losses, we still bear a significant portion of 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. Such losses could materially impact our cash flows 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, department and specialty stores and operators selling a single category or narrow range of merchandise. Such retailers and warehouse club operators compete in a variety of ways, including 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, which has enhanced competition. Some competitors have greater financial resources and technology capabilities, better access to merchandise, and greater market penetration than we do. Our inability to respond effectively to competitive pressures, changes in the retail markets or customer 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 changes in tax rates, duties, tariffs, or other restrictions, sovereign debt crises, pandemics and other health 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. Additionally, actions in various countries, particularly China, the United States and the United Kingdom, have raised the cost of many items and created uncertainty with respect to tariff impacts on the costs of some of our merchandise. The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs. The impact to our net sales and gross margin is influenced in part by our merchandising and pricing strategies in response to potential cost increases. While these potential impacts are uncertain, they could have an adverse impact on our results.
Prices of certain commodities, including gasoline and consumable goods used in manufacturing and our warehouse retail operations, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, inflationary pressures, 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 events like the outbreak of war or acts of terrorism.
Inflationary factors such as increases in merchandise costs may adversely affect our business, financial condition and results of operations. If inflation on merchandise increases beyond our ability to control we may not be able to adjust prices to sufficiently offset the effect of the various cost increases without negatively impacting consumer demand. Certain merchandise categories were impacted by inflation higher than what we have experienced in recent years due to, among other things, the continuing impacts of the pandemic and uncertain economic environment.
Suppliers may be unable to timely supply us with quality merchandise at competitive prices 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 supplier 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 causing a loss of sales and profits.
We buy from numerous domestic and foreign manufacturers and importers. Our inability to acquire suitable merchandise on acceptable terms or the loss of key suppliers could negatively affect us. We may not be able to develop relationships with new suppliers, and products from alternative sources, if any, may be of a lesser quality or more expensive. Because of our efforts to adhere to high quality standards for which available supply may be limited, particularly for certain food items, the large volumes 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, natural disasters, extreme weather conditions, public health emergencies, supply constraints and general economic and political conditions that could limit their ability to timely provide us with acceptable merchandise. One or more of our suppliers might not adhere to our quality control, packaging, 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 costs, and otherwise adversely impact our business.
Fluctuations in foreign exchange rates may adversely affect our results of operations.
During 2021, our international operations, including Canada, generated 28% 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 translate the financial statements of our international operations from local currencies into U.S. dollars using current exchange rates. Future fluctuations in exchange rates 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.
A portion of the products we purchase is paid for in a currency other than the local currency of the country in which the goods are sold. Currency fluctuations may increase our merchandise costs and may not be passed on to members. Consequently, fluctuations in currency exchange rates may adversely affect our results of operations.
Natural disasters, extreme weather conditions, public health emergencies or other catastrophic events could negatively affect our business, financial condition, and results of operations.
Natural disasters and extreme weather conditions, such as hurricanes, typhoons, floods, earthquakes, wildfires, droughts; acts of terrorism or violence, including active shooter situations; energy shortages; public health issues, including pandemics and quarantines, 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 our properties, limitations on store operating hours, less frequent visits by members to physical locations, the temporary closure of warehouses, depots, manufacturing or home office facilities, the temporary lack of an adequate work force, disruptions to our IT systems, 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, 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.
The COVID-19 pandemic continues to affect our business, financial condition and results of operations in many respects.
The continuing impacts of the COVID-19 pandemic are highly unpredictable and volatile and are affecting certain business operations, demand for our products and services, in-stock positions, costs of doing business, availability of labor, access to inventory, supply chain operations, our ability to predict future performance, exposure to litigation, and our financial performance, among other things.
The pandemic has resulted in widespread and continuing impacts on the global economy and on our employees, members, suppliers and other people and entities with which we do business. There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders, and business and government shutdowns. The pandemic and any preventative or protective actions that governments or we may take may result in business disruption, reduced member traffic and reduced sales in certain merchandise categories, and increased operating expenses.
The pandemic is continuing to impact the global supply chain, with restrictions and limitations on business activities causing disruption and delay, which have strained certain domestic and international supply chains, and could continue to negatively affect the flow or availability of certain products. Member demand for certain products has and may continue to fluctuate as the pandemic progresses and member
behaviors change, which may challenge our ability to anticipate and/or adjust inventory levels to meet that demand. Similarly, increased demand for online purchases of products has impacted our fulfillment operations, resulting in delays in deliveries and lost sales from being out of stock for certain SKUs.
Failure to appropriately respond, or the perception of an inadequate response to evolving events around the pandemic, could cause reputational harm to our brand and subject us to lost sales, as well as claims from employees, members, suppliers, regulators or other parties. Additionally, a future outbreak of confirmed cases of COVID-19 in our facilities could result in temporary or sustained workforce shortages or facility closures, which would negatively impact our business and results of operations. Some jurisdictions have taken measures intended to expand the availability of workers compensation or to change the presumptions applicable to workers compensation measures. These actions may increase our exposure to claims and increase our costs.
Other factors and uncertainties include, but are not limited to:
•The severity and duration of the pandemic, including future mutations or related variants of the virus in areas in which we operate;
•Evolving macroeconomic factors, including general economic uncertainty, unemployment rates, and recessionary pressures;
•Changes in labor markets affecting us and our suppliers;
•Unknown consequences on our business performance and initiatives stemming from the substantial investment of time and other resources to the pandemic response;
•The pace of recovery when the pandemic subsides.
•The long-term impact of the pandemic on our business, including consumer behaviors; and
•Disruption and volatility within the financial and credit markets.
To the extent that COVID-19 continues to adversely affect the U.S. and global economy, our business, results of operations, cash flows, or financial condition, it may also heighten other risks described in this section, including but not limited to those related to consumer behavior and expectations, competition, brand reputation, implementation of strategic initiatives, cybersecurity threats, payment-related risks, technology systems disruption, supply chain disruptions, labor availability and cost, litigation, operational risk as a result of remote work arrangements and regulatory requirements.
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. Government regulations limiting carbon dioxide and other greenhouse gas emissions may increase compliance and merchandise costs, and other regulation affecting energy inputs could materially affect our profitability. Climate change, extreme weather conditions, wildfires, droughts and rising sea levels could affect our ability to procure 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 face increased regulation.
Failure to meet financial market expectations 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 price of our stock to decline.
Legal and Regulatory Risks
We are subject 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.
At the end of 2021, we operated 251 warehouses 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 withdrawal of the U.K. from the European Union, 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 (including tariffs and trade sanctions), 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 in locations 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 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 self-insurance liabilities, are highly complex and involve subjective assumptions, estimates and judgments by our management. Changes in rules or interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance and have a material impact on our consolidated financial statements.
We are exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act.
Section 404 of the Sarbanes-Oxley Act of 2002 requires management assessments of the effectiveness of internal control over financial reporting and disclosure controls and procedures. If we are unable to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately and to prepare financial statements within required time periods could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price.
Changes in tax rates, new U.S. or foreign tax legislation, and exposure to additional tax liabilities could adversely affect our financial condition and results of operations.
We are subject to a variety of taxes and tax collection and remittance obligations in the U.S. and numerous foreign jurisdictions. Additionally, at any point in time, we may be under examination for value added, sales-based, payroll, product, import or other non-income taxes. We may recognize additional tax expense, be subject to additional tax liabilities, or incur losses and penalties, due to changes in laws, regulations, administrative practices, principles, assessments by authorities and interpretations related to tax, including tax rules in various jurisdictions. 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 or adverse outcomes in tax audits, including transfer pricing disputes, could have a material adverse effect on our financial condition and results of operations.
Significant changes in or failure to comply with 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 and increasingly broad array 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.
Operations at our facilities require the treatment and disposal of wastewater, stormwater and agricultural and food processing wastes, the use and maintenance of refrigeration systems, including ammonia-based chillers, noise, odor and dust management, the operation of mechanized processing equipment, and other operations that potentially could affect the environment and public health and safety. Failure to comply with current and future environmental, health and safety standards could result in the imposition of fines and penalties, illness or injury of our employees, and claims or lawsuits related to such illnesses or injuries, and temporary closures or limits on the operations of facilities.
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
At August 29, 2021, we operated 815 membership warehouses:
|United States and Puerto Rico||454 ||110 ||564 |
|Canada||89 ||16 ||105 |
|Other International||101 ||45 ||146 |
|Total||644 ||171 ||815 |
(1)121 of the 171 leases are land-only leases, where Costco owns the building.
At the end of 2021, our warehouses contained approximately 118.9 million square feet of operating floor space: 83.2 million in the U.S.; 14.9 million in Canada; and 20.8 million in Other International. Total square feet associated with distribution and logistics facilities were approximately 31.4 million. Additionally, we operate various processing, packaging, manufacturing and other facilities to support our business, which includes the production of certain private-label items.
Item 3—Legal Proceedings
See discussion of Legal Proceedings in Note 11 to the consolidated financial statements included in Item 8 of this Report.
Item 4—Mine Safety Disclosures
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 September 28, 2021, we had 9,958 stockholders of record.
Payment of 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 activity for the fourth quarter of 2021 (dollars in millions, except per share data):
|Period||Total Number of Shares Purchased||Average Price Paid per Share|
Total Number of Shares Purchased as Part of Publicly Announced Program(1)
|Maximum Dollar Value of Shares that May Yet be Purchased under the Program|
|May 10—June 6, 2021||102,000 ||$||381.50 ||102,000 ||$||3,338 |
|June 7—July 4, 2021||108,000 ||387.32 ||108,000 ||3,296 |
|July 5—August 1, 2021||63,000 ||412.73 ||63,000 ||3,270 |
|August 2—August 29, 2021||45,000 ||446.15 ||45,000 ||3,250 |
| Total fourth quarter||318,000 ||$||398.76 ||318,000 |
(1)The repurchase program is conducted under a $4,000 authorization approved by our Board of Directors in April 2019, which expires in April 2023.
The following graph compares the cumulative total shareholder return (stock price appreciation and the reinvestment of dividends) on an investment of $100 in Costco common stock, S&P 500 Index, and the S&P 500 Retail Index over the five years from August 28, 2016, through August 29, 2021.
The following graph provides information concerning average sales per warehouse over a 10 year period.
|Average Sales Per Warehouse*|
|(Sales In Millions)|
|Year Opened||# of Whses|
|2020||13||$||132 ||152 |
|2019||20||$||129 ||138 ||172 |
|2018||21||$||116 ||119 ||141 ||172 |
|2017||26||$||121 ||142 ||158 ||176 ||206 |
|2016||29||$||87 ||97 ||118 ||131 ||145 ||173 |
|2015||23||$||83 ||85 ||94 ||112 ||122 ||136 ||163 |
|2014||30||$||108 ||109 ||115 ||125 ||140 ||144 ||155 ||182 |
|2013||26||$||99 ||109 ||113 ||116 ||124 ||137 ||144 ||158 ||186 |
|2012 & Before||607||$||155 ||163 ||169 ||170 ||169 ||175 ||188 ||195 ||205 ||232 |
|Totals||815||155 ||160 ||164 ||162 ||159 ||163 ||176 ||182 ||192 ||217 |
|*First year sales annualized.|
|2017 was a 53-week fiscal year|
Item 7—Management's Discussion and Analysis of Financial Conditions and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data)
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to promote understanding of the results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K). This section generally discusses the results of operations for 2021 compared to 2020. For discussion related to the results of operations and changes in financial condition for 2020 compared to 2019 refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2020 Form 10-K, which was filed with the United States Securities and Exchange Commission (SEC) on October 7, 2020. In 2021, we combined the hardlines and softlines merchandise categories into non-foods. This change did not have a material impact on the discussion of our results of operations.
We believe that the most important driver of our profitability is increasing net sales, particularly comparable sales growth. Net sales includes our core merchandise categories (foods and sundries, non-foods, and fresh foods), warehouse ancillary (includes gasoline, pharmacy, optical, food court, hearing aids, and tire installation) and other businesses (includes e-commerce, business centers, travel and other). We define comparable sales as net sales from warehouses open for more than one year, including remodels, relocations and expansions, and sales-related to e-commerce websites operating for more than one year. Comparable sales growth is achieved through increasing shopping frequency from new and existing members and the amount they spend on each visit (average ticket). Sales comparisons can also be particularly influenced by certain factors that are beyond our control: fluctuations in currency exchange rates (with respect to the consolidation of the results of our international operations); and changes in the cost of gasoline and associated competitive conditions. The higher our comparable sales exclusive of these items, the more we can leverage certain of our selling, general and administrative (SG&A) expenses, reducing them as a percentage of sales and enhancing profitability. Generating comparable sales growth is foremost a question of making available to our members the right merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long-term. Another substantial factor in net sales growth is the health of the economies in which we do business, including the effects of inflation or deflation, especially the United States. Net sales growth and gross margins are also impacted by our competition, which is vigorous and widespread, across a wide range of global, national and regional wholesalers and retailers, including those with e-commerce operations. While we cannot control or reliably predict general economic health or changes in competition, we believe that we have been successful historically in adapting our business to these changes, such as through adjustments to our pricing and merchandise mix, including increasing the penetration of our private-label items and through online offerings.
Our philosophy is to provide our members with quality goods and services at competitive prices. We do not focus in the short-term on maximizing prices charged, but instead seek to maintain what we believe is a perception among our members of our “pricing authority” on quality goods – consistently providing the most competitive values. Our investments in merchandise pricing may include reducing prices on merchandise to drive sales or meet competition and holding prices steady despite cost increases instead of passing the increases on to our members, all negatively impacting gross margin as a percentage of net sales (gross margin percentage). We believe our gasoline business draws members, but it generally has a lower gross margin percentage relative to our non-gasoline business. It also has lower SG&A expenses as a percent of net sales compared to our non-gasoline business. A higher penetration of gasoline sales will generally lower our gross margin percentage. Rapidly changing gasoline prices may significantly impact our near-term net sales growth. Generally, rising gasoline prices benefit net sales growth which, given the higher sales base, negatively impacts our gross margin percentage but decreases our SG&A expenses as a percentage of net sales. A decline in gasoline prices has the inverse effect. Additionally, actions in various countries, particularly China, the United States and the United Kingdom, have created
uncertainty with respect to how tariffs will affect the costs of some of our merchandise. The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs. Certain merchandise categories were impacted by inflation higher than what we have experienced in recent years. The impact to our net sales and gross margin is influenced in part by our merchandising and pricing strategies in response to cost increases. While these potential impacts are uncertain, they could have an adverse impact on our results.
We also achieve net sales growth by opening new warehouses. As our warehouse base grows, available and desirable sites become more difficult to secure, and square footage growth becomes a comparatively less substantial component of growth. The negative aspects of such growth, however, including lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouses when openings occur in existing markets, are continuing to decline in significance as they relate to the results of our total operations. Our rate of operating floor space square footage growth is generally higher in foreign markets, due to the smaller base in those markets, and we expect that to continue. Our e-commerce business growth, domestically and internationally, has also increased our sales but it generally has a lower gross margin percentage relative to our warehouse operations.
The membership format is an integral part of our business and has a significant effect on our profitability. This format is designed to reinforce member loyalty and provide continuing fee revenue. The extent to which we achieve growth in our membership base, increase the penetration of our Executive members, and sustain high renewal rates materially influences our profitability. Our paid membership growth rate may be adversely impacted when warehouse openings occur in existing markets as compared to new markets.
Our financial performance depends heavily on controlling costs. While we believe that we have achieved successes in this area, some significant costs are partially outside our control, particularly health care and utility expenses. With respect to the compensation of our employees, our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that achieving our longer-term objectives of reducing employee turnover and enhancing employee satisfaction requires maintaining compensation levels that are better than the industry average for much of our workforce. This may cause us, for example, to absorb costs that other employers might seek to pass through to their workforces. Because our business operates on very low margins, modest changes in various items in the consolidated statements of income, particularly merchandise costs and selling, general and administrative expenses, can have substantial impacts on net income.
Our operating model is generally the same across our U.S., Canadian, and Other International operating segments (see Note 12 to the consolidated financial statements included in Item 8 of this Report). Certain operations in the Other International segment have relatively higher rates of square footage growth, lower wage and benefit costs as a percentage of sales, less or no direct membership warehouse competition, or lack an e-commerce business.
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. References to 2021, 2020, and 2019 relate to the 52-week fiscal years ended August 29, 2021, August 30, 2020, and September 1, 2019, 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 2021 included:
•We opened 22 new warehouses, including 2 relocations: 12 net new in the U.S., 4 net new in our Canadian segment, and 4 new in our Other International segment, compared to 16 new warehouses, including 3 relocations in 2020;
•Net sales increased 18% to $192,052 driven by a 16% increase in comparable sales and sales at new warehouses opened in 2020 and 2021;
•Membership fee revenue increased 9% to $3,877, driven by sign-ups and upgrades to Executive membership;
•Gross margin percentage decreased seven basis points, driven primarily by a shift in sales penetration from our core merchandise categories to our warehouse ancillary and other businesses;
•SG&A expenses as a percentage of net sales decreased 40 basis points, primarily due to leveraging increased sales and decreased incremental wages related to COVID-19;
•The effective tax rate in 2021 was 24.0% compared to 24.4% in 2020;
•Net income increased 25% to $5,007, or $11.27 per diluted share compared to $4,002, or $9.02 per diluted share in 2020;
•We paid a special cash dividend of $10.00 per share in December 2020 and in April 2021, increased the quarterly cash dividend from $0.70 to $0.79 per share totaling $5,748.
During 2021, our sales mix began returning to pre-pandemic levels. This included sales increases in non-foods and in many of our warehouse ancillary and other businesses, certain of which experienced closures or restrictions in 2020. COVID-related supply and logistics constraints have adversely affected some merchandise categories and are expected to do so for the foreseeable future.
We paid $515 in incremental wages during 2021 related to COVID-19. The incremental wage and benefit costs associated with COVID-19, which began on March 1, 2020 and ended on February 28, 2021, totaled approximately $825.
Effective March 1, 2021, we permanently increased wages for hourly and most salaried warehouse employees. The estimated annualized pre-tax cost is approximately $400. Additionally, in certain areas in the United States governments have mandated or are considering mandating extra pay for classes of employees that include our employees, which has and will result in higher costs.
RESULTS OF OPERATIONS
Increases in net sales:
|U.S.||16 ||%||9 ||%||9 ||%|
|Canada||22 ||%||5 ||%||3 ||%|
|Other International||23 ||%||13 ||%||5 ||%|
|Total Company||18 ||%||9 ||%||8 ||%|
Increases in comparable sales:
|U.S.||15 ||%||8 ||%||8 ||%|
|Canada||20 ||%||5 ||%||2 ||%|
|Other International||19 ||%||9 ||%||2 ||%|
|Total Company||16 ||%||8 ||%||6 ||%|
Increases in comparable sales excluding the impact of changes in foreign currency and gasoline prices(1):
|U.S.||14 ||%||9 ||%||6 ||%|
|Canada||12 ||%||7 ||%||5 ||%|
|Other International||13 ||%||11 ||%||6 ||%|
|Total Company||13 ||%||9 ||%||6 ||%|
(1)Excluding the impact of the revenue recognition standard for the year ended September 1, 2019.
Net sales increased $28,832 or 18% during 2021. The improvement was attributable to an increase in comparable sales of 16%, and sales at new warehouses opened in 2020 and 2021. While sales in all core merchandise categories increased, sales were particularly strong in non-foods. Sales increases were also strong in our warehouse ancillary and other businesses, predominantly e-commerce and gasoline. Certain merchandise categories were impacted by inflation higher than what we have experienced in recent years.
Changes in foreign currencies relative to the U.S. dollar positively impacted net sales by approximately $2,759, or 169 basis points, compared to 2020, attributable to our Canadian and Other International operations. Changes in gasoline prices positively impacted net sales by $1,636, or 100 basis points, compared to 2020, due to a 12% increase in the average price per gallon. The volume of gasoline sold increased approximately 10%, positively impacting net sales by $1,469, or 90 basis points.
Comparable sales increased 16% during 2021 and were positively impacted by increases in shopping frequency and average ticket. There was an increase of 44% in e-commerce comparable sales in 2021, driven by an increase of 80% in the first half of the year.
|Membership fees increase||9 ||%||6 ||%||7 ||%|
Membership fees increased 9% in 2021, driven by sign-ups and upgrades to Executive membership. Excluding the positive impact of changes in foreign currencies relative to the U.S. dollar, membership fees increased 8%. At the end of 2021, our member renewal rates were 91% in the U.S. and Canada and 89% worldwide. Our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date. We account for membership fee revenue on a deferred basis, recognized ratably over the one-year membership period.
|Less merchandise costs||170,684||144,939||132,886|
|Gross margin percentage||11.13 ||%||11.20 ||%||11.02 ||%|
The gross margin of our core merchandise categories (foods and sundries, non-foods and fresh foods), when expressed as a percentage of core merchandise sales (rather than total net sales), increased 23 basis points. This measure eliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses. The increase was across all categories, most significantly in non-foods.
Total gross margin percentage decreased seven basis points compared to 2020. Excluding the impact of gasoline price inflation on net sales in 2021, gross margin percentage was 11.22%, an increase of two basis points. This increase was due to a two basis point improvement in our core merchandise categories, predominantly non-foods, and in our warehouse ancillary and other businesses, largely e-commerce. The comparison was also positively impacted by a three basis point reserve on inventory recorded in 2020 with no such reserve this year. Gross margin percentage was negatively impacted three basis points due to increased 2% rewards and two basis points due to a LIFO charge for higher merchandise costs. Changes in foreign currencies relative to the U.S. dollar positively impacted gross margin by approximately $301 in 2021.
Gross margin on a segment basis, when expressed as a percentage of the segment's own sales and excluding the impact of changes in gasoline prices on net sales (segment gross margin percentage), decreased in our U.S. segment, due to our warehouse ancillary and other businesses, our core merchandise categories, and the LIFO charge, partially offset by the reserve for certain inventory in 2020. Our Canadian and Other International segments increased, primarily due to our warehouse ancillary and other businesses and certain of our core merchandise categories. These increases were partially offset by increased 2% rewards.
Selling, General and Administrative Expenses
|SG&A expenses as a percentage of net sales||9.61 ||%||10.01 ||%||10.04 ||%|
SG&A expenses as a percentage of net sales decreased 40 basis points compared to 2020. SG&A expenses as a percentage of net sales excluding the impact of gasoline price inflation was 9.69%, a decrease of 32 basis points. Warehouse operations and other businesses were lower by 24 basis points, largely attributable to payroll leveraging increased sales. Incremental wages as a result of COVID-19, which ended on February 28, 2021, were lower by eight basis points. Central operating costs were lower by five basis points. Stock compensation expense was lower by three basis points, and costs associated with the acquisition of Innovel were lower by one basis point. These decreases were offset by an increase of five basis points related to a partial reversal of a product tax assessment in 2020, as well as an increase of four basis points related to a write-off of certain information technology assets in the fourth quarter of 2021 that are no longer expected to be utilized as part of the modernization of our information systems. Changes in foreign currencies relative to the U.S. dollar increased our SG&A expenses by approximately $228 in 2021.
|Preopening expenses||$||76 ||$||55 ||$||86 |
|Warehouse openings, including relocations|
|13 ||9 ||18 |
|Canada||5 ||4 ||3 |
|Other International||4 ||3 ||4 |
|Total warehouse openings, including relocations||22 ||16 ||25 |
Preopening expenses include startup costs for new warehouses and relocations, developments in new international markets, new manufacturing and distribution facilities, and expansions at existing warehouses and corporate facilities. Preopening expenses vary due to the number of warehouse and facility 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||$||171 ||$||160 ||$||150 |
Interest expense primarily relates to Senior Notes. For more information on our debt arrangements, refer to the consolidated financial statements included in Item 8 of this Report.
Interest Income and Other, Net
|Interest income||$||41 ||$||89 ||$||126 |
|Foreign-currency transaction gains, net||56 ||7 ||27 |
|Other, net||46 ||(4)||25 |
|Interest income and other, net||$||143 ||$||92 ||$||178 |The decrease in interest income in 2021 was primarily due to lower interest rates in the U.S. and Canada, partially offset by higher average cash and investment balances. Foreign-currency transaction gains, net include mark-to-market adjustments for forward foreign-exchange contracts and revaluation or settlement of monetary assets and liabilities by our Canadian and Other International operations. See Derivatives and Foreign Currency sections in Note 1 to the consolidated financial statements included in Item 8 of this Report. During 2020, other, net was impacted by a $36 charge related to the repayment of certain Senior Notes.
Provision for Income Taxes
|Provision for income taxes||$||1,601 ||$||1,308 ||$||1,061 |
|Effective tax rate||24.0 ||%||24.4 ||%||22.3 ||%|
The effective tax rate for 2021 included discrete net tax benefits of $163, including a benefit of $75 due to excess benefits from stock compensation, $70 related to the special dividend payable through our 401(k) plan, and $19 related to a reduction in the valuation allowance against certain deferred tax assets. Excluding these benefits, the tax rate was 26.4% for 2021.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our significant sources and uses of cash and cash equivalents:
|Net cash provided by operating activities||$||8,958 ||$||8,861 ||$||6,356 |
|Net cash used in investing activities||(3,535)||(3,891)||(2,865)|
|Net cash used in financing activities||(6,488)||(1,147)||(1,147)|
Our primary sources of liquidity are cash flows generated from our operations, cash and cash equivalents, and short-term investments. Cash and cash equivalents and short-term investments were $12,175 and $13,305 at the end of 2021 and 2020, respectively. Of these balances, unsettled credit and debit card receivables represented approximately $1,816 and $1,636 at the end of 2021 and 2020, respectively. These receivables generally settle within four days. Cash and cash equivalents were positively impacted by a change in exchange rates of $46 and $70 in 2021 and 2020, respectively, and negatively impacted by $15 in 2019.
Material contractual obligations arising in the normal course of business primarily consist of purchase obligations, long-term debt and related interest payments, leases, and construction and land purchase obligations. See Notes 5 and 6 to the consolidated financial statements included in Item 8 of this Report for amounts outstanding on August 29, 2021, related to debt and leases.
Purchase obligations consist of contracts primarily related to merchandise, equipment, and third-party services, the majority of which are due in the next 12 months. Construction and land purchase obligations consist of contracts primarily related to the development and opening of new and relocated warehouses, the majority of which (other than leases) are due in the next 12 months.
Management believes that our cash and investment position and operating cash flows as well as capacity under existing and available credit agreements 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.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $8,958 in 2021, compared to $8,861 in 2020. Our cash flow provided by operations is primarily from net sales and membership fees. Cash flow used in operations generally consists of payments to merchandise suppliers, 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. Changes in our net investment in merchandise inventories (the difference between merchandise inventories and accounts payable) is impacted by several factors, including how fast inventory is sold, the forward deployment of inventory to accelerate delivery times, payment terms with our suppliers, and early payments to obtain discounts from suppliers.
Cash Flows from Investing Activities
Net cash used in investing activities totaled $3,535 in 2021, compared to $3,891 in 2020, and is primarily related to capital expenditures. In 2020, we acquired Innovel (Costco Wholesale Logistics) and a minority interest in Navitus. Net cash flows from investing activities also includes purchases and maturities of short-term investments.
Our primary requirements for capital are acquiring land, buildings, and equipment for new and remodeled warehouses. Capital is also required for information systems, manufacturing and distribution facilities, initial warehouse operations, and working capital. In 2021, we spent $3,588 on capital expenditures, and it is our current intention to spend approximately $3,800 to $4,200 during fiscal 2022. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents, and short-term investments. We opened 22 new warehouses, including two relocations, in 2021, and plan to open approximately up to 35 additional new warehouses, including five relocations, in 2022. We have experienced delays in real estate and construction activities due to COVID-19. 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 or based on the current economic environment.
Cash Flows from Financing Activities
Net cash used in financing activities totaled $6,488 in 2021, compared to $1,147 in 2020. Cash flows used in financing activities primarily related to the payment of dividends, repurchases of common stock, and withholding taxes on stock-based awards.
In 2020, we issued $4,000 in aggregate principal amount of Senior Notes and repaid $3,200 of Senior Notes.
Stock Repurchase Programs
During 2021 and 2020, we repurchased 1,358,000 and 643,000 shares of common stock, at average prices of $364.39 and $308.45, respectively, totaling approximately $495 and $198, respectively. 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. The remaining amount available to be purchased under our approved plan was $3,250 at the end of 2021.
Cash dividends declared in 2021 totaled $12.98 per share, as compared to $2.70 per share in 2020. Dividends in 2021 included a special dividend of $10.00 per share, resulting in an aggregate payment of approximately $4,430. In April 2021, the Board of Directors increased our quarterly cash dividend from $0.70 to $0.79 per share.
Bank Credit Facilities and Commercial Paper Programs
We maintain bank credit facilities for working capital and general corporate purposes. At August 29, 2021, we had borrowing capacity under these facilities of $1,050. Our international operations maintain $574 of the total borrowing capacity under bank credit facilities, of which $201 is guaranteed by the Company. Short-term borrowings outstanding under the bank credit facilities at the end of 2021 were immaterial, and there were none outstanding at the end of 2020.
The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $235. The outstanding commitments under these facilities at the end of 2021 totaled $197, most of which were standby letters of credit which do not expire or have expiration dates within one year. The bank credit facilities have various expiration dates, most of which are within one year, and we generally intend to renew these facilities. The amount of borrowings available at any time under our bank credit facilities is reduced by the amount of standby and commercial letters of credit outstanding.
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.
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 assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on assumptions that we believe to be reasonable, and we continue to review and evaluate these estimates. For further information on significant accounting policies, see discussion in Note 1 to the consolidated financial statements included in Item 8 of this Report.
Claims for employee health-care benefits, workers’ compensation, general liability, property damage, directors’ and officers’ liability, vehicle liability, inventory loss, and other exposures are funded predominantly through self-insurance. Insurance coverage is maintained for certain risks to seek to limit exposures arising from very large losses. We use different risk management mechanisms, including a wholly-owned captive insurance subsidiary, and participate in a reinsurance program. Liabilities associated with the risks that we retain are not discounted and are estimated by using historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The costs of claims are highly unpredictable and can fluctuate as a result of inflation rates, regulatory or legal changes, and unforeseen developments in claims over time. While we believe our estimates are reasonable and provide for a certain degree of coverage to account for these variables, actual claims and costs could differ significantly from recorded liabilities. Historically, adjustments to our estimates have not been material.
Recent Accounting Pronouncements
We do not expect that any recently issued accounting pronouncements will have a material effect on our financial statements.
Item 7A—Quantitative and Qualitative Disclosures About Market Risk (amounts in millions)
Our exposure to financial market risk results from fluctuations in interest rates and foreign currency exchange rates. We do not engage in speculative or leveraged transactions or hold or issue financial instruments for trading purposes.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our investment holdings that are diversified among various instruments considered to be cash equivalents, as defined in Note 1 to the consolidated financial statements included in Item 8 of this Report, as well as short-term investments in government and agency securities with effective maturities of generally three months to five years at the date of purchase. The primary objective of our investment activities is to preserve principal and secondarily to generate yields. The majority of our short-term investments are in fixed interest-rate securities. These securities are subject to changes in fair value due to interest rate fluctuations.
Our policy limits investments in the U.S. to direct U.S. government and government agency obligations, repurchase agreements collateralized by U.S. government and government agency obligations, U.S. government and government agency money market funds, and insured bank balances. Our wholly-owned captive insurance subsidiary invests in U.S. government and government agency obligations and U.S. government and government agency money market funds. Our Canadian and Other International subsidiaries’ investments are primarily in money market funds, bankers’ acceptances, and bank certificates of deposit, generally denominated in local currencies.
A 100 basis point change in interest rates as of the end of 2021 would have had an immaterial incremental change in fair market value. For those investments that are classified as available-for-sale, the unrealized gains or losses related to fluctuations in market volatility and interest rates are reflected within stockholders’ equity in accumulated other comprehensive income in the consolidated balance sheets.
The nature and amount of our long-term debt may vary as a result of business requirements, market conditions, and other factors. As of the end of 2021, long-term debt with fixed interest rates was $7,531. Fluctuations in interest rates may affect the fair value of the fixed-rate debt. See Note 5 to the consolidated financial statements included in Item 8 of this Report for more information on our long-term debt.
Foreign Currency Risk
Our foreign subsidiaries conduct certain transactions in non-functional currencies, which exposes us to fluctuations in exchange rates. We manage these fluctuations, in part, through the use of forward foreign-exchange contracts, seeking to economically hedge the impact of these fluctuations on known future expenditures denominated in a non-functional foreign-currency. The contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by our international subsidiaries whose functional currency is other than the U.S. dollar. We seek to mitigate risk with the use of these contracts and do not intend to engage in speculative transactions. For additional information related to the Company's forward foreign-exchange contracts, see Notes 1 and 4 to the consolidated financial statements included in Item 8 of this Report. A hypothetical 10% strengthening of the functional currency compared to the non-functional currency exchange rates at August 29, 2021, would have decreased the fair value of the contracts by $149 and resulted in an unrealized loss in the consolidated statements of income for the same amount.
Commodity Price Risk
We are exposed to fluctuations in prices for energy, particularly electricity and natural gas, and other commodities used in retail and manufacturing operations, which we seek to partially mitigate through fixed-price contracts for certain of our warehouses and other facilities, predominantly in the U.S. and Canada. We also enter into variable-priced contracts for some purchases of electricity and natural gas, in addition to some of the fuel for our gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the “normal purchases and normal sales” exception under authoritative guidance and require no mark-to-market adjustment.
Item 8—Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Costco Wholesale Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation and subsidiaries (the Company) as of August 29, 2021 and August 30, 2020, the related consolidated statements of income, comprehensive income, equity, and cash flows for the 52-week periods ended August 29, 2021, August 30, 2020 and September 1, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of August 29, 2021 and August 30, 2020, and the results of its operations and its cash flows for the 52-week periods ended August 29, 2021, August 30, 2020 and September 1, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of August 29, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated October 5, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
The Company changed its method of accounting for leases as of September 2, 2019, due to the adoption of Accounting Standards Update 2016-02 – Leases (ASC 842).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of workers' compensation self-insurance liabilities
As discussed in Note 1 to the consolidated financial statements, the Company estimates its self-insurance liabilities by considering historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The estimated self-insurance liabilities as of August 29, 2021 were $1,257 million, a portion of which related to workers’ compensation self-insurance liabilities for the United States operations.
We identified the evaluation of the Company’s workers’ compensation self-insurance liabilities for the United States operations as a critical audit matter because of the extent of specialized skill and knowledge needed to evaluate the underlying assumptions and judgments made by the Company in the actuarial models. Specifically, subjective auditor judgment was required to evaluate the Company's selected loss rates and initial expected losses used in the actuarial models.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s self-insurance workers' compensation process. This included controls related to the development and selection of the assumptions listed above used in the actuarial calculation and review of the actuarial report. We involved actuarial professionals with specialized skills and knowledge who assisted in:
•Assessing the actuarial models used by the Company for consistency with generally accepted actuarial standards
•Evaluating the Company’s ability to estimate self-insurance workers' compensation liabilities by comparing its historical estimates with actual incurred losses and paid losses
•Evaluating the above listed assumptions underlying the Company’s actuarial estimates by developing an independent expectation of the self-insurance workers' compensation liabilities and comparing them to the amounts recorded by the Company
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
October 5, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Costco Wholesale Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Costco Wholesale Corporation and subsidiaries’ (the Company) internal control over financial reporting as of August 29, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 29, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of August 29, 2021 and August 30, 2020, the related consolidated statements of income, comprehensive income, equity, and cash flows for the 52-week periods ended August 29, 2021, August 30, 2020 and September 1, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated October 5, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
October 5, 2021
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(amounts in millions, except per share data)
|52 Weeks Ended||52 Weeks Ended||52 Weeks Ended|
|Net sales||$||192,052 ||$||163,220 ||$||149,351 |
|Membership fees||3,877 ||3,541 ||3,352 |
|Total revenue||195,929 ||166,761 ||152,703 |
|Merchandise costs||170,684 ||144,939 ||132,886 |
|Selling, general and administrative||18,461 ||16,332 ||14,994 |
|Preopening expenses||76 ||55 ||86 |
|Operating income||6,708 ||5,435 ||4,737 |
|OTHER INCOME (EXPENSE)|
|Interest income and other, net||143 ||92 ||178 |
|INCOME BEFORE INCOME TAXES||6,680 ||5,367 ||4,765 |
|Provision for income taxes||1,601 ||1,308 ||1,061 |
|Net income including noncontrolling interests||5,079 ||4,059 ||3,704 |
Net income attributable to noncontrolling interests
|NET INCOME ATTRIBUTABLE TO COSTCO||$||5,007 ||$||4,002 ||$||3,659 |
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO:
|Basic||$||11.30 ||$||9.05 ||$||8.32 |
|Diluted||$||11.27 ||$||9.02 ||$||8.26 |
|Shares used in calculation (000’s)|
|Basic||443,089 ||442,297 ||439,755 |
|Diluted||444,346 ||443,901 ||442,923 |
The accompanying notes are an integral part of these consolidated financial statements.
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in millions)
| ||52 Weeks Ended||52 Weeks Ended||52 Weeks Ended|
| ||August 29,|
NET INCOME INCLUDING NONCONTROLLING INTERESTS
|$||5,079 ||$||4,059 ||$||3,704 |
Foreign-currency translation adjustment and other, net
|181 ||162 ||(245)|
|Comprehensive income||5,260 ||4,221 ||3,459 |
Less: Comprehensive income attributable to noncontrolling interests
|93 ||80 ||37 |
COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO
|$||5,167 ||$||4,141 ||$||3,422 |
The accompanying notes are an integral part of these consolidated financial statements.
COSTCO WHOLESALE CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in millions, except par value and share data)
|Cash and cash equivalents||$||11,258 ||$||12,277 |
|Short-term investments||917 ||1,028 |
|Receivables, net||1,803 ||1,550 |
|Merchandise inventories||14,215 ||12,242 |
|Other current assets||1,312 ||1,023 |
|Total current assets||29,505 ||28,120 |
|Property and equipment, net||23,492 ||21,807 |
|Operating lease right-of-use assets||2,890 ||2,788 |
|Other long-term assets||3,381 ||2,841 |
|TOTAL ASSETS||$||59,268 ||$||55,556 |
|LIABILITIES AND EQUITY|
|Accounts payable||$||16,278 ||$||14,172 |
|Accrued salaries and benefits||4,090 ||3,605 |
|Accrued member rewards||1,671 ||1,393 |
|Deferred membership fees||2,042 ||1,851 |
|Current portion of long-term debt||799 ||95 |
|Other current liabilities||4,561 ||3,728 |
|Total current liabilities||29,441 ||24,844 |
|Long-term debt, excluding current portion||6,692 ||7,514 |
|Long-term operating lease liabilities||2,642 ||2,558 |
|Other long-term liabilities||2,415 ||1,935 |
|TOTAL LIABILITIES||41,190 ||36,851 |
|COMMITMENTS AND CONTINGENCIES|
Preferred stock $0.01 par value; 100,000,000 shares authorized; no shares issued and outstanding
|— ||— |
Common stock $0.01 par value; 900,000,000 shares authorized; 441,825,000 and 441,255,000 shares issued and outstanding
|4 ||4 |
|Additional paid-in capital||7,031 ||6,698 |
|Accumulated other comprehensive loss||(1,137)||(1,297)|
|Retained earnings||11,666 ||12,879 |
|Total Costco stockholders’ equity||17,564 ||18,284 |
|Noncontrolling interests||514 ||421 |
|TOTAL EQUITY||18,078 ||18,705 |
|TOTAL LIABILITIES AND EQUITY||$||59,268 ||$||55,556 |
The accompanying notes are an integral part of these consolidated financial statements.
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(amounts in millions)
| ||Common Stock||Additional|
| ||Shares (000’s)||Amount|
|BALANCE AT SEPTEMBER 2, 2018||438,189 ||$||4 ||$||6,107 ||$||(1,199)||$||7,887 ||$||12,799 ||$||304 ||$||13,103 |
|— ||— ||— ||— ||3,659 ||3,659 ||45 ||3,704 |
Foreign-currency translation adjustment and other, net
|— ||— ||— ||(237)||— ||(237)||(8)||(245)|
|— ||— ||598 ||— ||— ||598 ||— ||598 |
Release of vested restricted stock units (RSUs), including tax effects
|2,533 ||— ||(272)||— ||— ||(272)||— ||(272)|
Repurchases of common stock
|(1,097)||— ||(16)||— ||(231)||(247)||— ||(247)|
Cash dividends declared and other
|— ||— ||— ||— ||(1,057)||(1,057)||— ||(1,057)|
|BALANCE AT SEPTEMBER 1, 2019||439,625 ||4 ||6,417 ||(1,436)||10,258 ||15,243 ||341 ||15,584 |
|— ||— ||— ||— ||4,002 ||4,002 ||57 ||4,059 |
Foreign-currency translation adjustment and other, net
|— ||— ||— ||139 ||— ||139 ||23 ||162 |
|— ||— ||621 ||— ||— ||621 ||— ||621 |
Release of vested RSUs, including tax effects
|2,273 ||— ||(330)||— ||— ||(330)||— ||(330)|
Repurchases of common stock
|(643)||— ||(10)||— ||(188)||(198)||— ||(198)|
|Cash dividends declared||— ||— ||— ||— ||(1,193)||(1,193)||— ||(1,193)|
|BALANCE AT AUGUST 30, 2020||441,255 ||4 ||6,698 ||(1,297)||12,879 ||18,284 ||421 ||18,705 |
|— ||— ||— ||— ||5,007 ||5,007 ||72 ||5,079 |
Foreign-currency translation adjustment and other, net
|— ||— ||— ||160 ||— ||160 ||21 ||181 |
|— ||— ||668 ||— ||— ||668 ||— ||668 |
Release of vested RSUs, including tax effects
|1,928 ||— ||(312)||— ||— ||(312)||— ||(312)|
Repurchases of common stock
|(1,358)||— ||(23)||— ||(472)||(495)||— ||(495)|
Cash dividends declared
|— ||— ||— ||— ||(5,748)||(5,748)||— ||(5,748)|
|BALANCE AT AUGUST 29, 2021||441,825 ||$||4 ||$||7,031 ||$||(1,137)||$||11,666 ||$||17,564 ||$||514 ||$||18,078 |
The accompanying notes are an integral part of these consolidated financial statements.
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in millions)
|52 Weeks Ended||52 Weeks Ended||52 Weeks Ended|
|CASH FLOWS FROM OPERATING ACTIVITIES|
|Net income including noncontrolling interests||$||5,079 ||$||4,059 ||$||3,704 |
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization
|1,781 ||1,645 ||1,492 |
Non-cash lease expense
|286 ||194 ||— |
|665 ||619 ||595 |
Other non-cash operating activities, net
|85 ||42 ||9 |
Deferred income taxes
|59 ||104 ||147 |
Changes in operating assets and liabilities:
|Accounts payable||1,838 ||2,261 ||322 |
|Other operating assets and liabilities, net||1,057 ||728 ||623 |
|Net cash provided by operating activities||8,958 ||8,861 ||6,356 |
|CASH FLOWS FROM INVESTING ACTIVITIES|
|Purchases of short-term investments||(1,331)||(1,626)||(1,094)|
|Maturities and sales of short-term investments||1,446 ||1,678 ||1,231 |
|Additions to property and equipment||(3,588)||(2,810)||(2,998)|
|Acquisitions||— ||(1,163)||— |
|Other investing activities, net||(62)||30 ||(4)|
|Net cash used in investing activities||(3,535)||(3,891)||(2,865)|
|CASH FLOWS FROM FINANCING ACTIVITIES|
|Change in bank payments outstanding||188 ||137 ||210 |
|Proceeds from short-term borrowings||41 ||— ||— |
|Proceeds from issuance of long-term debt||— ||3,992 ||298 |
|Repayments of long-term debt||(94)||(3,200)||(89)|
|Tax withholdings on stock-based awards||(312)||(330)||(272)|
|Repurchases of common stock||(496)||(196)||(247)|
|Cash dividend payments||(5,748)||(1,479)||(1,038)|
|Other financing activities, net||(67)||(71)||(9)|
|Net cash used in financing activities||(6,488)||(1,147)||(1,147)|
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
|46 ||70 ||(15)|
|Net change in cash and cash equivalents||(1,019)||3,893 ||2,329 |
|CASH AND CASH EQUIVALENTS BEGINNING OF YEAR||12,277 ||8,384 ||6,055 |
|CASH AND CASH EQUIVALENTS END OF YEAR||$||11,258 ||$||12,277 ||$||8,384 |
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:|
|Cash paid during the year for:|
|$||149 ||$||124 ||$||141 |
|Income taxes, net||$||1,527 ||$||1,052 ||$||1,187 |
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|Cash dividend declared, but not yet paid||$||— ||$||— ||$||286 |
The accompanying notes are an integral part of these consolidated financial statements.
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data)
Note 1—Summary of Significant Accounting Policies
Description of Business
Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries operate membership warehouses based on the concept that offering members low prices on a limited selection of nationally-branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. At August 29, 2021, Costco operated 815 warehouses worldwide: 564 in the United States (U.S.) located in 46 states, Washington, D.C., and Puerto Rico, 105 in Canada, 39 in Mexico, 30 in Japan, 29 in the United Kingdom (U.K.), 16 in Korea, 14 in Taiwan, 12 in Australia, three in Spain, and one each in Iceland, France and China. The Company operates e-commerce websites in the U.S., Canada, U.K., Mexico, Korea, Taiwan, Japan, and Australia.
Basis of Presentation
The consolidated financial statements include the accounts of Costco, its wholly-owned subsidiaries, and subsidiaries in which it has a controlling interest. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company’s equity. All material inter-company transactions between and among the Company and its consolidated subsidiaries have been eliminated in consolidation. The Company’s net income excludes income attributable to the noncontrolling interest in Taiwan. Unless otherwise noted, references to net income relate to net income attributable to Costco.
Fiscal Year End
The Company operates on a 52/53-week fiscal year basis with the year ending on the Sunday closest to August 31. References to 2021, 2020, and 2019 relate to the 52-week fiscal years ended August 29, 2021, August 30, 2020, and September 1, 2019, respectively.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions take into account historical and forward-looking factors that the Company believes are reasonable, including but not limited to the potential impacts arising from the novel coronavirus (COVID-19) and related public and private sector policies and initiatives. Actual results could differ from those estimates and assumptions.
Cash and Cash Equivalents
The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with a maturity of three months or less at the date of purchase, and proceeds due from credit and debit card transactions with settlement terms of up to four days. Credit and debit card receivables were $1,816 and $1,636 at the end of 2021 and 2020, respectively.
The Company provides for the daily replenishment of major bank accounts as payments are presented. Included in accounts payable at the end of 2021 and 2020, are $999 and $810, respectively, representing the excess of outstanding payments over cash on deposit at the banks on which the payments were drawn.
Short-term investments generally consist of debt securities (U.S. Government and Agency Notes), with maturities at the date of purchase of three months to five years. Investments with maturities beyond five years may be classified, based on the Company’s determination, as short-term based on their highly liquid nature and because they represent the investment of cash that is available for current operations. Short-term investments classified as available-for-sale are recorded at fair value using the specific identification method with the unrealized gains and losses reflected in accumulated other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis and are recorded in interest income and other, net in the consolidated statements of income. These available-for-sale investments have a low level of inherent credit risk given they are issued by the U.S. Government and Agencies. Changes in their fair value are primarily attributable to changes in interest rates and market liquidity. Short-term investments classified as held-to-maturity are financial instruments that the Company has the intent and ability to hold to maturity and are reported net of any related amortization and are not remeasured to fair value on a recurring basis.
The Company periodically evaluates unrealized losses in its investment securities for credit impairment, using both qualitative and quantitative criteria. In the event a security is deemed to be impaired as the result of a credit loss, the Company recognizes the loss in interest income and other, net in the consolidated statements of income.
Fair Value of Financial Instruments
The Company accounts for certain assets and liabilities at fair value. The carrying value of the Company’s financial instruments, including cash and cash equivalents, receivables and accounts payable, approximate fair value due to their short-term nature or variable interest rates. See Notes 3, 4, and 5 for the carrying value and fair value of the Company’s investments, derivative instruments, and fixed-rate debt, respectively.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying a fair value hierarchy, which requires maximizing the use of observable inputs when measuring fair value. The three levels of inputs are:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market
Level 3: Significant unobservable inputs that are not corroborated by market data.
The Company’s valuation techniques used to measure the fair value of money market mutual funds are based on quoted market prices, such as quoted net asset values published by the fund as supported in an active market. Valuation methodologies used to measure the fair value of all other non-derivative financial instruments are based on independent external valuation information. The pricing process uses data from a variety of independent external valuation information providers, including trades, bid price or spread, two-sided markets, quotes, benchmark curves including but not limited to treasury benchmarks and LIBOR or Secured Overnight Financing Rate and swap curves, discount rates, and market data feeds. All are observable in the market or can be derived principally from or corroborated by observable market data. The Company reports transfers in and out of Levels 1, 2, and 3, as applicable, using the fair
value of the individual securities as of the beginning of the reporting period in which the transfer(s) occurred.
Current financial liabilities have fair values that approximate their carrying values. Long-term financial liabilities include the Company's long-term debt, which are recorded on the balance sheet at issuance price and adjusted for unamortized discounts or premiums and debt issuance costs, and are being amortized to interest expense over the term of the loan. The estimated fair value of the Company's long-term debt is based primarily on reported market values, recently completed market transactions, and estimates based upon interest rates, maturities, and credit.
Receivables consist primarily of vendor, reinsurance, credit card incentive, third-party pharmacy and other receivables. Vendor receivables include discounts and volume rebates. Balances are generally presented on a gross basis, separate from any related payable due. In certain circumstances, these receivables may be settled against the related payable to that vendor, in which case the receivables are presented on a net basis. Reinsurance receivables are held by the Company’s wholly-owned captive insurance subsidiary and primarily represent amounts ceded through reinsurance arrangements gross of the amounts assumed under reinsurance, which are presented within other current liabilities in the consolidated balance sheets. Credit card incentive receivables primarily represent amounts earned under the co-branded credit card arrangement in the U.S. Third-party pharmacy receivables generally relate to amounts due from members’ insurers. Other receivables primarily consist of amounts due from governmental entities, mostly tax-related items.
Receivables are recorded net of an allowance for credit losses which considers creditworthiness of vendors and third parties, historical experience and current economic trends. Write-offs of receivables were immaterial in 2021, 2020, and 2019.
Merchandise inventories consist of the following:
|United States ||$||10,248 ||$||8,871 |
|Canada||1,456 ||1,310 |
|Other International||2,511 ||2,061 |
|Merchandise inventories||$||14,215 ||$||12,242 |
Merchandise inventories are stated at the lower of cost or market. U.S. merchandise inventories are valued by the cost method of accounting, using the last-in, first-out (LIFO) basis. The Company believes the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. The Company records an adjustment each quarter, if necessary, for the projected annual effect of inflation or deflation, and these estimates are adjusted to actual results determined at year-end, after actual inflation or deflation rates and inventory levels have been determined. An immaterial charge was recorded to merchandise costs to increase the cumulative LIFO valuation on merchandise inventories at August 29, 2021. As of August 30, 2020, U.S. merchandise inventories valued at LIFO approximated first-in, first-out (FIFO) after considering the lower of cost or market principle. Canadian and Other International merchandise inventories are predominantly valued using the cost and retail inventory methods, respectively, using the FIFO basis.
The Company provides for estimated inventory losses between physical inventory counts using estimates based on experience. The provision is adjusted periodically to reflect physical inventory counts, which generally occur in the second and fourth fiscal quarters. Inventory cost, where appropriate, is reduced by estimates of vendor rebates when earned or as the Company progresses towards earning those rebates, provided that they are probable and reasonably estimable.
Property and Equipment, Net
Property and equipment are stated at cost. Depreciation and amortization expense is computed primarily using the straight-line method over estimated useful lives. Leasehold improvements made after the beginning of the initial lease term are depreciated over the shorter of the estimated useful life of the asset or the remaining term of the initial lease plus any renewals that are reasonably certain at the date the leasehold improvements are made.
The Company capitalizes certain computer software and costs incurred in developing or obtaining software for internal use. During development, these costs are included in construction in progress. To the extent that the assets become ready for their intended use, these costs are included in equipment and fixtures and amortized on a straight-line basis over their estimated useful lives. In the fourth quarter of 2021, the Company recognized an $84 write-off of certain information technology assets, which was recorded in selling, general and administrative expenses, in the consolidated statements of income.
Repair and maintenance costs are expensed when incurred. Expenditures for remodels, refurbishments and improvements that add to or change the way an asset functions or that extend the useful life are capitalized. Assets removed during the remodel, refurbishment or improvement are retired. Assets classified as held-for-sale at the end of 2021 and 2020 were immaterial. The following table summarizes the Company's property and equipment balances at the end of 2021 and 2020:
|Estimated Useful Lives||2021||2020|
|Land||N/A||$||7,507 ||$||6,696 |
|Buildings and improvements||5-50 years||19,139 |