COSTCO WHOLESALE CORP /NEW - Quarter Report: 2024 May (Form 10-Q)

NET INCOME$ $ $ $

NET INCOME PER COMMON SHARE:

Basic$ $ $ $ Diluted$ $ $ $ Shares used in calculation (000s):Basic Diluted

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

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COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in millions) (unaudited)

12 Weeks Ended

36 Weeks Ended

May 12,
2024

May 7,
2023

May 12,
2024

May 7,
2023

NET INCOME

Foreign-currency translation adjustment and other, net

()

TOTAL EQUITY

TOTAL LIABILITIES AND EQUITY

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

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COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(amounts in millions) (unaudited)

12 Weeks Ended May 12, 2024

Common Stock

Additional
Paid-in
Capital

Accumulated
Other
Comprehensive Income (Loss)

Retained
Earnings

Total Costco
Stockholders’
Equity

Noncontrolling
Interests

Total
Equity

Shares (000s)

Amount

BALANCE AT FEBRUARY 18, 2024

()

Net income

—

Foreign-currency translation adjustment and other, net

—

()

—

()

Stock-based compensation

—

Release of vested restricted stock units (RSUs), including tax effects

—

()

—

()

—

()

Repurchases of common stock

()

—

()

—

()

—

()

Cash dividend declared and other

—

()

—

()

BALANCE AT MAY 12, 2024

()

12 Weeks Ended May 7, 2023

Common Stock

Additional
Paid-in
Capital

Accumulated
Other
Comprehensive Income (Loss)

Retained
Earnings

Total Costco
Stockholders’
Equity

Noncontrolling
Interests

Total
Equity

Shares (000s)

Amount

BALANCE AT FEBRUARY 12, 2023

()

Net income

—

Foreign-currency translation adjustment and other, net

—

()

—

()

Stock-based compensation

—

Release of vested RSUs, including tax effects

—

Repurchases of common stock

()

—

()

—

()

—

()

Cash dividend declared

—

()

—

()

BALANCE AT MAY 7, 2023

()

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

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COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(amounts in millions) (unaudited)

36 Weeks Ended May 12, 2024

Common Stock

Additional
Paid-in
Capital

Accumulated
Other
Comprehensive Income (Loss)

Retained
Earnings

Total Costco
Stockholders’
Equity

Noncontrolling
Interests

Total
Equity

Shares (000s)

Amount

BALANCE AT SEPTEMBER 3, 2023

()

Net income

—

Foreign-currency translation adjustment and other, net

—

()

—

()

Stock-based compensation

—

Release of vested RSUs, including tax effects

—

()

—

()

—

()

Repurchases of common stock

()

—

()

—

()

—

()

Cash dividends declared and other

—

()

—

()

BALANCE AT MAY 12, 2024

()

36 Weeks Ended May 7, 2023

Common Stock

Additional
Paid-in
Capital

Accumulated
Other
Comprehensive Income (Loss)

Retained
Earnings

Total Costco
Stockholders’
Equity

Noncontrolling
Interests

Total
Equity

Shares (000s)

Amount

BALANCE AT AUGUST 28, 2022

()

Net income

—

Foreign-currency translation adjustment and other, net

—

Stock-based compensation

—

Release of vested RSUs, including tax effects

—

()

—

()

—

()

Repurchases of common stock

()

—

()

—

()

—

()

Cash dividends declared

—

()

—

()

BALANCE AT MAY 7, 2023

()

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

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COSTCO WHOLESALE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in millions) (unaudited)


	36 Weeks Ended
	May 12, 2024	May 7, 2023
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	$
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Non-cash lease expense
Stock-based compensation
Impairment of assets and other non-cash operating activities, net	()
Changes in operating assets and liabilities:
Merchandise inventories	()
Accounts payable		()
Other operating assets and liabilities, net		()
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments	()	()
Maturities of short-term investments
Additions to property and equipment	()	()
Other investing activities, net	()	()
Net cash used in investing activities	()	()
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of short-term borrowings	()	()
Proceeds from short-term borrowings
Repayments of long-term debt		()
Proceeds from issuance of long-term debt
Tax withholdings on stock-based awards	()	()
Repurchases of common stock	()	()
Cash dividend payments	()	()
Financing lease payments	()	()
Other financing activities, net	()	()
Net cash used in financing activities	()	()
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	()
Net change in cash and cash equivalents	()
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS END OF PERIOD	$	$

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the first thirty-six weeks of the year for:
Interest	$	$
Income taxes, net	$	$
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Cash dividend declared, but not yet paid	$	$
Financing lease assets obtained in exchange for new or modified leases	$	$
Operating lease assets obtained in exchange for new or modified leases	$	$
Capital expenditures included in liabilities	$	$

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

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COSTCO WHOLESALE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

warehouses worldwide: in the United States (U.S.) located in states, Washington, D.C., and Puerto Rico, in Canada, in Mexico, in Japan, in the United Kingdom (U.K.), in Korea, in Australia, in Taiwan, in China, in Spain, in France, and each in Iceland, New Zealand, and Sweden. The Company operates e-commerce sites in the U.S., Canada, the U.K., Mexico, Korea, Taiwan, Japan, and Australia.

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$()$ Held-to-maturity:Certificates of deposit — Total short-term investments$ $()$

September 3, 2023:

Cost
Basis

Unrealized
Losses, Net

Recorded
Basis

Available-for-sale:

Government and agency securities

()

Held-to-maturity:

Certificates of deposit

—

Total short-term investments

()

Gross unrealized holding gains and losses on available-for-sale securities were not material for the periods ended May 12, 2024, or September 3, 2023. At those dates, there were no available-for-sale securities in a material continuous unrealized-loss position. There were no sales of available-for-sale securities during the first thirty-six weeks of 2024 or 2023.

$ $ Due after one year through five years Due after five years Total$ $ $

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Forward foreign-exchange contracts, in asset position(1)

Forward foreign-exchange contracts, in (liability) position(1)

()()Total$ $

_______________

(1)

At May 12, 2024, and September 3, 2023, the Company did not hold any Level 1 or 3 financial assets or liabilities that were measured at fair value on a recurring basis. There were no transfers between levels during the first thirty-six weeks of 2024 or 2023.

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 material fair value adjustments to these items during the first thirty-six weeks of 2024. During the first and third quarter of 2023, the Company recognized in merchandise costs charges of $ and $, primarily related to the impairment of certain leased assets associated with charter shipping activities, now discontinued.

% Senior Notes due May 2024$ $

% Senior Notes due May 2027

% Senior Notes due June 2027

% Senior Notes due April 2030

% Senior Notes due April 2032

Other long-term debt

Total long-term debt

Less unamortized debt discounts and issuance costs

Less current portion(1)

Long-term debt, excluding current portion

$ $

_______________

(1).

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, at fixed interest rates ranging from % to %. Interest is payable semi-annually, and maturity dates range from November 7, 2033, to November 7, 2043. The fair value of the Company's long-term debt, including the current portion, was approximately $ and $ at May 12, 2024, and September 3, 2023.

Subsequent to the end of the quarter on May 18, 2024, the Company paid the outstanding principal balance and interest on the % Senior Notes using cash and cash equivalents and short-term investments.

per share was declared on April 10, 2024, and paid on May 10, 2024. The dividend was $ per share in the third quarter of 2023. On January 12, 2024, an aggregate payment of approximately $ was made in connection with a special dividend of $ per share, declared on December 13, 2023.

Stock Repurchase Programs

The Company's stock repurchase program is conducted under a $ authorization by the Board of Directors, which expires in January 2027. At May 12, 2024, the remaining amount available under the program was $.

$ $ First thirty-six weeks of 2024 $ $ Third quarter of 2023 $ $ First thirty-six weeks of 2023 $ $

These amounts may differ from the accompanying condensed consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each quarter. 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.

RSUs. To preserve the value of outstanding awards, the number of RSUs that may be granted under this Plan is subject to adjustments from changes in capital structure. 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.

As required by the 2019 Incentive Plan, in conjunction with the 2024 special dividend, the number of shares subject to outstanding RSUs was increased on the dividend record date to preserve their value. They were adjusted by multiplying the number of outstanding shares by a factor of , representing the ratio of the Nasdaq closing price of $ on December 26, 2023, which was the last trading day immediately prior to the ex-dividend date, to the Nasdaq opening price of $ on the ex-dividend date, December 27, 2023. The outstanding RSUs increased by approximately . The adjustment did not result in additional stock-based compensation expense, as the fair value of the awards did not

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RSU shares available to be granted.

Summary of Restricted Stock Unit Activity

At May 12, 2024, shares were available to be granted as RSUs, and the following awards, adjusted for the effects of the special dividend, were outstanding:

• time-based RSUs, which vest upon continued employment over specified periods and accelerate upon achievement of a long-service term;

• performance-based RSUs granted to executive officers of the Company, for which the performance targets have been met. The awards vest upon continued employment over specified periods of time and upon achievement of a long-service term; and

• performance-based RSUs granted to executive officers of the Company, subject to achievement of performance targets for 2024, as determined by the Compensation Committee of the Board of Directors after the end of the fiscal year. These awards are included in the table below. The Company recognized compensation expense for these awards in the third quarter of 2024, as it is currently deemed probable that the targets will be achieved.

$ Granted Vested and delivered() Forfeited() Special dividend N/AOutstanding at May 12, 2024 $

The remaining unrecognized compensation cost related to RSUs unvested at May 12, 2024, was $, and the weighted-average period over which this cost will be recognized is years.

Summary of Stock-Based Compensation

$ $ $ Less recognized income tax benefits Stock-based compensation expense, net$ $ $ $

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$ $ $

Weighted average basic shares

RSUs

Weighted average diluted shares

Basic earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated based on the dilutive effect of RSUs using the treasury stock method.

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$ $ $ Operating income 12 Weeks Ended May 7, 2023Total revenue$ $ $ $ Operating income 36 Weeks Ended May 12, 2024Total revenue$ $ $ $ Operating income 36 Weeks Ended May 7, 2023Total revenue$ $ $ $ Operating income 53 Weeks Ended September 3, 2023Total revenue$ $ $ $ Operating income $ $ $ Non-Foods Fresh Foods Warehouse Ancillary and Other Businesses

Total net sales

$ $ $ $

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

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

FORWARD-LOOKING STATEMENTS

Certain statements contained in this document constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For these purposes, forward-looking statements are statements that address activities, events, conditions or developments that the Company expects or anticipates may occur in the future and may relate to such matters as net sales growth, changes in comparable sales, cannibalization of existing locations by new openings, price or fee changes, earnings performance, earnings per share, stock-based compensation expense, warehouse openings and closures, capital spending, the effect of adopting certain accounting standards, future financial reporting, financing, margins, return on invested capital, strategic direction, expense controls, membership renewal rates, shopping frequency, litigation, and the demand for our products and services. In some cases, forward-looking statements can be identified because they contain words such as “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. These risks and uncertainties include, but are not limited to, domestic and international economic conditions, including exchange rates, inflation or deflation, the effects of competition and regulation, uncertainties in the financial markets, consumer and small business spending patterns and debt levels, breaches of security or privacy of member or business information, conditions affecting the acquisition, development, ownership or use of real estate, capital spending, actions of vendors, rising costs associated with employees (generally including health-care costs and wages), energy and certain commodities, geopolitical conditions (including tariffs), the ability to maintain effective internal control over financial reporting, regulatory and other impacts related to climate change, public-health related factors, and other risks identified from time to time in the Company's public statements and reports filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made, and the Company does not undertake to update these statements, except as required by law.

OVERVIEW

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 condensed consolidated financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q), as well as our consolidated financial statements, the accompanying Notes to Financial Statements, and the related Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2023 Form 10-K, filed with the United States Securities and Exchange Commission on October 11, 2023.

We operate membership warehouses and e-commerce sites based on the concept that offering members low prices on a limited selection of quality 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 often sell inventory before we are required to pay for it, even while taking advantage of early payment discounts.

We believe that the most important driver of our profitability is increasing net sales, particularly comparable sales. Net sales includes our core merchandise categories (foods and sundries, non-foods, and fresh foods), warehouse ancillary (gasoline, pharmacy, optical, food court, hearing aids, and tire installation) and other businesses (e-commerce, business centers, travel, and other). Comparable sales is

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defined as net sales from warehouses open for more than one year, including remodels, relocations and expansions, and sales related to e-commerce sites operating for more than one year. The measure is intended as supplemental information and is not a substitute for net sales presented in accordance with U.S. GAAP and should be reviewed in conjunction with results reported in accordance with U.S. GAAP. 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 our international operations); and inflation or deflation 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 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 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” – 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, negatively impacting gross margin and gross margin in the near term as a percentage of net sales (gross margin percentage).

We believe our gasoline business enhances traffic in our warehouses; it generally has a lower gross margin percentage and lower SG&A expense relative to our non-gasoline businesses. A higher penetration of gasoline sales will generally lower our gross margin percentage. 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.

Government actions in various countries relating to tariffs, particularly China and the United States, have affected 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. Higher tariffs could adversely impact 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. Negative aspects of such growth include lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouses when openings occur in existing markets. Our rate of square footage growth is generally higher in foreign markets, due to the smaller base in those markets, and we expect that to continue. Our e-commerce business, domestically and internationally, has a lower gross-margin percentage than our warehouse operations.

The membership format is an integral part of our business and 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 Executive memberships, 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 worldwide

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renewal rate may be adversely impacted by lower renewal rates in newer markets, which historically have been less than rates in mature 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, increasing productivity 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 SG&A 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 9 to the consolidated financial statements included in Part I, Item 1, 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 e-commerce or business delivery.

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 differences between the foreign-exchange rates we use to convert the financial results of our international operations from local currencies into U.S. dollars. This impact is calculated based on the difference between the current and prior period's exchange rates. The impact of changes in gasoline prices on net sales is calculated based on the difference between the current and prior period's average price per gallon sold. Results expressed excluding the impacts of foreign exchange and gasoline prices are intended as supplemental information and are not a substitute for net sales presented in accordance with U.S. GAAP and should be reviewed in conjunction with results reported in accordance with U.S. GAAP.

Our fiscal year ends on the Sunday closest to August 31. References to the third quarter of 2024 and 2023 relate to the 12-week fiscal quarters ended May 12, 2024, and May 7, 2023. References to the first thirty-six weeks of 2024 and 2023 relate to the 36 weeks ended May 12, 2024, and May 7, 2023. Certain percentages presented are calculated using actual results prior to rounding.

Highlights for the third quarter of 2024 versus 2023 include:

•Net sales increased 9% to $57,392, driven by an increase in comparable sales and sales at 24 net new warehouses opened since the end of the third quarter of 2023;

•Membership fee revenue increased 8% to $1,123, driven by new member sign-ups and upgrades to Executive Membership;

•Gross margin percentage increased 52 basis points, driven primarily by the absence of a charge of $298, $0.50 per diluted share, recorded in the third quarter of 2023 predominantly related to the discontinuation of our charter shipping activities;

•SG&A expenses as a percentage of net sales decreased 15 basis points, primarily due to warehouse operations and other businesses, largely attributable to improved productivity;

•A quarterly cash dividend of $1.16 per share was declared on April 10, 2024, and paid on May 10, 2024; and

•Net income was $1,681, $3.78 per diluted share, compared to $1,302, $2.93 per diluted share in 2023.

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RESULTS OF OPERATIONS

Net Sales


	12 Weeks Ended						36 Weeks Ended
	May 12, 2024			May 7, 2023			May 12, 2024			May 7, 2023
Net Sales	$	57,392		$	52,604		$	171,440		$	160,280
Changes in net sales:
U.S.	9		%	1		%	6		%	6		%
Canada	10		%	—		%	9		%	2		%
Other International	10		%	8		%	12		%	5		%
Total Company	9		%	2		%	7		%	5		%
Changes in comparable sales(1):
U.S.	6		%	—		%	4		%	5		%
Canada	8		%	(1)		%	8		%	2		%
Other International	8		%	4		%	9		%	2		%
Total Company	7		%	—		%	5		%	4		%
E-commerce	21		%	(10)		%	15		%	(8)		%
Changes in comparable sales excluding the impact of changes in foreign-currency and gasoline prices(1):
U.S.	6		%	2		%	4		%	5		%
Canada	7		%	7		%	8		%	8		%
Other International	8		%	8		%	8		%	9		%
Total Company	7		%	3		%	5		%	6		%
E-commerce	21		%	(9)		%	15		%	(7)		%

_______________

(1)Comparable sales for the third quarter and first thirty-six weeks of 2024 were calculated using comparable retail weeks.

Net Sales

The improvement in net sales for the third quarter and first thirty-six weeks of 2024 was attributable to an increase in comparable sales and sales at the 24 net new warehouses opened since the end of the third quarter of 2023. Sales increased $3,892 or 9% and $9,458 or 7% in core merchandise categories during the third quarter and first thirty-six weeks of 2024, due to increases in all categories. Sales in warehouse ancillary and other businesses increased $896 or 8% during the third quarter of 2024, led by gasoline, and $1,702 or 5% during the first thirty-six weeks of 2024, led by pharmacy.

During the third quarter of 2024, higher gasoline prices positively impacted net sales by $149, 28 basis points, compared to 2023, with a 2% increase in the average price per gallon. Changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately $108, 21 basis points, compared to the third quarter of 2023, primarily attributable to our Other International operations.

During the first thirty-six weeks of 2024, lower gasoline prices negatively impacted net sales by $423, 26 basis points, compared to 2023, with a 2% decrease in the average price per gallon. Changes in foreign currencies relative to the U.S. dollar positively impacted net sales by approximately $180, 11 basis points, compared to the first thirty-six weeks of 2023, attributable to our Other International operations, partially offset by our Canadian operations.

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Comparable Sales

Comparable sales increased 7% in the third quarter of 2024 and were positively impacted by increased shopping frequency and a slightly higher average ticket. Comparable sales increased 5% in the first thirty-six weeks of 2024 and were positively impacted by increased shopping frequency, partially offset by a slight decrease in average ticket.

Membership Fees


	12 Weeks Ended						36 Weeks Ended
	May 12, 2024			May 7, 2023			May 12, 2024			May 7, 2023
Membership fees	$	1,123		$	1,044		$	3,316		$	3,071
Membership fees increase	8		%	6		%	8		%	6		%
Total paid members (000s)	74,500			69,100			—			—
Total cardholders (000s)	133,900			124,700			—			—

Membership fee revenue increased 8% in both the third quarter and first thirty-six weeks of 2024, driven by new member sign-ups and upgrades to Executive Membership. At the end of the third quarter of 2024, our renewal rates were 93.0% in the U.S. and Canada and 90.5% worldwide. Renewal rates benefited from higher penetration of Executive members. Our renewal rate, which excludes affiliates of Business members, 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.

Gross Margin


	12 Weeks Ended						36 Weeks Ended
	May 12, 2024			May 7, 2023			May 12, 2024			May 7, 2023
Net sales	$	57,392		$	52,604		$	171,440		$	160,280
Less merchandise costs	51,173			47,175			152,770			143,367
Gross margin	$	6,219		$	5,429		$	18,670		$	16,913
Gross margin percentage	10.84		%	10.32		%	10.89		%	10.55		%

Quarterly Results

Gross margin percentage increased 52 basis points. Excluding the impact of gasoline price inflation on net sales, gross margin percentage was 10.86%, an increase of 54 basis points. The 54 basis-point increase was positively impacted by: 56 basis points due to the absence of a charge related to the discontinuation of our charter shipping activities that was recorded in the third quarter of 2023; two basis points due to core merchandise categories, and two basis points due to a LIFO benefit. This increase was partially offset by five basis points due to warehouse ancillary and other businesses, predominantly gasoline, partially offset by e-commerce, and one basis point due to increased 2% rewards.

The gross margin in core merchandise categories, when expressed as a percentage of core merchandise sales (rather than total net sales), increased 10 basis points. The increase was primarily due to non-foods, partially offset by fresh foods. This measure eliminates the impact of changes in sales penetration and gross margin from our warehouse ancillary and other businesses.

Gross margin percentage on a segment basis, when expressed as a percentage of the segment's own sales and excluding the impact of changes in gasoline prices on net sales (segment gross margin percentage), increased in our U.S. and Canadian segments. Our U.S. segment performed similarly to the consolidated results above. Our Canadian segment gross margin increased primarily due to increases in

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core merchandise categories, partially offset by increased 2% rewards. Gross margin decreased in our Other International segment, due to decreases in core merchandise categories and increased 2% rewards.

Year-to-date Results

Gross margin percentage increased 34 basis points. Excluding the impact of gasoline price deflation on net sales, gross margin percentage was 10.86%, an increase of 31 basis points. The 31 basis-point increase was positively impacted by: 24 basis points due to the absence of charges related to the discontinuation of our charter shipping activities that were recorded in the first and third quarters of 2023; nine basis points due to warehouse ancillary and other business, primarily e-commerce; and two basis points due to a LIFO benefit. This increase was partially offset by four basis points due to increased 2% rewards. Our core merchandise categories were flat.

The gross margin in core merchandise categories, when expressed as a percentage of core merchandise sales (rather than total net sales), increased 13 basis points. The increase was primarily due to non-foods, partially offset by fresh foods.

Segment gross margin percentage increased in our U.S. and Canadian segments. Our U.S. segment performed similarly to the consolidated results above. Our Canadian segment gross margin increased, primarily due to increases in core merchandise categories and warehouse ancillary and other businesses, partially offset by increased 2% rewards. Gross margin percentage decreased in our Other International segment, primarily due to decreases in core merchandise categories and increased 2% rewards.

Selling, General and Administrative Expenses


	12 Weeks Ended						36 Weeks Ended
	May 12, 2024			May 7, 2023			May 12, 2024			May 7, 2023
SG&A expenses	$	5,145		$	4,794		$	15,743		$	14,651
SG&A expenses as a percentage of net sales	8.96		%	9.11		%	9.18		%	9.14		%

Quarterly Results

SG&A expenses as a percentage of net sales decreased 15 basis points. SG&A expenses as a percentage of net sales excluding the impact of gasoline price inflation was 8.99%, a decrease of 12 basis points. The comparison to last year was favorably impacted by 12 basis points due to warehouse operations and other businesses, largely attributable to improved productivity.

Year-to-date Results

SG&A expenses as a percentage of net sales increased four basis points. SG&A expenses as a percentage of net sales excluding the impact of gasoline price deflation was 9.16%, an increase of two basis points. The comparison to last year was negatively impacted by three basis points in warehouse operations and other businesses, driven by our U.S. operations, which included the impact of wage increases in March and September 2023, partially offset by one basis point due to central operating costs. SG&A expenses as a percentage of net sales were lower in our Canadian and Other International operations.

Interest Expense


	12 Weeks Ended				36 Weeks Ended
	May 12, 2024		May 7, 2023		May 12, 2024		May 7, 2023
Interest expense	$	41	$	36	$	120	$	104

Interest expense is primarily related to Senior Notes and financing leases.

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Interest Income and Other, Net


	12 Weeks Ended				36 Weeks Ended
	May 12, 2024		May 7, 2023		May 12, 2024		May 7, 2023
Interest income	$	94	$	110	$	395	$	269
Foreign-currency transaction gains, net	20		9		54		3
Other, net	14		9		55		23
Interest income and other, net	$	128	$	128	$	504	$	295

The decrease in interest income in the third quarter was due to lower average cash and investment balances, caused by the payment of the special dividend. The increase in interest income in the first thirty-six weeks of 2024 was primarily due to higher global interest rates and higher average cash and investment balances, prior to the payment of the special dividend. Foreign-currency transaction gains, net, include revaluation or settlement of monetary assets and liabilities by our Canadian and Other International operations and mark-to-market adjustments for forward foreign-exchange contracts. See Derivatives and Foreign Currency sections in Item 8, Note 1 of our Annual Report on Form 10-K, for the fiscal year ended September 3, 2023.

Provision for Income Taxes


	12 Weeks Ended						36 Weeks Ended
	May 12, 2024			May 7, 2023			May 12, 2024			May 7, 2023
Provision for income taxes	$	603		$	469		$	1,614		$	1,392
Effective tax rate	26.4		%	26.5		%	24.4		%	25.2		%

The effective tax rate for the first thirty-six weeks of 2024 was favorably impacted by net discrete tax benefits of $146. This included $94 related to the portion of the special dividend payable through our 401(k) plan in the second quarter and $44 of excess tax benefits related to stock compensation in the first quarter. Excluding discrete net tax benefits, the tax rate was 26.6%.

The effective tax rate for the first thirty-six weeks of 2023 was impacted by net discrete tax benefits of $57, primarily due to excess tax benefits related to stock compensation in the first quarter. Excluding discrete net tax benefits, the tax rate was 26.2%.

LIQUIDITY AND CAPITAL RESOURCES

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


	36 Weeks Ended
	May 12, 2024		May 7, 2023
Net cash provided by operating activities	$	8,381	$	7,343
Net cash used in investing activities	(2,706)		(3,147)
Net cash used in financing activities	(8,948)		(1,950)

Our primary sources of liquidity are cash flows from operations, cash and cash equivalents, and short-term investments. Cash and cash equivalents and short-term investments were $11,499 and $15,234 at May 12, 2024, and September 3, 2023. Of these balances, unsettled credit and debit card receivables represented approximately $2,391 and $2,282 at May 12, 2024, and September 3, 2023. These receivables generally settle within four days.

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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.

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, with 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 $8,381 in the first thirty-six weeks of 2024, compared to $7,343 in the first thirty-six weeks of 2023. 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 wages and employee benefits, utilities, credit and debit card processing fees, and operating leases. 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 inventory levels and turnover, payment terms with suppliers, and early payments to obtain discounts.

Cash Flows from Investing Activities

Net cash used in investing activities totaled $2,706 in the first thirty-six weeks of 2024, compared to $3,147 in the first thirty-six weeks of 2023, and is primarily related to capital expenditures. Net cash from investing activities also includes purchases and maturities of short-term investments.

Capital Expenditure Plans

Our primary requirements for capital are acquiring land, buildings, and equipment for new and remodeled warehouses. Capital is also required for information systems, manufacturing and distribution facilities, initial warehouse operations, and working capital. In the first thirty-six weeks of 2024, we spent $3,133 on capital expenditures, and it is our current intention to spend a total of approximately $4,300 to $4,500 during fiscal 2024. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents, and short-term investments. We opened 16 new warehouses, including one relocation, in the first thirty-six weeks of 2024 and plan to open 14 additional new warehouses in the remainder of fiscal 2024. 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 and the economic environment.

Cash Flows from Financing Activities

Net cash used in financing activities totaled $8,948 in the first thirty-six weeks of 2024, compared to $1,950 in the first thirty-six weeks of 2023. Cash flow used in financing activities during the first thirty-six weeks of 2024 was primarily related to the payment of dividends, repayments of short-term borrowings, repurchases of common stock, and withholding taxes on stock-based awards. Cash flow provided by financing activities included proceeds from short-term borrowings and four Guaranteed Senior Notes totaling approximately $500, at fixed interest rates ranging from 1.400% to 2.120% issued by our Japan subsidiary. Subsequent to the end of the quarter on May 18, 2024, we paid the outstanding principal balance and interest on the 2.750% Senior Notes using cash and cash equivalents and short-term investments.

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Dividends

A quarterly cash dividend of $1.16 per share was declared on April 10, 2024, payable to shareholders of record on April 26, 2024, which was paid on May 10, 2024. On January 12, 2024, an aggregate payment of approximately $6,655 was made in connection with a special dividend of $15.00 per share, declared on December 13, 2023.

Share Repurchase Program

On January 19, 2023, the Board of Directors authorized a share repurchase program in the amount of $4,000, which expires in January 2027. During the first thirty-six weeks of 2024 and 2023, we repurchased 749,000 and 908,000 shares of common stock, at an average price per share of $646.07 and $492.30, totaling approximately $484 and $447. These amounts may differ from the accompanying condensed consolidated statements of cash flows due to changes in unsettled repurchases at the end of a quarter. Purchases are made from time to time, as conditions warrant, in the open market or in block purchases, 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 $3,079 at the end of the third quarter.

Bank Credit Facilities and Commercial Paper Programs

We maintain bank credit facilities for working capital and general corporate purposes. At May 12, 2024, we had borrowing capacity under these facilities of $1,145. Our international operations maintain $656 of this capacity under bank credit facilities, of which $160 is guaranteed by the Company. Short-term borrowings outstanding under the bank credit facilities, which are included in other current liabilities on the consolidated balance sheets, were immaterial at the end of the third quarter of 2024 and at the end of fiscal 2023.

The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $204. The outstanding commitments under these facilities at the end of the third quarter of 2024 totaled $187, most of which were standby letters of credit that do not expire or have expiration dates within one year. The bank credit facilities have various expiration dates, most 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.

Critical Accounting Estimates

The preparation of our consolidated financial statements in accordance with U.S. GAAP requires that we make estimates and judgments. We base these on historical experience and on assumptions that we believe to be reasonable. Our critical accounting policies are discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K, for the fiscal year ended September 3, 2023. There have been no material changes to the critical accounting estimates previously disclosed in that Report.

Recent Accounting Pronouncements

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

Item 3—Quantitative and Qualitative Disclosures about Market Risk

Our direct exposure to financial market risk results from fluctuations in foreign-currency exchange rates and interest rates. There have been no material changes to our market risks as disclosed in our Annual Report on Form 10-K, for the fiscal year ended September 3, 2023.

Item 4—Controls and Procedures

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Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of May 12, 2024, and, based on their evaluation, have concluded the disclosure controls and procedures were effective as of such date.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the third quarter of fiscal 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1—Legal Proceedings

See discussion of Legal Proceedings in Note 8 to the condensed consolidated financial statements included in Part I, Item 1 of this Report.

Item 1A—Risk Factors

In addition to the other information set forth in the Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K, for the fiscal year ended September 3, 2023. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K.

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

The following table sets forth information on our common stock repurchase program activity for the third quarter of 2024 (amounts in millions, except share and per share data):


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs(1)	Maximum Dollar Value of Shares that May Yet be Purchased Under the Programs(1)
February 19, 2024 — March 17, 2024	72,000	$	742.12	72,000	$	3,188
March 18, 2024 — April 14, 2024	73,000	724.97		73,000	3,135
April 15, 2024 — May 12, 2024	76,000	732.82		76,000	3,079
Total third quarter	221,000	$	733.23	221,000

_______________

(1)Our share repurchase program is conducted under a $4,000 authorization approved by our Board of Directors in January 2023, which expires in January 2027.

Item 3—Defaults Upon Senior Securities

None.

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Item 4—Mine Safety Disclosures

Not applicable.

Item 5—Other Information

None.

Item 6—Exhibits

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

Incorporated by Reference

Exhibit
Number

Exhibit Description

Filed
Herewith

Form

Period
Ending

Filing Date

3.1

Articles of Incorporation as amended of Costco Wholesale Corporation

10-K

8/28/2022

10/5/2022

3.2

Bylaws as amended of Costco Wholesale Corporation

8-K

8/10/2023

31.1

Rule 13(a) – 14(a) Certifications

32.1

Section 1350 Certifications

101.INS

Inline XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

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

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SIGNATURES

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


		COSTCO WHOLESALE CORPORATION (Registrant)

June 5, 2024	By	/s/ RON M. VACHRIS
Date		Ron M. Vachris Chief Executive Officer, President and Director

June 5, 2024	By	/s/ GARY MILLERCHIP
Date		Gary Millerchip Executive Vice President and Chief Financial Officer

COSTCO WHOLESALE CORP /NEW - Quarter Report: 2024 May (Form 10-Q)

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