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 September 1, 2019, Costco operated 782 warehouses worldwide: 543 in the United States (U.S.) located in 44 states, Washington, D.C., and Puerto Rico, 100 in Canada, 39 in Mexico, 29 in the United Kingdom (U.K.), 26 in Japan, 16 in Korea, 13 in Taiwan, 11 in Australia, two in Spain, and one each in Iceland, France and China. The Company operates e-commerce websites in the U.S., Canada, Mexico, U.K., Korea, and Taiwan.
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. During the first quarter of 2018, the Company purchased its former joint-venture partner's remaining equity interest in its Korean operations. Unless otherwise noted, references to net income relate to net income attributable to Costco.
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 2019 and 2018 relate to the 52-week fiscal years ended September 1, 2019, and September 2, 2018, respectively. References to 2017 relate to the 53-week fiscal year ended September 3, 2017.
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. 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 $1,434 and $1,348 at the end of 2019 and 2018, respectively.
The Company provides for the daily replenishment of major bank accounts as payments are presented. Included in accounts payable at the end of 2019 and 2018 are $673 and $463, respectively, representing the excess of outstanding payments over cash on deposit at the banks on which the payments were drawn.
The accompanying notes are an integral part of these consolidated financial statements.
39
Short-Term Investments
In general, short-term investments have a maturity 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. 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 other-than-temporary impairment, using both qualitative and quantitative criteria. In the event a security is deemed to be other-than-temporarily impaired, 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 2, 3, and 4 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 data.
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 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, Net
Receivables consist primarily of vendor, reinsurance, credit card incentive, third-party pharmacy and other receivables. Vendor receivables include volume rebates or other discounts. 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 doubtful accounts. The allowance is based on historical experience and application of the specific identification method. Write-offs of receivables were immaterial in 2019, 2018, and 2017.
Merchandise Inventories
Merchandise inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
United States
|
$
|
8,415
|
|
|
$
|
8,081
|
|
Canada
|
1,123
|
|
|
1,189
|
|
Other International
|
1,857
|
|
|
1,770
|
|
Merchandise inventories
|
$
|
11,395
|
|
|
$
|
11,040
|
|
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. As of September 1, 2019 and September 2, 2018, 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 as a percentage of net sales, using estimates based on the Company’s 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
Property and equipment are stated at cost. In general, new building additions are classified into components, each with an estimated useful life, generally five to fifty years for buildings and improvements and three to twenty years for equipment and fixtures. Depreciation and amortization expense is computed using the straight-line method over estimated useful lives or the lease term, if shorter. 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 assured at the date the leasehold improvements are made.
The Company capitalizes certain computer software and software development costs incurred in developing or obtaining software for internal use. During development, these costs are included in construction in
progress. When the assets are ready for their intended use, these costs are included in equipment and fixtures and amortized on a straight-line basis over the estimated useful lives of the software, generally three to seven years.
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 2019 and 2018 were immaterial.
The Company evaluates long-lived assets for impairment on an annual basis, when relocating or closing a facility, or when events or changes in circumstances may indicate the carrying amount of the asset group, generally an individual warehouse, may not be fully recoverable. For asset groups held and used, including warehouses to be relocated, the carrying value of the asset group is considered recoverable when the estimated future undiscounted cash flows generated from the use and eventual disposition of the asset group exceed the respective carrying value. In the event that the carrying value is not considered recoverable, an impairment loss is recognized for the asset group to be held and used equal to the excess of the carrying value above the estimated fair value of the asset group. For asset groups classified as held-for-sale (disposal group), the carrying value is compared to the disposal group’s fair value less costs to sell. The Company estimates fair value by obtaining market appraisals from third party brokers or using other valuation techniques. There were no impairment charges recognized in 2019, 2018 or 2017.
Insurance/Self-insurance Liabilities
The Company is predominantly self-insured for employee health care benefits, workers’ compensation, general liability, property damage, directors’ and officers’ liability, vehicle liability, and inventory loss. Insurance coverage is maintained in certain instances to limit exposures arising from very large losses. It uses different risk management mechanisms, including a wholly-owned captive insurance subsidiary (the captive) and participates in a reinsurance program. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends. At the end of 2019 and 2018, these insurance liabilities were $1,222 and $1,148 in the aggregate, respectively, and were included in accrued salaries and benefits and other current liabilities in the consolidated balance sheets, classified based on their nature.
The captive receives direct premiums, which are netted against the Company’s premium costs in selling, general and administrative expenses, in the consolidated statements of income. The captive participates in a reinsurance program that includes other third-party participants. The reinsurance agreement is one year in duration, and new agreements are entered into by each participant at their discretion at the commencement of the next calendar year. The participant agreements and practices of the reinsurance program limit a participating members’ individual risk. Income statement adjustments related to the reinsurance program and related impacts to the consolidated balance sheets are recognized as information becomes known. In the event the Company leaves the reinsurance program, the Company retains its primary obligation to the policyholders for prior activity.
Derivatives
The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business. It manages these fluctuations, in part, through the use of forward foreign-exchange contracts, seeking to economically hedge the impact of fluctuations of foreign exchange on known future expenditures denominated in a non-functional foreign-currency. The contracts relate primarily to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries with functional currencies other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate risk with the use of these contracts and does not intend to engage in speculative transactions. Some of these contracts contain credit-risk-related contingent features that require settlement of outstanding
contracts upon certain triggering events. At the end of 2019 and 2018, the aggregate fair value amounts of derivative instruments in a net liability position and the amount needed to settle the instruments immediately if the credit-risk-related contingent features were triggered were immaterial. The aggregate notional amounts of open, unsettled forward foreign-exchange contracts were $704 and $717 at the end of 2019 and 2018, respectively. See Note 3 for information on the fair value of unsettled forward foreign-exchange contracts at the end of 2019 and 2018.
The unrealized gains or losses recognized in interest income and other, net in the accompanying consolidated statements of income relating to the net changes in the fair value of unsettled forward foreign-exchange contracts were immaterial in 2019, 2018, and 2017.
The Company is exposed to fluctuations in prices for energy, particularly electricity and natural gas, and other commodity products used in retail and manufacturing operations, which it seeks to partially mitigate through the use of fixed-price contracts for certain of its warehouses and other facilities, primarily in the U.S. and Canada. The Company also enters into variable-priced contracts for some purchases of natural gas, in addition to fuel for its gas stations, on an index basis. These contracts meet the characteristics of derivative instruments, but generally qualify for the “normal purchases or normal sales” exception under authoritative guidance and require no mark-to-market adjustment.
Foreign Currency
The functional currencies of the Company’s international subsidiaries are the local currency of the country in which the subsidiary is located. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Translation adjustments are recorded in accumulated other comprehensive loss. Revenues and expenses of the Company’s consolidated foreign operations are translated at average exchange rates prevailing during the year.
The Company recognizes foreign-currency transaction gains and losses related to revaluing or settling monetary assets and liabilities denominated in currencies other than the functional currency in interest income and other, net in the accompanying consolidated statements of income. Generally, these include the U.S. dollar cash and cash equivalents and the U.S. dollar payables of consolidated subsidiaries revalued to their functional currency. Also included are realized foreign-currency gains or losses from settlements of forward foreign-exchange contracts. These items were immaterial for 2019, 2018, and 2017.
Revenue Recognition
The Company recognizes sales for the amount of consideration collected from the member, which includes gross shipping fees where applicable, and is net of sales taxes collected and remitted to government agencies and returns. The Company reserves for estimated returns based on historical trends in merchandise returns and reduces sales and merchandise costs accordingly. The Company records, on a gross basis, a refund liability and an asset for recovery, which are included in other current liabilities and other current assets, respectively, in the consolidated balance sheets.
Merchandise Sales - The Company offers merchandise in the following core merchandise categories: food and sundries, hardlines, softlines, and fresh foods. The Company also provides expanded products and services through warehouse ancillary and other businesses. The majority of revenue from merchandise sales is recognized at the point of sale. Revenue generated through e-commerce or special orders is recognized upon shipment to the member to the extent there is no installation provided as a part of the contract. For merchandise shipped directly to the member, shipping and handling costs are expensed as incurred as fulfillment costs and included in merchandise costs in the consolidated statements of income. In certain ancillary businesses, revenue is deferred until the member picks up merchandise at the warehouse. Deferred sales are included in other current liabilities in the consolidated balance sheets.
Principal Versus Agent - The Company is the principal for the majority of its transactions and recognizes revenue on a gross basis. The Company is the principal when it has control of the merchandise or service before it is transferred to the member, which generally is established when Costco is primarily responsible
for merchandising decisions, maintains the relationship with the member, including assurance of member service and satisfaction, and has pricing discretion.
Membership Fees - The Company accounts for membership fee revenue, net of refunds, on a deferred basis, ratably over the one-year membership period. Deferred membership fees at the end of 2019 and 2018 were $1,711 and $1,624, respectively.
In certain countries, the Company's Executive members qualify for a 2% reward on qualified purchases (up to a maximum of approximately $1,000 per year), which does not expire and can be redeemed only at Costco warehouses. The Company accounts for this reward as a reduction in sales, net of the estimated impact of non-redemptions (breakage), with the corresponding liability classified as accrued member rewards in the consolidated balance sheets. Estimated breakage is computed based on redemption data. For 2019, 2018 and 2017, the net reduction in sales was $1,537, $1,394, and $1,281 respectively.
Shop Cards - The Company sells and otherwise provides proprietary shop cards that do not expire and are redeemable at the warehouse or online for merchandise or membership. Revenue from shop cards is recognized upon redemption, and estimated breakage is recognized based on redemption data. The Company accounts for outstanding shop card balances as a shop card liability, net of estimated breakage. Previously, the shop cards were branded as cash cards.
Co-Branded Credit Card Program - Citibank, N.A. (“Citi”) became the exclusive issuer of co-branded credit cards to U.S. members in June 2016. The Company receives various forms of consideration, including a royalty on purchases made on the card outside of Costco, a portion of which, after giving rise to estimated breakage, is used to fund the rebate that cardholders receive. The rebates are issued in February and expire on December 31. Breakage is estimated based on redemption data.
Merchandise Costs
Merchandise costs consist of the purchase price or manufacturing costs of inventory sold, inbound and outbound shipping charges and all costs related to the Company’s depot and fulfillment operations, including freight from depots to selling warehouses, and are reduced by vendor consideration. Merchandise costs also include salaries, benefits, depreciation, and utilities in fresh foods and certain ancillary departments.
Vendor Consideration
The Company has agreements to receive funds from vendors for discounts and a variety of other programs. These programs are evidenced by signed agreements that are reflected in the carrying value of the inventory when earned or as the Company progresses towards earning the rebate or discount, and as a component of merchandise costs as the merchandise is sold. Other vendor consideration is generally recorded as a reduction of merchandise costs upon completion of contractual milestones, terms of the related agreement, or by another systematic approach.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries, benefits and workers’ compensation costs for warehouse employees (other than fresh foods departments and certain ancillary businesses which are reflected in merchandise costs) as well as all regional and home office employees, including buying personnel. Selling, general and administrative expenses also include substantially all building and equipment depreciation, stock compensation expense, credit and debit card processing fees, utilities, as well as other operating costs incurred to support warehouse and e-commerce website operations.
Retirement Plans
The Company's 401(k) retirement plan is available to all U.S. employees over the age of 18 who have completed 90 days of employment. The plan allows participants to make wage deferral contributions, a portion of which the Company matches. In addition, the Company provides each eligible participant an annual discretionary contribution. The Company also has a defined contribution plan for Canadian employees and contributes a percentage of each employee's wages. Certain subsidiaries in the Company's Other International operations have defined benefit and defined contribution plans that are not material. Amounts expensed under all plans were $614, $578, and $543 for 2019, 2018, and 2017, respectively, and are predominantly included in selling, general and administrative expenses in the accompanying consolidated statements of income.
Stock-Based Compensation
Restricted stock units (RSUs) granted to employees generally vest over five years and allow for quarterly vesting of the pro-rata number of stock-based awards that would vest on the next anniversary of the grant date in the event of retirement or voluntary termination. Actual forfeitures are recognized as they occur.
Compensation expense for stock-based awards is predominantly recognized using the straight-line method over the requisite service period for the entire award. Awards for employees and non-employee directors provide for accelerated vesting of a portion of outstanding shares based on cumulative years of service with the Company. Compensation expense for the accelerated shares is recognized upon achievement of the long-service term. The cumulative amount of compensation cost recognized at any point in time equals at least the portion of the grant-date fair value of the award that is vested at that date. The fair value of RSUs is calculated as the market value of the common stock on the measurement date less the present value of the expected dividends forgone during the vesting period.
Stock-based compensation expense is predominantly included in selling, general and administrative expenses in the consolidated statements of income. Certain stock-based compensation costs are capitalized or included in the cost of merchandise. See Note 7 for additional information on the Company’s stock-based compensation plans.
Leases
The Company leases land and/or buildings at warehouses and certain other office and distribution facilities, primarily under operating leases. Operating leases expire at various dates through 2068, with the exception of one lease in the U.K., which expires in 2151. These leases generally contain one or more of the following options, which the Company can exercise at the end of the initial lease term: (a) renewal for a defined number of years at the then-fair market rental rate or rate stipulated in the lease agreement; (b) purchase of the property at the then-fair market value; or (c) right of first refusal in the event of a third-party purchase offer.
The Company accounts for its lease expense with free rent periods and step-rent provisions on a straight-line basis over the original term of the lease and any extension options that the Company more likely than not expects to exercise, from the date the Company has control of the property. Certain leases provide for periodic rental increases based on price indices, or the greater of minimum guaranteed amounts or sales volume.
The Company has capital leases for certain warehouse locations, expiring at various dates through 2059. Capital lease assets are included in land and buildings and improvements in the accompanying consolidated balance sheets. Amortization expense on capital lease assets is recorded as depreciation expense and is included in selling, general and administrative expenses. Capital lease liabilities are recorded at the lesser of the estimated fair market value of the leased property or the net present value of the aggregate future minimum lease payments and are included in other current liabilities and other liabilities in the accompanying consolidated balance sheets. Interest on these obligations is included in interest expense in the consolidated statements of income.
The Company records an asset and related financing obligation for the estimated construction costs under build-to-suit lease arrangements where it is considered the owner for accounting purposes, to the extent the Company is involved in the construction of the building or structural improvements or has construction risk prior to commencement of a lease. Upon occupancy, the Company assesses whether these arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If the Company continues to be the deemed owner, it accounts for the arrangement as a financing lease.
The Company’s asset retirement obligations (ARO) primarily relate to leasehold improvements that at the end of a lease must be removed. These obligations are generally recorded as a discounted liability with an offsetting asset at the inception of the lease term based upon the estimated fair value of the costs to remove the improvements. These liabilities are accreted over time to the projected future value of the obligation. The ARO assets are depreciated using the same depreciation method as the leasehold improvement assets and are included with buildings and improvements. Estimated ARO liabilities associated with these leases were immaterial at the end of 2019 and 2018, respectively, and are included in other liabilities in the accompanying consolidated balance sheets.
Preopening Expenses
Preopening expenses include costs for startup operations related to new warehouses and relocations, developments in new international markets, new manufacturing and distribution facilities, and expansions at existing warehouses and are expensed as incurred.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits and loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts that are more likely than not expected to be realized.
The timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions requires significant judgment. The benefits of uncertain tax positions are recorded in the Company’s consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge from tax authorities. When facts and circumstances change, the Company reassesses these probabilities and records any changes as appropriate.
Net Income per Common Share Attributable to Costco
The computation of basic net income per share uses the weighted average number of shares that were outstanding during the period. The computation of diluted net income per share uses the weighted average number of shares in the basic net income per share calculation plus the number of common shares that would be issued assuming vesting of all potentially dilutive common shares outstanding using the treasury stock method for shares subject to RSUs.
Stock Repurchase Programs
Repurchased shares of common stock are retired, in accordance with the Washington Business Corporation Act. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted by allocation to additional paid-in capital and retained earnings. The amount allocated to additional paid-in capital is the current value of additional paid-in capital per share outstanding and is applied to the number of shares repurchased. Any remaining amount is allocated to retained earnings. See Note 6 for additional information.
Recent Accounting Pronouncements Adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, providing for changes in the recognition of revenue from contracts with customers. The guidance requires disclosures sufficient to describe the nature, amount, timing, and uncertainty of revenue and cash flows. The Company adopted the standard in the first quarter of 2019, using the modified retrospective approach, and recorded a cumulative effect adjustment of $16 as an increase to retained earnings, which is included in cash dividend declared and other in the consolidated statements of equity.
The standard impacted the presentation and timing of certain revenue transactions. Specifically, the changes included gross presentation of the Company’s estimate of merchandise returns reserve and the related recoverable assets, recognizing shop card breakage over the period of redemption, and accelerating the recognition of certain e-commerce and special-order sales. Additionally, the Company’s evaluation under the standard of its status as a principal in certain revenue arrangements resulted in the recognition of additional sales on a gross basis.
The effect of the standard on the Company's consolidated balance sheet was an increase to other current liabilities and other current assets of $649 and $698 at adoption and at the end of 2019, respectively, related to the estimate of merchandise returns reserve and the related recoverable assets.
The effect of the adoption of this standard on the Company's consolidated statement of income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
ASU 2014-09 Effect
|
|
Excluding ASU 2014-09 Effect
|
52 Weeks Ended September 1, 2019
|
|
|
|
|
|
Net Sales
|
$
|
149,351
|
|
|
$
|
1,332
|
|
|
$
|
148,019
|
|
Merchandise Costs
|
132,886
|
|
|
1,324
|
|
|
131,562
|
|
Gross Margin (1)
|
16,465
|
|
|
8
|
|
|
16,457
|
|
______________
|
|
(1)
|
Net sales less merchandise costs.
|
For related disaggregated revenue disclosures, see Note 11.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, which requires recognition on the balance sheet of rights and obligations created by leases with terms greater than twelve months. The standard is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal 2020 and utilize the transition option, which allows for a cumulative-effect adjustment in the period of adoption and does not require application of the guidance to comparative periods. The primary effect of adoption will be recording right-of-use assets and corresponding lease obligations for current operating leases. The Company has substantially completed its assessment of the new standard and estimates total assets and liabilities will increase by approximately $2,400 upon adoption. The adoption is not expected to have a material impact to the Company's consolidated statements of income or cash flows. The Company continues to evaluate the related disclosure requirements.
Note 2—Investments
The Company’s investments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019:
|
Cost
Basis
|
|
Unrealized
Gains, Net
|
|
Recorded
Basis
|
Available-for-sale:
|
|
|
|
|
|
Government and agency securities
|
$
|
716
|
|
|
$
|
6
|
|
|
$
|
722
|
|
Held-to-maturity:
|
|
|
|
|
|
Certificates of deposit
|
338
|
|
|
|
|
338
|
|
Total short-term investments
|
$
|
1,054
|
|
|
$
|
6
|
|
|
$
|
1,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018:
|
Cost
Basis
|
|
Unrealized
Losses, Net
|
|
Recorded
Basis
|
Available-for-sale:
|
|
|
|
|
|
Government and agency securities
|
$
|
912
|
|
|
$
|
(14
|
)
|
|
$
|
898
|
|
Held-to-maturity:
|
|
|
|
|
|
Certificates of deposit
|
306
|
|
|
|
|
306
|
|
Total short-term investments
|
$
|
1,218
|
|
|
$
|
(14
|
)
|
|
$
|
1,204
|
|
Gross unrecognized holding gains and losses on available-for-sale securities were not material for the years ended September 1, 2019, and September 2, 2018. At the end of 2019 and 2018, the Company's available-for-sale securities that were in a continuous unrealized-loss position were not material.
There were no sales of available-for-sale securities in 2019. Proceeds from sales of available-for-sale securities were $39 and $202 during 2018, and 2017, respectively. Gross realized gains or losses from sales of available-for-sale securities were not material in 2018 and 2017.
The maturities of available-for-sale and held-to-maturity securities at the end of 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-For-Sale
|
|
Held-To-Maturity
|
|
Cost Basis
|
|
Fair Value
|
|
Due in one year or less
|
$
|
297
|
|
|
$
|
297
|
|
|
$
|
338
|
|
Due after one year through five years
|
402
|
|
|
407
|
|
|
0
|
|
Due after five years
|
17
|
|
|
18
|
|
|
0
|
|
Total
|
$
|
716
|
|
|
$
|
722
|
|
|
$
|
338
|
|
Note 3—Fair Value Measurement
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tables below present information regarding the Company’s financial assets and financial liabilities that are measured at fair value on a recurring basis and indicate the level within the hierarchy reflecting the valuation techniques utilized to determine such fair value.
|
|
|
|
|
|
|
|
|
2019:
|
Level 1
|
|
Level 2
|
Investment in government and agency securities(1)
|
$
|
0
|
|
|
$
|
766
|
|
Forward foreign-exchange contracts, in asset position(2)
|
0
|
|
|
15
|
|
Forward foreign-exchange contracts, in (liability) position(2)
|
0
|
|
|
(4
|
)
|
Total
|
$
|
0
|
|
|
$
|
777
|
|
|
|
|
|
|
|
|
|
|
2018:
|
Level 1
|
|
Level 2
|
Money market mutual funds(3)
|
$
|
9
|
|
|
$
|
0
|
|
Investment in government and agency securities(1)
|
0
|
|
|
903
|
|
Forward foreign-exchange contracts, in asset position(2)
|
0
|
|
|
16
|
|
Forward foreign-exchange contracts, in (liability) position(2)
|
0
|
|
|
(2
|
)
|
Total
|
$
|
9
|
|
|
$
|
917
|
|
______________
|
|
(1)
|
At September 1, 2019, $44 cash and cash equivalents and $722 short-term investments are included in the accompanying consolidated balance sheets. At September 2, 2018, immaterial cash and cash equivalents and $898 short-term investments are included in the accompanying consolidated balance sheets.
|
|
|
(2)
|
The asset and the liability values are included in other current assets and other current liabilities, respectively, in the accompanying consolidated balance sheets.
|
|
|
(3)
|
Included in cash and cash equivalents in the accompanying balance sheet.
|
During and at the end of both 2019 and 2018, the Company did not hold any Level 3 financial assets or liabilities that were measured at fair value on a recurring basis. There were no transfers in or out of Level 1 or 2 during 2019 and 2018.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities recognized and disclosed at fair value on a nonrecurring basis include items such as financial assets measured at amortized cost and long-lived nonfinancial assets. These assets are measured at fair value if determined to be impaired. There were no fair value adjustments to these items during 2019 and 2018.
Note 4—Debt
Short-Term Borrowings
The Company maintains various short-term bank credit facilities, with a borrowing capacity of $865 and $857, in 2019 and 2018, respectively. Borrowings on these short-term facilities were immaterial during 2019 and 2018, and there were no outstanding borrowings at the end of 2019 and 2018.
Long-Term Debt
The Company's long-term debt consists primarily of Senior Notes, which have various principal balances, interest rates, and maturity dates as described below. The Company at its option may redeem the Senior Notes at any time, in whole or in part, at a redemption price plus accrued interest. The redemption price is equal to the greater of 100% of the principal amount or the sum of the present value of the remaining scheduled payments of principal and interest to maturity. Additionally, upon certain events, as defined by the terms of the Senior Notes, the holder has the right to require the Company to purchase this security at a price of 101% of the principal amount plus accrued and unpaid interest to the date of the event. Interest on all outstanding long-term debt is payable semi-annually. The estimated fair value of Senior Notes is valued using Level 2 inputs.
Other long-term debt consists of Guaranteed Senior Notes issued by the Company's Japanese subsidiary and are valued using Level 3 inputs. In October 2018, the Company's Japanese subsidiary repaid a Guaranteed Senior Note and in August 2019, issued approximately $200 and $100 of Guaranteed Senior Notes at fixed interest rates of 0.28% and 0.42%, respectively. Interest is payable semi-annually, and principal is due in August 2029 and August 2034, respectively.
At the end of 2019 and 2018, the fair value of the Company's long-term debt, including the current portion, was approximately $6,997 and $6,492, respectively. The carrying value of long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
1.70% Senior Notes due December 2019
|
$
|
1,200
|
|
|
$
|
1,200
|
|
1.75% Senior Notes due February 2020
|
500
|
|
|
500
|
|
2.15% Senior Notes due May 2021
|
1,000
|
|
|
1,000
|
|
2.25% Senior Notes due February 2022
|
500
|
|
|
500
|
|
2.30% Senior Notes due May 2022
|
800
|
|
|
800
|
|
2.75% Senior Notes due May 2024
|
1,000
|
|
|
1,000
|
|
3.00% Senior Notes due May 2027
|
1,000
|
|
|
1,000
|
|
Other long-term debt
|
852
|
|
|
613
|
|
Total long-term debt
|
6,852
|
|
|
6,613
|
|
Less unamortized debt discounts and issuance costs
|
29
|
|
|
36
|
|
Less current portion(1)
|
1,699
|
|
|
90
|
|
Long-term debt, excluding current portion
|
$
|
5,124
|
|
|
$
|
6,487
|
|
_______________
(1) Net of unamortized debt discounts and issuance costs.
Maturities of long-term debt during the next five fiscal years and thereafter are as follows:
|
|
|
|
|
2020
|
$
|
1,700
|
|
2021
|
1,094
|
|
2022
|
1,300
|
|
2023
|
94
|
|
2024
|
1,113
|
|
Thereafter
|
1,551
|
|
Total
|
$
|
6,852
|
|
Note 5—Leases
Operating Leases
The aggregate rental expense for 2019, 2018, and 2017 was $268, $265, and $258, respectively. Sub-lease income and contingent rent were not material in 2019, 2018, or 2017.
Capital and Build-to-Suit Leases
Gross assets recorded under capital and build-to-suit leases were $457 and $427 at the end of 2019 and 2018, respectively. These assets are recorded net of accumulated amortization of $106 and $94 at the end of 2019 and 2018, respectively.
At the end of 2019, future minimum payments, net of sub-lease income of $105 for all years combined, under non-cancelable operating leases with terms of at least one year and capital leases were as follows:
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
Capital
Leases(1)
|
2020
|
$
|
239
|
|
|
$
|
51
|
|
2021
|
229
|
|
|
53
|
|
2022
|
202
|
|
|
38
|
|
2023
|
193
|
|
|
39
|
|
2024
|
181
|
|
|
39
|
|
Thereafter
|
2,206
|
|
|
544
|
|
Total
|
$
|
3,250
|
|
|
764
|
|
Less amount representing interest
|
|
|
(343
|
)
|
Net present value of minimum lease payments
|
|
|
421
|
|
Less current installments(2)
|
|
|
(26
|
)
|
Long-term capital lease obligations less current installments(3)
|
|
|
$
|
395
|
|
_______________
|
|
(1)
|
Includes build-to-suit lease obligations.
|
|
|
(2)
|
Included in other current liabilities in the accompanying consolidated balance sheets.
|
|
|
(3)
|
Included in other liabilities in the accompanying consolidated balance sheets.
|
Note 6—Stockholders’ Equity
Dividends
The Company’s current quarterly dividend rate is $0.65 per share. In August 2019, the Board of Directors declared a quarterly cash dividend in the amount of $0.65 per share, which was paid subsequent to the end of 2019.
Stock Repurchase Programs
In April 2019, the Board of Directors authorized a new share repurchase program in the amount of $4,000, which expires in April 2023. This authorization revoked previously authorized but unused amounts, totaling $2,237. As of the end of 2019, the remaining amount available for stock repurchases under the approved plan was $3,943. The following table summarizes the Company’s stock repurchase activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Repurchased
(000’s)
|
|
Average
Price per
Share
|
|
Total Cost
|
2019
|
1,097
|
|
|
$
|
225.16
|
|
|
$
|
247
|
|
2018
|
1,756
|
|
|
183.13
|
|
|
322
|
|
2017
|
2,998
|
|
|
157.87
|
|
|
473
|
|
These amounts may differ from repurchases of common stock in the accompanying consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year.
Note 7—Stock-Based Compensation Plans
The Company grants stock-based compensation, primarily to employees and non-employee directors. Grants to all executive officers are performance-based. Through a series of shareholder approvals, there have been amended and restated plans and new provisions implemented by the Company. RSUs are subject to quarterly vesting upon retirement or voluntary termination. Employees who attain at least 25 years of service with the Company receive shares under accelerated vesting provisions on the annual vesting date. On January 24, 2019, shareholders approved the adoption of the 2019 Incentive Plan, which replaced the Seventh Restated 2002 Stock Incentive Plan (Seventh Plan). The 2019 Incentive Plan authorized the issuance of 17,500,000 shares (10,000,000 RSUs) of common stock for future grants, plus the remaining shares that were available for grant under the Seventh Plan on January 24, 2019 and future forfeited shares from grants under the Seventh Plan up to a maximum aggregate of 27,800,000 shares (15,885,000 RSUs). The Company issues new shares of common stock upon vesting of RSUs. Shares for vested RSUs are generally delivered to participants annually, net of shares withheld for taxes.
Summary of Restricted Stock Unit Activity
RSUs granted to employees and to non-employee directors generally vest over five and three years, respectively. Additionally, the terms of the RSUs, including performance-based awards, provide for accelerated vesting for employees and non-employee directors who have attained 25 or more and five or more years of service with the Company, respectively. Recipients are not entitled to vote or receive dividends on non-vested and undelivered shares. At the end of 2019, 15,676,000 shares were available to be granted as RSUs under the 2019 Incentive Plan.
The following awards were outstanding at the end of 2019:
|
|
•
|
6,268,000 time-based RSUs that vest upon continued employment over specified periods of time;
|
|
|
•
|
228,000 performance-based RSUs, of which 150,000 were granted to executive officers subject to the certification of the attainment of specified performance targets for 2019. This certification occurred in September 2019, at which time a portion vested as a result of the long service of all executive officers. The remaining awards vest upon continued employment over specified periods of time.
|
The following table summarizes RSU transactions during 2019:
|
|
|
|
|
|
|
|
|
Number of
Units
(in 000’s)
|
|
Weighted-Average
Grant Date Fair
Value
|
Outstanding at the end of 2018
|
7,578
|
|
|
$
|
140.85
|
|
Granted
|
2,792
|
|
|
224.00
|
|
Vested and delivered
|
(3,719
|
)
|
|
155.65
|
|
Forfeited
|
(155
|
)
|
|
164.75
|
|
Outstanding at the end of 2019
|
6,496
|
|
|
$
|
167.55
|
|
The weighted-average grant date fair value of RSUs granted was $224.00, $156.19, and $144.12 in 2019, 2018, and 2017, respectively. The remaining unrecognized compensation cost related to non-vested RSUs at the end of 2019 was $694 and the weighted-average period of time over which this cost will be recognized is 1.6 years. Included in the outstanding balance at the end of 2019 were approximately 2,194,000 RSUs vested but not yet delivered.
Summary of Stock-Based Compensation
The following table summarizes stock-based compensation expense and the related tax benefits under the Company’s plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Stock-based compensation expense before income taxes
|
$
|
595
|
|
|
$
|
544
|
|
|
$
|
514
|
|
Less income tax benefit (1)
|
(128
|
)
|
|
(116
|
)
|
|
(167
|
)
|
Stock-based compensation expense, net of income taxes
|
$
|
467
|
|
|
$
|
428
|
|
|
$
|
347
|
|
_______________
(1) In 2019 and 2018, the income tax benefit reflects the reduction in the U.S. federal statutory income tax rate from 35% to 21%.
Note 8— Taxes
Income Taxes
Income before income taxes is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Domestic
|
$
|
3,591
|
|
|
$
|
3,182
|
|
|
$
|
2,988
|
|
Foreign
|
1,174
|
|
|
1,260
|
|
|
1,051
|
|
Total
|
$
|
4,765
|
|
|
$
|
4,442
|
|
|
$
|
4,039
|
|
The provisions for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Federal:
|
|
|
|
|
|
Current
|
$
|
328
|
|
|
$
|
636
|
|
|
$
|
802
|
|
Deferred
|
222
|
|
|
(35
|
)
|
|
7
|
|
Total federal
|
550
|
|
|
601
|
|
|
809
|
|
State:
|
|
|
|
|
|
Current
|
178
|
|
|
190
|
|
|
161
|
|
Deferred
|
26
|
|
|
22
|
|
|
8
|
|
Total state
|
204
|
|
|
212
|
|
|
169
|
|
Foreign:
|
|
|
|
|
|
Current
|
405
|
|
|
487
|
|
|
389
|
|
Deferred
|
(98
|
)
|
|
(37
|
)
|
|
(42
|
)
|
Total foreign
|
307
|
|
|
450
|
|
|
347
|
|
Total provision for income taxes
|
$
|
1,061
|
|
|
$
|
1,263
|
|
|
$
|
1,325
|
|
In December 2017, the 2017 Tax Act was signed into law. Except for certain provisions, the 2017 Tax Act is effective for tax years beginning on or after January 1, 2018. The Company is a fiscal-year taxpayer, so most provisions became effective for 2019, including limitations on the Company’s ability to claim foreign tax credits, repeal of the domestic manufacturing deduction, and limitations on certain business deductions. Provisions with significant impacts that were effective starting in the second quarter of 2018 and throughout 2019 included: a decrease in the U.S. federal income tax rate, remeasurement of certain net deferred tax liabilities, and a transition tax on deemed repatriation of certain foreign earnings. The decrease in the U.S. federal statutory income tax rate to 21.0% was effective for all of 2019 and resulted in a blended rate for the Company of 25.6% for 2018.
The reconciliation between the statutory tax rate and the effective rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Federal taxes at statutory rate
|
$
|
1,001
|
|
|
21.0
|
%
|
|
$
|
1,136
|
|
|
25.6
|
%
|
|
$
|
1,414
|
|
|
35.0
|
%
|
State taxes, net
|
171
|
|
|
3.6
|
|
|
154
|
|
|
3.4
|
|
|
116
|
|
|
2.9
|
|
Foreign taxes, net
|
(1
|
)
|
|
0.0
|
|
|
32
|
|
|
0.7
|
|
|
(64
|
)
|
|
(1.6
|
)
|
Employee stock ownership plan (ESOP)
|
(18
|
)
|
|
(0.4
|
)
|
|
(14
|
)
|
|
(0.3
|
)
|
|
(104
|
)
|
|
(2.6
|
)
|
2017 Tax Act
|
(123
|
)
|
|
(2.6
|
)
|
|
19
|
|
|
0.4
|
|
|
—
|
|
|
—
|
|
Other
|
31
|
|
|
0.7
|
|
|
(64
|
)
|
|
(1.4
|
)
|
|
(37
|
)
|
|
(0.9
|
)
|
Total
|
$
|
1,061
|
|
|
22.3
|
%
|
|
$
|
1,263
|
|
|
28.4
|
%
|
|
$
|
1,325
|
|
|
32.8
|
%
|
During 2019, the Company recognized net tax benefits of $123 related to the 2017 Tax Act. This benefit primarily included $105 related to U.S. taxation of deemed foreign dividends, partially offset by losses of current year foreign tax credits. During 2018, the Company recognized a net tax expense of $19 related to the 2017 Tax Act. This expense included $142 for the estimated tax on deemed repatriation of foreign earnings, and $43 for the reduction in foreign tax credits and other immaterial items, largely offset by a tax benefit of $166 for the remeasurement of certain deferred tax liabilities.
In 2019 and 2018, the Company recognized total net tax benefits of $221 and $57, which included a benefit of $59 and $33, respectively, related to the stock-based compensation accounting standard adopted in 2018 in addition to the impacts of the 2017 Tax Act noted above. In 2017, the Company’s provision for income taxes was favorably impacted by a net tax benefit of $104, primarily due to the $82 tax benefit recorded in connection with the May 2017 special cash dividends paid by the Company to employees through the Company's 401(k) retirement plan. Dividends on these shares are deductible for U.S. income tax purposes. There was no similar special cash dividend in 2019 or 2018.
The components of the deferred tax assets (liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
Equity compensation
|
$
|
74
|
|
|
$
|
72
|
|
Deferred income/membership fees
|
180
|
|
|
136
|
|
Foreign tax credit carry forward
|
65
|
|
|
—
|
|
Accrued liabilities and reserves
|
566
|
|
|
484
|
|
Total deferred tax assets
|
885
|
|
|
692
|
|
Valuation allowance
|
(76
|
)
|
|
—
|
|
Total net deferred tax assets
|
809
|
|
|
692
|
|
Deferred tax liabilities:
|
|
|
|
Property and equipment
|
(677
|
)
|
|
(478
|
)
|
Merchandise inventories
|
(187
|
)
|
|
(175
|
)
|
Foreign branch deferreds
|
(69
|
)
|
|
—
|
|
Other
|
(21
|
)
|
|
(40
|
)
|
Total deferred tax liabilities
|
$
|
(954
|
)
|
|
$
|
(693
|
)
|
Net deferred tax (liabilities)/assets
|
$
|
(145
|
)
|
|
$
|
(1
|
)
|
The deferred tax accounts at the end of 2019 and 2018 include deferred income tax assets of $398 and $316, respectively, included in other assets; and deferred income tax liabilities of $543 and $317, respectively, included in other liabilities.
In 2019, the Company recorded a valuation allowance of $76 primarily related to foreign tax credits that we believe will not be realized due to limitations on the Company's ability to claim the credits during the carry forward period. The foreign tax credit carry forwards are set to expire beginning in fiscal 2027.
The Company no longer considers fiscal year earnings of our non-U.S. consolidated subsidiaries after 2017 to be indefinitely reinvested and has recorded the estimated incremental foreign withholding (net of available foreign tax credits) on fiscal year earnings and state income taxes payable assuming a hypothetical repatriation to the U.S. The Company continues to consider undistributed earnings of certain non-U.S. consolidated subsidiaries prior to 2018, which totaled $2,924, to be indefinitely reinvested and has not provided for withholding or state taxes.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Gross unrecognized tax benefit at beginning of year
|
$
|
36
|
|
|
$
|
52
|
|
Gross increases—current year tax positions
|
5
|
|
|
6
|
|
Gross increases—tax positions in prior years
|
2
|
|
|
6
|
|
Gross decreases—tax positions in prior years
|
0
|
|
|
(17
|
)
|
Settlements
|
(4
|
)
|
|
(1
|
)
|
Lapse of statute of limitations
|
(12
|
)
|
|
(10
|
)
|
Gross unrecognized tax benefit at end of year
|
$
|
27
|
|
|
$
|
36
|
|
The gross unrecognized tax benefit includes tax positions for which the ultimate deductibility is highly certain but there is uncertainty about the timing of such deductibility. At the end of 2019 and 2018, these amounts were immaterial. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority. The total amount of such unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods is $24 and $32 at the end of 2019 and 2018, respectively.
Accrued interest and penalties related to income tax matters are classified as a component of income tax expense. Interest and penalties recognized during 2019 and 2018 and accrued at the end of each respective period were not material.
The Company is currently under audit by several jurisdictions in the United States and in several foreign countries. Some audits may conclude in the next 12 months and the unrecognized tax benefits recorded in relation to the audits may differ from actual settlement amounts. It is not practical to estimate the effect, if any, of any amount of such change during the next 12 months to previously recorded uncertain tax positions in connection with the audits. The Company does not anticipate that there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next 12 months.
The Company files income tax returns in the United States, various state and local jurisdictions, in Canada, and in several other foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local examination for years before fiscal 2014.
Other Taxes
The Company is undergoing multiple examinations for value added, sales-based, payroll, product, import or other non-income taxes in various jurisdictions. In certain cases, the Company has received assessments from the authorities. Subsequent to the end of 2019, the Company received an assessment related to a product tax audit covering multiple years. The Company recorded a charge of $123 in 2019, but plans to protest the assessment. Other possible losses or range of possible losses associated with these matters are either immaterial or an estimate of the possible loss or range of loss cannot be made at this time. If certain matters or a group of matters were to be decided adversely to the Company, it could result in a charge that might be material to the results of an individual fiscal quarter or year.
Note 9—Net Income per Common and Common Equivalent Share
The following table shows the amounts used in computing net income per share and the weighted average number of shares of basic and of potentially dilutive common shares outstanding (shares in 000’s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net income attributable to Costco
|
$
|
3,659
|
|
|
$
|
3,134
|
|
|
$
|
2,679
|
|
Weighted average basic shares
|
439,755
|
|
|
438,515
|
|
|
438,437
|
|
RSUs and other
|
3,168
|
|
|
3,319
|
|
|
2,500
|
|
Weighted average diluted shares
|
442,923
|
|
|
441,834
|
|
|
440,937
|
|
Note 10—Commitments and Contingencies
Legal Proceedings
The Company is involved in a number of claims, proceedings and litigation arising from its business and property ownership. In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. There may be exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss (taking into account where applicable indemnification arrangements concerning suppliers and insurers) and the accrued amount, if any, thereof, and adjusts the amount as appropriate. As of the date of this Report, the Company has recorded immaterial accruals with respect to certain matters described below, in addition to other immaterial accruals for matters not described below. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. In each case, there is a reasonable possibility that a loss may be incurred, including a loss in excess of the applicable accrual. For matters where no accrual has been recorded, the possible loss or range of loss (including any loss in excess of the accrual) cannot, in the Company's view, be reasonably estimated because, among other things: (i) the remedies or penalties sought are indeterminate or unspecified; (ii) the legal and/or factual theories are not well developed; and/or (iii) the matters involve complex or novel legal theories or a large number of parties.
The Company is a defendant in a class action alleging violation of California Wage Order 7-2001 for failing to provide seating to member service assistants who act as greeters in the Company’s California warehouses. Canela v. Costco Wholesale Corp., et al. (Case No. 5:13-CV-03598, N.D. Cal. filed July 1, 2013). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys’ fees. The Company filed an answer denying the material allegations of the complaint. The action has been stayed pending review by the Ninth Circuit of the order certifying a class. In January 2019, an employee brought similar claims for relief concerning Costco employees engaged at member services counters in California. Rodriguez v. Costco Wholesale Corp. (Case No. RG19001310, Alameda Superior Court filed Jan. 4, 2019). The Company filed an answer denying the material allegations of the complaint. In December 2018, a depot employee raised similar claims, alleging that depot employees in California did not receive suitable seating or appropriate workplace temperature conditions. Lane v. Costco Wholesale Corp. (Dec. 6, 2018 Notice to California Labor and Workforce Development Agency). The Company filed an answer denying the material allegations of the complaint.
In January 2019, a former seasonal employee filed a class action, alleging failure to provide California seasonal employees meal and rest breaks, proper wage statements, and appropriate wages. Jadan v. Costco Wholesale Corp. (Case No. 19-CV-340438 Santa Clara Superior Court filed Jan. 3, 2019). The complaint seeks relief under the California Labor Code, including civil penalties and attorneys’ fees.
In March 2019, employees filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide meal periods and itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. Nevarez, et ano., v. Costco Wholesale Corp., et al. (Case No. 2:19-cv-03454 C.D. Cal. Filed Mar. 25, 2019). The Company filed an answer denying the material allegations of the complaint. In May 2019, employees filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Rough v. Costco Wholesale Corp. (Case No. 2:19-cv-01340 E.D. Cal. filed May 28, 2019). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. In June 2019, employees filed a class action against the Company alleging claims under California law for failure to pay overtime, to provide meal and rest periods, itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Martinez v. Costco Wholesale Corp., (Case No. 3:19-cv-05624 (N.D. Cal. filed June 11, 2019). The Company filed an answer denying the material allegations of the complaint. In August 2019, Rough filed a companion case in state court seeking penalties under the California Labor Code Private Attorneys General Act. Rough v. Costco (Case No. FCS053454, Sonoma County Superior Court, filed August 23, 2019). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees. In September 2019, an employee re-filed a class action against the Company alleging claims under California law for failure to pay wages, to provide meal and rest periods and itemized wage statements, to timely pay wages due to terminating employees, to pay minimum wages, and for unfair business practices. Mosley v. Costco Wholesale Corp. (Case No. 2:19-cv-07935, C.D. Cal. filed Sept. 12, 2019). Relief is sought under the California Labor Code, including civil penalties and attorneys' fees.
In December 2017, the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases filed against various defendants by counties, cities, hospitals, Native American tribes, and third-party payors concerning the impacts of opioid abuse. In re National Prescription Opiate Litigation (MDL No. 2804) (N.D. Ohio). Included are federal cases that name the Company, including actions filed by counties and cities in Michigan, New Jersey, Oregon, Virginia and South Carolina, a third-party payor in Ohio, and class actions filed in thirty-eight states on behalf of infants born with opioid-related medical conditions. In 2019 similar actions were commenced against the Company in state courts in Utah. Claims against the Company in state courts in New Jersey and Oklahoma have been dismissed. The Company is defending all of these matters.
The Company and its CEO and CFO are defendants in putative class actions brought on behalf of shareholders who acquired Company stock between June 6 and October 25, 2018. Johnson v. Costco Wholesale Corp., et al. (W.D. Wash. filed Nov. 5, 2018); Chen v. Costco Wholesale Corp., et al. (W.D. Wash. filed Dec. 11, 2018). The complaints allege violations of the federal securities laws stemming from the Company’s disclosures concerning internal control over financial reporting. They seek unspecified damages, equitable relief, interest, and costs and attorneys’ fees. On January 30, 2019, an order was entered consolidating the actions and a consolidated amended complaint was filed on April 16, 2019. A motion to dismiss the complaint was filed on June 7.
Members of the Board of Directors, one other individual, and the Company are defendants in a shareholder derivative action related to the internal controls and related disclosures identified in the putative class actions, alleging that the individual defendants breached their fiduciary duties. Wedekind v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, Richard Libenson, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (W.D. Wash. filed Dec. 11, 2018). The complaint seeks unspecified damages, disgorgement of compensation, corporate governance changes, and costs and attorneys' fees. Because the complaint is derivative in nature, it does not seek monetary damages from the Company, which is a nominal defendant. By agreement among the parties the action has been stayed pending further proceedings in the class actions. Similar actions were filed in King County Superior Court on February 20, 2019, Elliott v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, Richard Libenson, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-04824-7), and April 16, 2019, Brad Shuman, et ano. v. Hamilton James, Susan Decker, Kenneth Denman, Richard Galanti, Craig Jelinek, John Meisenbach, Charles Munger, Jeffrey Raikes, John Stanton, Mary Agnes Wilderotter, and Costco Wholesale Corp. (Case No. 19-2-10460-1). These actions have also been stayed.
In November 2016 and September 2017, the Company received notices of violation from the Connecticut Department of Energy and Environmental Protection regarding hazardous waste practices at its Connecticut warehouses, primarily concerning unsalable pharmaceuticals. The relief to be sought is not known at this time. The Company is seeking to cooperate concerning the resolution of these notices. On February 13, 2019, the Company's affiliate in Spain received notice from the General Directorate on Environment and Sustainability of the Regional Government of Madrid that the Directorate was investigating issues concerning rain, sewage and hydrocarbon drainage related to the Company's warehouse in Getafe. In August the Company was advised that no fines would be sought in this matter.
The Company does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company’s financial position, results of operations or cash flows; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual fiscal quarter or year.
Note 11—Segment Reporting
The Company and its subsidiaries are principally engaged in the operation of membership warehouses in the U.S., Canada, Mexico, U.K., Japan, Korea, Australia, Spain, Iceland, France, and China and through a majority-owned subsidiary in Taiwan. Reportable segments are largely based on management’s organization of the operating segments for operational decisions and assessments of financial performance, which considers geographic locations. The material accounting policies of the segments are as described in Note 1. Inter-segment net sales and expenses have been eliminated in computing total revenue and operating income. Certain operating expenses, predominantly stock-based compensation, incurred on behalf of the Company's Canadian and Other International operations, are included in the U.S. operations because those costs generally come under the responsibility of U.S. management.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
Operations
|
|
Canadian
Operations
|
|
Other
International
Operations
|
|
Total
|
2019
|
|
|
|
|
|
|
|
Total revenue
|
$
|
111,751
|
|
|
$
|
21,366
|
|
|
$
|
19,586
|
|
|
$
|
152,703
|
|
Operating income
|
3,063
|
|
|
924
|
|
|
750
|
|
|
4,737
|
|
Depreciation and amortization
|
1,126
|
|
|
143
|
|
|
223
|
|
|
1,492
|
|
Additions to property and equipment
|
2,186
|
|
|
303
|
|
|
509
|
|
|
2,998
|
|
Net property and equipment
|
14,367
|
|
|
2,044
|
|
|
4,479
|
|
|
20,890
|
|
Total assets
|
32,162
|
|
|
4,369
|
|
|
8,869
|
|
|
45,400
|
|
2018
|
|
|
|
|
|
|
|
Total revenue
|
$
|
102,286
|
|
|
$
|
20,689
|
|
|
$
|
18,601
|
|
|
$
|
141,576
|
|
Operating income
|
2,787
|
|
|
939
|
|
|
754
|
|
|
4,480
|
|
Depreciation and amortization
|
1,078
|
|
|
135
|
|
|
224
|
|
|
1,437
|
|
Additions to property and equipment
|
2,046
|
|
|
268
|
|
|
655
|
|
|
2,969
|
|
Net property and equipment
|
13,353
|
|
|
1,900
|
|
|
4,428
|
|
|
19,681
|
|
Total assets
|
28,207
|
|
|
4,303
|
|
|
8,320
|
|
|
40,830
|
|
2017
|
|
|
|
|
|
|
|
Total revenue
|
$
|
93,889
|
|
|
$
|
18,775
|
|
|
$
|
16,361
|
|
|
$
|
129,025
|
|
Operating income
|
2,644
|
|
|
841
|
|
|
626
|
|
|
4,111
|
|
Depreciation and amortization
|
1,044
|
|
|
124
|
|
|
202
|
|
|
1,370
|
|
Additions to property and equipment
|
1,714
|
|
|
277
|
|
|
511
|
|
|
2,502
|
|
Net property and equipment
|
12,339
|
|
|
1,820
|
|
|
4,002
|
|
|
18,161
|
|
Total assets
|
24,068
|
|
|
4,471
|
|
|
7,808
|
|
|
36,347
|
|
Disaggregated Revenue
The following table summarizes net sales by merchandise category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Food and Sundries
|
$
|
59,672
|
|
|
$
|
56,073
|
|
|
$
|
52,362
|
|
Hardlines
|
24,570
|
|
|
22,620
|
|
|
20,583
|
|
Fresh Foods
|
19,948
|
|
|
18,879
|
|
|
17,849
|
|
Softlines
|
16,590
|
|
|
15,387
|
|
|
14,537
|
|
Ancillary
|
28,571
|
|
|
25,475
|
|
|
20,841
|
|
Total Net Sales
|
$
|
149,351
|
|
|
$
|
138,434
|
|
|
$
|
126,172
|
|
Note 12—Quarterly Financial Data (Unaudited)
The two tables that follow reflect the unaudited quarterly results of operations for 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks Ended September 1, 2019
|
|
First
Quarter
(12 Weeks)
|
|
Second
Quarter
(12 Weeks)
|
|
Third
Quarter
(12 Weeks)
|
|
Fourth
Quarter
(16 Weeks)
|
|
Total
(52 Weeks)
|
REVENUE
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
34,311
|
|
|
$
|
34,628
|
|
|
$
|
33,964
|
|
|
$
|
46,448
|
|
|
$
|
149,351
|
|
Membership fees
|
758
|
|
|
768
|
|
|
776
|
|
|
1,050
|
|
|
3,352
|
|
Total revenue
|
35,069
|
|
|
35,396
|
|
|
34,740
|
|
|
47,498
|
|
|
152,703
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
Merchandise costs
|
30,623
|
|
|
30,720
|
|
|
30,233
|
|
|
41,310
|
|
|
132,886
|
|
Selling, general and administrative
|
3,475
|
|
|
3,464
|
|
|
3,371
|
|
|
4,684
|
|
(1
|
)
|
14,994
|
|
Preopening expenses
|
22
|
|
|
9
|
|
|
14
|
|
|
41
|
|
|
86
|
|
Operating income
|
949
|
|
|
1,203
|
|
|
1,122
|
|
|
1,463
|
|
|
4,737
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(36
|
)
|
|
(34
|
)
|
|
(35
|
)
|
|
(45
|
)
|
|
(150
|
)
|
Interest income and other, net
|
22
|
|
|
46
|
|
|
36
|
|
|
74
|
|
|
178
|
|
INCOME BEFORE INCOME TAXES
|
935
|
|
|
1,215
|
|
|
1,123
|
|
|
1,492
|
|
|
4,765
|
|
Provision for income taxes
|
158
|
|
|
314
|
|
|
207
|
|
|
382
|
|
|
1,061
|
|
Net income including noncontrolling interests
|
777
|
|
|
901
|
|
|
916
|
|
|
1,110
|
|
|
3,704
|
|
Net income attributable to noncontrolling interests
|
(10
|
)
|
|
(12
|
)
|
|
(10
|
)
|
|
(13
|
)
|
|
(45
|
)
|
NET INCOME ATTRIBUTABLE TO COSTCO
|
$
|
767
|
|
|
$
|
889
|
|
|
$
|
906
|
|
|
$
|
1,097
|
|
|
$
|
3,659
|
|
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.75
|
|
|
$
|
2.02
|
|
|
$
|
2.06
|
|
|
$
|
2.49
|
|
|
$
|
8.32
|
|
Diluted
|
$
|
1.73
|
|
|
$
|
2.01
|
|
|
$
|
2.05
|
|
|
$
|
2.47
|
|
|
$
|
8.26
|
|
Shares used in calculation (000’s)
|
|
|
|
|
|
|
|
|
|
Basic
|
439,157
|
|
|
440,284
|
|
|
439,859
|
|
|
439,727
|
|
|
439,755
|
|
Diluted
|
442,749
|
|
|
442,337
|
|
|
442,642
|
|
|
443,400
|
|
|
442,923
|
|
CASH DIVIDENDS DECLARED PER COMMON SHARE
|
$
|
0.57
|
|
|
$
|
0.57
|
|
|
$
|
0.65
|
|
|
$
|
0.65
|
|
|
$
|
2.44
|
|
_______________
(1) Includes a $123 charge for a product tax assessment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks Ended September 2, 2018
|
|
First
Quarter
(12 Weeks)
|
|
Second
Quarter
(12 Weeks)
|
|
Third
Quarter
(12 Weeks)
|
|
Fourth
Quarter
(16 Weeks)
|
|
Total (52 Weeks)
|
REVENUE
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
31,117
|
|
|
$
|
32,279
|
|
|
$
|
31,624
|
|
|
$
|
43,414
|
|
|
$
|
138,434
|
|
Membership fees
|
692
|
|
|
716
|
|
|
737
|
|
|
997
|
|
|
3,142
|
|
Total revenue
|
31,809
|
|
|
32,995
|
|
|
32,361
|
|
|
44,411
|
|
|
141,576
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
Merchandise costs
|
27,617
|
|
|
28,733
|
|
|
28,131
|
|
|
38,671
|
|
|
123,152
|
|
Selling, general and administrative
|
3,224
|
|
|
3,234
|
|
|
3,155
|
|
|
4,263
|
|
|
13,876
|
|
Preopening expenses
|
17
|
|
|
12
|
|
|
8
|
|
|
31
|
|
|
68
|
|
Operating income
|
951
|
|
|
1,016
|
|
|
1,067
|
|
|
1,446
|
|
|
4,480
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(37
|
)
|
|
(37
|
)
|
|
(37
|
)
|
|
(48
|
)
|
|
(159
|
)
|
Interest income and other, net
|
22
|
|
|
7
|
|
|
41
|
|
|
51
|
|
|
121
|
|
INCOME BEFORE INCOME TAXES
|
936
|
|
|
986
|
|
|
1,071
|
|
|
1,449
|
|
|
4,442
|
|
Provision for income taxes
|
285
|
|
|
273
|
|
|
309
|
|
|
396
|
|
|
1,263
|
|
Net income including noncontrolling interests
|
651
|
|
|
713
|
|
|
762
|
|
|
1,053
|
|
|
3,179
|
|
Net income attributable to noncontrolling interests
|
(11
|
)
|
|
(12
|
)
|
|
(12
|
)
|
|
(10
|
)
|
|
(45
|
)
|
NET INCOME ATTRIBUTABLE TO COSTCO
|
$
|
640
|
|
|
$
|
701
|
|
|
$
|
750
|
|
|
$
|
1,043
|
|
|
$
|
3,134
|
|
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.46
|
|
|
$
|
1.60
|
|
|
$
|
1.71
|
|
|
$
|
2.38
|
|
|
$
|
7.15
|
|
Diluted
|
$
|
1.45
|
|
|
$
|
1.59
|
|
|
$
|
1.70
|
|
|
$
|
2.36
|
|
|
$
|
7.09
|
|
Shares used in calculation (000’s)
|
|
|
|
|
|
|
|
|
|
Basic
|
437,965
|
|
|
439,022
|
|
|
438,740
|
|
|
438,379
|
|
|
438,515
|
|
Diluted
|
440,851
|
|
|
441,568
|
|
|
441,715
|
|
|
442,427
|
|
|
441,834
|
|
CASH DIVIDENDS DECLARED PER COMMON SHARE
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
$
|
0.57
|
|
|
$
|
0.57
|
|
|
$
|
2.14
|
|