Costco Wholesale Corp 10-Q for FY2024 Q1
Costco Wholesale Corp (COST)
10-Q
2023-12-20
For: 2023-11-26
View Original
Added on
April 02, 2026
About this 10-Q
Costco Wholesale Corp filed this 10-Q on December 20, 2023, covering the quarter ended November 26, 2023 (FY2024 Q1).
Headline figures
Quarter ended November 26, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $57.8B
- up 6.2% from $54.44B a year earlier
- Net income
- $1.59B
- up 16.5% from net income of $1.36B a year earlier
- Diluted EPS
- $3.58
- up 16.6% from $3.07 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended November 26, 2023
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Commission file number 0-20355
Costco Wholesale Corporation
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code): (425 ) 313-8100
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the issuer's common stock as of December 13, 2023 was 443,728,416 .
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COSTCO WHOLESALE CORPORATION
INDEX TO FORM 10-Q
| Page | ||||||||
| PART I | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
2
PART I—FINANCIAL INFORMATION
Item 1—Financial Statements
COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(amounts in millions, except per share data) (unaudited)
| 12 Weeks Ended | |||||||||||||||||||||||
| November 26, 2023 | November 20, 2022 | ||||||||||||||||||||||
| REVENUE | |||||||||||||||||||||||
| Net sales | $ | $ | |||||||||||||||||||||
| Membership fees | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| OPERATING EXPENSES | |||||||||||||||||||||||
| Merchandise costs | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| OTHER INCOME (EXPENSE) | |||||||||||||||||||||||
| Interest expense | ( | ( | |||||||||||||||||||||
| Interest income and other, net | |||||||||||||||||||||||
| INCOME BEFORE INCOME TAXES | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| 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.
3
COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in millions) (unaudited)
| 12 Weeks Ended | |||||||||||||||||||||||
| November 26, 2023 | November 20, 2022 | ||||||||||||||||||||||
NET INCOME | $ | $ | |||||||||||||||||||||
Foreign-currency translation adjustment and other, net | ( | ( | |||||||||||||||||||||
COMPREHENSIVE INCOME | $ | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in millions, except par value and share data) (unaudited)
| November 26, 2023 | September 3, 2023 | ||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Receivables, net | |||||||||||
| Merchandise inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| OTHER ASSETS | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Other long-term assets | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| CURRENT LIABILITIES | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued salaries and benefits | |||||||||||
| Accrued member rewards | |||||||||||
| Deferred membership fees | |||||||||||
| Current portion of long-term debt | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| OTHER LIABILITIES | |||||||||||
| Long-term debt, excluding current portion | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| TOTAL LIABILITIES | |||||||||||
| COMMITMENTS AND CONTINGENCIES | |||||||||||
| EQUITY | |||||||||||
Preferred stock $ | |||||||||||
Common stock $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Retained earnings | |||||||||||
| TOTAL EQUITY | |||||||||||
| TOTAL LIABILITIES AND EQUITY | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(amounts in millions) (unaudited)
| 12 Weeks Ended November 26, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive 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 restricted stock units (RSUs), including tax effects | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | — | ( | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Cash dividend declared and other | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| BALANCE AT NOVEMBER 26, 2023 | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| 12 Weeks Ended November 20, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive 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 dividend declared | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| BALANCE AT NOVEMBER 20, 2022 | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in millions) (unaudited)
| 12 Weeks Ended | |||||||||||
| November 26, 2023 | November 20, 2022 | ||||||||||
| 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 | |||||||||||
| 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 increase 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 12 weeks of the year for: | |||||||||||
Interest | $ | $ | |||||||||
| Income taxes, net | $ | $ | |||||||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: | |||||||||||
| Financing lease assets obtained in exchange for new or modified leases | $ | $ | |||||||||
| Operating lease assets obtained in exchange for new or modified leases | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions, except share, per share, and warehouse count data)
(unaudited)
Note 1—Summary of Significant Accounting Policies
Description of Business
Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries operate membership warehouses based on the concept that offering members low prices on a limited selection of nationally-branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. At November 26, 2023, Costco operated 870 warehouses worldwide: 599 in the United States (U.S.) located in 47 states, Washington, D.C., and Puerto Rico, 108 in Canada, 40 in Mexico, 33 in Japan, 29 in the United Kingdom (U.K.), 18 in Korea, 15 in Australia,14 in Taiwan, five in China, four in Spain, two in France, and one each in Iceland, New Zealand, and Sweden. The Company operates e-commerce websites in the U.S., Canada, the U.K., Mexico, Korea, Taiwan, Japan, and Australia.
Basis of Presentation
The condensed consolidated financial statements include the accounts of Costco and its wholly-owned subsidiaries. All material inter-company transactions among the Company and its consolidated subsidiaries have been eliminated in consolidation.
Fiscal Year End
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions take into account historical and forward-looking factors that the Company believes are reasonable. Actual results could differ from those estimates and assumptions.
Reclassification
Reclassifications were made to the condensed consolidated statement of cash flows for the first twelve weeks of fiscal 2023 to conform with current year presentation.
8
Recent Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07, which is intended to improve reportable segment disclosure requirements, primarily through additional disclosures about significant segment expenses. The standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments should be applied retrospectively to all prior periods presented in the financial statements. The Company is evaluating the disclosure requirements related to the new standard.
Note 2—Investments
The Company's investments were as follows:
| November 26, 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 | $ | $ | ( | $ | |||||||||||||
| 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 unrecognized holding gains and losses on available-for-sale securities were not material for the periods ended November 26, 2023, and 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 quarter of 2024 or 2023.
The maturities of available-for-sale and held-to-maturity securities at November 26, 2023, are as follows:
| Available-For-Sale | Held-To-Maturity | ||||||||||||||||
| Cost Basis | Fair Value | ||||||||||||||||
| Due in one year or less | $ | $ | $ | ||||||||||||||
| Due after one year through five years | |||||||||||||||||
| Due after five years | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
Note 3—Fair Value Measurement
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The table below presents 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.
9
| Level 2 | |||||||||||
| November 26, 2023 | September 3, 2023 | ||||||||||
| Investment in government and agency securities | $ | $ | |||||||||
Forward foreign-exchange contracts, in asset position(1) | |||||||||||
Forward foreign-exchange contracts, in (liability) position(1) | ( | ( | |||||||||
| Total | $ | $ | |||||||||
_______________
(1)The asset and liability values are included in other current assets and other current liabilities, respectively, in the accompanying condensed consolidated balance sheets.
At November 26, 2023, 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 quarter of 2024 or 2023.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Note 4—Debt
The carrying value of the Company’s long-term debt consisted of the following:
| November 26, 2023 | September 3, 2023 | ||||||||||
| $ | $ | ||||||||||
| 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)Net of unamortized debt discounts and issuance costs .
The fair value of the Senior Notes is estimated using Level 2 inputs. Other long-term debt consists of Guaranteed Senior Notes issued by the Company's Japan subsidiary, valued using Level 3 inputs. In November 2023, our Japan subsidiary issued four Guaranteed Senior Notes, totaling approximately $500 , at fixed interest rates ranging from 1.400 % to 2.120 %. 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 $6,234 and $5,738 at November 26, 2023, and September 3, 2023.
10
Note 5—Equity
Dividends
A quarterly cash dividend of $1.02 per share was declared on October 18, 2023, and paid on November 17, 2023. The dividend was $0.90 per share in the first quarter of 2023.
Subsequent to the end of the quarter, on December 13, 2023, the Board of Directors declared a special cash dividend of $15.00 per share, payable January 12, 2024, to shareholders of record as of the close of business on December 28, 2023. The aggregate amount of payments will be approximately $6.7 billion.
Stock Repurchase Programs
The Company's stock repurchase program is conducted under a $4,000 authorization by the Board of Directors, which expires in January 2027. At November 26, 2023, the remaining amount available under the program was $3,401 . The following table summarizes the repurchase activity:
| Shares Repurchased (000s) | Average Price per Share | Total Cost | |||||||||||||||
| First quarter of 2024 | $ | $ | |||||||||||||||
| First quarter of 2023 | $ | $ | |||||||||||||||
Note 6—Stock-Based Compensation
The 2019 Incentive Plan authorized the issuance of up to a maximum of 15,885,000 RSUs. The Company issues new shares of common stock upon vesting of RSUs. Shares for vested RSUs are generally delivered to participants annually, net of shares withheld for taxes.
Summary of Restricted Stock Unit Activity
At November 26, 2023, 7,097,000 shares were available to be granted as RSUs, and the following awards were outstanding:
•2,726,000 time-based RSUs, which vest upon continued employment over specified periods and accelerate upon achievement of a long-service term;
•69,000 performance-based RSUs granted to executive officers of the Company, for which the performance targets have been met. The awards vest upon continued employment over specified periods of time and upon achievement of a long-service term; and
•90,000 performance-based RSUs granted to executive officers of the Company, subject to achievement of performance targets for fiscal 2024, as determined by the Compensation Committee of the Board of Directors after the end of the fiscal year. These awards are not included in the table below or in the amount of unrecognized compensation cost.
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The following table summarizes RSU transactions during the first quarter of 2024:
| Number of Units (in 000s) | Weighted-Average Grant Date Fair Value | ||||||||||
| Outstanding at September 3, 2023 | $ | ||||||||||
| Granted | |||||||||||
| Vested and delivered | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Outstanding at November 26, 2023 | $ | ||||||||||
The remaining unrecognized compensation cost related to RSUs unvested at November 26, 2023, was $1,193 , and the weighted-average period over which this cost will be recognized is 1.8 years.
Summary of Stock-Based Compensation
The following table summarizes stock-based compensation expense and the related tax benefits:
| 12 Weeks Ended | |||||||||||||||||||||||
| November 26, 2023 | November 20, 2022 | ||||||||||||||||||||||
Stock-based compensation expense | $ | $ | |||||||||||||||||||||
| Less recognized income tax benefits | |||||||||||||||||||||||
| Stock-based compensation expense, net | $ | $ | |||||||||||||||||||||
Note 7—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 000s):
| 12 Weeks Ended | |||||||||||||||||||||||
| November 26, 2023 | November 20, 2022 | ||||||||||||||||||||||
Net income | $ | $ | |||||||||||||||||||||
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.
Note 8—Commitments and Contingencies
Legal Proceedings
The Company is involved in many claims, proceedings and litigations 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 present loss contingencies that are both probable and reasonably estimable. There may be losses in excess of 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. The Company has recorded immaterial accruals with
12
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 monitors for developments that make the 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: the remedies or penalties sought are indeterminate or unspecified; the legal and/or factual theories are not well developed; and/or the matters involve complex or novel legal theories or a large number of parties.
In September 2023, a former employee filed a class action against the Company alleging claims under California law for failure to pay minimum wage, to pay overtime, to provide meal and rest periods, to provide accurate wage statements, to timely pay final wages, to reimburse employee expenses, and for unfair business practices. Jordan Clower v. Costco Wholesale Corporation (Case No. 1:23-cv-01621). The Company has filed a motion to dismiss.
In November 2023, a former employee filed a class action against the Company alleging claims under California law for failure to pay minimum wage, failure to pay overtime, failure to provide meal and rest breaks, failure to provide accurate wage statements, failure to reimburse expenses, failure to pay wages when due, and failure to pay sick pay. Martin Reyes v. Costco Wholesale Corporation, Sacramento County Superior Court. (Case No. 23cv011351). The Company has not yet responded to the complaint.
In August 2023, a former employee of a third-party staffing company filed a letter with the California Labor and Workforce Development Agency threatening claims under the California Private Attorneys General Act for alleged Labor Code violations consisting of minimum wage and overtime violations, meal and rest period violations, wage statement violations and failure to pay all wages at termination. Yesenia Murillo v. Real Time Staffing Services, LLC and Costco Wholesale Corporation. The Company is named as an alleged joint employer. A complaint has not yet been filed.
In October 2023, current and former employees filed suit against the Company asserting collective and class claims on behalf of all “Junior Managers” under the Fair Labor Standards Act and New York Labor Law for failure to pay overtime compensation and for inaccurate wage notices and statements under New York law. Lock et al. v. Costco Wholesale Corp. (Case No. 2:23-cv-07904; E.D.N.Y.). The Company has not yet responded to the complaint.
In October 2023, a current employee filed suit against the Company asserting collective and class claims on behalf of all “supervisors” employed in New Jersey under the Fair Labor Standards Act and New Jersey Wage and Hour Law for failure to pay all hours worked. Shah v. Costco Wholesale Corp. (Case No. 2:23-cv-21286; D.N.J.) The Company has not yet responded to the complaint.
In February 2021, a former employee filed a class action against the Company alleging violations of California Labor Code regarding payment of wages, meal and rest periods, wage statements, reimbursement of expenses, payment of final wages to terminated employees, and for unfair business practices. Edwards v. Costco Wholesale Corp. (Case No. 5:21-cv-00716: C.D. Cal.). On September 27, 2022, the parties reached a settlement for an immaterial amount. The settlement was granted final court approval on October 20, 2023.
In July 2021, a former temporary staffing employee filed a class action against the Company and a staffing company, alleging violations of the California Labor Code regarding payment of wages, meal and rest periods, wage statements, the timeliness of wages and final wages, and for unfair business practices. Dimas v. Costco Wholesale Corp. (Case No. STK-CV-UOE-2021-0006024; San Joaquin Superior Court). The Company has moved to compel arbitration of the plaintiff's individual claims and to dismiss the class action complaint. On September 7, 2021, the same plaintiff filed a separate representative action under the California Private Attorneys General Act, asserting the same Labor Code violations and seeking civil
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penalties and attorneys' fees. The case has been stayed pending arbitration of the plaintiff's individual claims.
In September 2021, an employee filed a class action against the Company alleging violations of the California Labor Code regarding failure to provide sick pay, failure to timely pay wages due at separation from employment, and for violations of California's unfair competition law. De Benning v. Costco Wholesale Corp. (Case No. 34-2021-00309030-CU-OE-GDS; Sacramento Superior Court). In April 2022, a settlement for an immaterial amount was agreed upon, subject to court approval. Final approval of the settlement was granted on February 10, 2023. A compliance hearing is scheduled for February 9, 2024.
In May 2022, an employee filed a PAGA action against the Company, alleging claims under the California Labor Code regarding the payment of wages, meal and rest periods, the timeliness of wages and final wages, wage statements, accurate records and business expenses. Gonzalez v. Costco Wholesale Corp. (Case No. 22AHCV00255; Los Angeles Superior Court). The Company filed an answer denying the allegations. On October 31, 2023, a settlement was reached for an immaterial amount. The settlement requires court approval.
Beginning in December 2017, the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases concerning the impacts of opioid abuses filed against various defendants by counties, cities, hospitals, Native American tribes, third-party payors, and others. In re National Prescription Opiate Litigation (MDL No. 2804) (N.D. Ohio). Included are cases filed against the Company by counties and cities in Michigan, New Jersey, Oregon, Virginia and South Carolina, a third-party payor in Ohio, and a hospital in Texas, class actions filed on behalf of infants born with opioid-related medical conditions in 40 states, and class actions and individual actions filed on behalf of individuals seeking to recover alleged increased insurance costs associated with opioid abuse in 43 states and American Samoa. Claims against the Company filed in federal court outside the MDL have been asserted by certain counties and cities in Florida and Georgia; claims filed by certain cities and counties in New York are pending in state court. Claims against the Company in state courts in New Jersey, Oklahoma, Utah, and Arizona have been dismissed. The Company is defending all of the pending matters.
Members of the Board of Directors, six corporate officers and the Company were defendants in a shareholder derivative action filed in June 2022 related to chicken welfare and alleged breaches of fiduciary duties. Smith, et ano. v. Vachris, et al., Superior Court of the State of Washington, County of King, No, 22-2-08937-7SEA. The complaint sought from the individual defendants' damages, injunctive relief, costs, and attorneys' fees. On March 28, 2023, the court granted the defendants' motion to dismiss the action. The plaintiffs subsequently made a demand that the Board of Directors take various actions, including among other things, pursuing claims against directors and officers of the type asserted in the litigation. A demand review committee of the Board has been appointed to make a recommendation to the Board as to the demand.
In February 2023, Go Green Norcal, LLC filed an arbitration demand against the Company. The demand alleged a breach of a supply agreement and sought unspecified damages and cancellation of a loan from the Company. In March 2023, the Company filed its answer, denying any breach by the Company, along with counterclaims against Go Green and an affiliate for breach of contract, negligent misrepresentation, and an accounting. In August 2023 the plaintiff asserted that its damages exceed $70 million.
Between September 25, 2023, and October 21, 2023, five class action suits were filed against the Company alleging various privacy law violations stemming from pixel trackers on Costco.com. Birdwell v. Costco, Case No. T23-1405, Contra Costa County Superior Court; Castillo v. Costco, Case No. 2:34-cv-01548 (W.D. Wash.); Groves et ano. v. Costco, Case No. 2:23-cv-01662 (W.D. Wash.); R.S. v, Costco, Case No. 2:23-cv-01628; Stock v. Costco, Case No. 2:23-cv-08808 (C.D. Cal.). The complaints seek damages, equitable relief and attorneys’ fees under various statutes, including the Washington Consumer Protection Act, Washington Privacy Act, Electronic Communications Privacy Act, California Invasion of Privacy Act, and California Confidentiality of Medical Information Act. They also allege breach of implied
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contract, breach of fiduciary duty of confidentiality, unjust enrichment, negligence, and invasion of privacy. The Company has not yet responded to the complaints.
In October 2021 the Company received a notice that the Quebec Health Insurance Board had commenced an inquiry to determine whether the Company had given or received improper payments for drugs that are covered by the province's prescription drug program from drug wholesalers, generic drug manufacturers or the independent pharmacist who owns and operates the pharmacies located in the Company's Quebec locations. The inquiry covers a period beginning January 1, 2017.
In January 2023 the Company received a Civil Investigative Demand from the U.S. Attorney's Office, Western District of Washington, requesting documents. The government is conducting a False Claims Act investigation concerning whether the Company presented or caused to be presented to the federal government for payment false claims relating to prescription medications.
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; 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.
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Note 9—Segment Reporting
The Company is principally engaged in the operation of membership warehouses through wholly owned subsidiaries in the U.S., Canada, Mexico, Japan, the U.K., Korea, Australia, Taiwan, China, Spain, France, Iceland, New Zealand, and Sweden. 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 the notes to the consolidated financial statements included in the Company's Annual Report filed on Form 10-K for the fiscal year ended September 3, 2023, and Note 1 above. Inter-segment net sales and expenses have been eliminated in computing total revenue and operating income.
The following table provides information for the Company's reportable segments:
| United States | Canada | Other International | Total | ||||||||||||||||||||
| 12 Weeks Ended November 26, 2023 | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| 12 Weeks Ended November 20, 2022 | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| 53 Weeks Ended September 3, 2023 | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
| Operating income | |||||||||||||||||||||||
Disaggregated Revenue
The following table summarizes net sales by merchandise category; sales from e-commerce websites and business centers have been allocated to the applicable merchandise categories:
| 12 Weeks Ended | |||||||||||||||||||||||
| November 26, 2023 | November 20, 2022 | ||||||||||||||||||||||
| Foods and Sundries | $ | $ | |||||||||||||||||||||
| 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), energy and certain commodities, geopolitical conditions (including tariffs and the Ukraine conflict), 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
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to promote understanding of the results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our 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 websites based on the concept that offering our members low prices on a limited selection of nationally-branded and private-label products in a wide range of categories will produce high sales volumes and rapid inventory turnover. When combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, these volumes and turnover enable us to operate profitably at significantly lower gross margins (net sales less merchandise costs) than most other retailers. We 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 websites 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. generally accepted accounting principles (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); 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 SG&A expenses, reducing them as a percentage of sales and enhancing profitability. Generating comparable sales growth is foremost a question of making available to our members the right merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long-term. Another substantial factor in net sales growth is the health of the economies in which we do business, including the effects of inflation or deflation, especially the United States. Net sales growth and gross margins are also impacted by our competition, which is vigorous and widespread, across a wide range of global, national and regional wholesalers and retailers, including those with e-commerce operations. While we cannot control or reliably predict general economic health or changes in competition, we believe that we have been successful historically in adapting our business to these changes, such as through adjustments to our pricing and merchandise mix, including increasing the penetration of our private-label items, and through online offerings.
Our philosophy is to provide our members with quality goods and services at competitive prices. We do not focus in the short-term on maximizing prices charged, but instead seek to maintain what we believe is a perception among our members of our “pricing authority” – consistently providing the most competitive values. Our investments in merchandise pricing may include reducing prices on merchandise to drive sales or meet competition and holding prices steady despite cost increases instead of passing the increases on to our members, all negatively impacting gross margin and gross margin as a percentage of net sales (gross margin percentage).
We believe our gasoline business enhances traffic in our warehouses, but 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. Rapidly changing gasoline prices may significantly impact our near-term net sales growth. Generally, rising gasoline prices benefit net sales growth which, given the higher sales base, negatively impacts our gross margin percentage but decreases our SG&A expenses as a percentage of net sales. A decline in gasoline prices has the inverse effect.
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. The negative aspects of such growth, however, including lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouses when openings occur in existing markets, are continuing to decline in significance as they relate to the results of our total operations. Our rate of 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, generally has a lower gross margin percentage than our warehouse operations.
The membership format is an integral part of our business and has a significant effect on our profitability. This format is designed to reinforce member loyalty and provide continuing fee revenue. The extent to which we achieve growth in our membership base, increase the penetration of our Executive members,
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and sustain high renewal rates materially influences our profitability. Our paid-membership growth rate may be adversely impacted when warehouse openings occur in existing markets as compared to new markets.
Our financial performance depends heavily on controlling costs. While we believe that we have achieved successes in this area, some significant costs are partially outside our control, particularly health care and utility expenses. With respect to the compensation of our employees, our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that achieving our longer-term objectives of reducing employee turnover and enhancing employee satisfaction requires maintaining compensation levels that are better than the industry average for much of our workforce. This may cause us, for example, to absorb costs that other employers might seek to pass through to their workforces. Because our business operates on very low margins, modest changes in various items in the consolidated statements of income, particularly merchandise costs and 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 of foreign-exchange rate changes 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 first quarter of 2024 and 2023 relate to the 12-week fiscal quarters ended November 26, 2023, and November 20, 2022. Certain percentages presented are calculated using actual results prior to rounding.
Highlights for the first quarter of 2024 versus 2023 include:
•Net sales increased 6% to $56,717, driven by a 4% increase in comparable sales and sales at 25 net new warehouses opened since the end of the first quarter of 2023;
•Membership fee revenue increased 8% to $1,082, driven by new member sign-ups, upgrades to Executive Membership, and a higher renewal rate;
•Gross margin percentage increased 43 basis points, driven primarily by our warehouse operations and other businesses and the absence of a charge of $93, $0.15 per diluted share, predominantly related to the discontinuation of our charter shipping activities, which was recorded in the first quarter of 2023;
•SG&A expenses as a percentage of net sales increased 25 basis points, primarily due to increased costs in warehouse operations and other businesses, including the impact of wage increases in March and September 2023;
•The provision for income taxes in the first quarter of 2024 was positively impacted by a benefit related to stock compensation of $44, $0.10 per diluted share, compared to $53, $0.12 per diluted share, in the first quarter of 2023;
•Net income was $1,589, $3.58 per diluted share, compared to $1,364, $3.07 per diluted share in 2023;
•A quarterly cash dividend of $1.02 per share was declared on October 18, 2023, and paid on November 17, 2023; and
•Subsequent to the end of the quarter, on December 13, 2023, the Board of Directors declared a special cash dividend of $15.00 per share, payable January 12, 2024.
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RESULTS OF OPERATIONS
Net Sales
| 12 Weeks Ended | |||||||||||||||||||||||
| November 26, 2023 | November 20, 2022 | ||||||||||||||||||||||
Net Sales | $ | 56,717 | $ | 53,437 | |||||||||||||||||||
Changes in net sales: | |||||||||||||||||||||||
| U.S. | 4 | % | 11 | % | |||||||||||||||||||
| Canada | 7 | % | 3 | % | |||||||||||||||||||
| Other International | 16 | % | — | % | |||||||||||||||||||
| Total Company | 6 | % | 8 | % | |||||||||||||||||||
Changes in comparable sales: | |||||||||||||||||||||||
| U.S. | 2 | % | 9 | % | |||||||||||||||||||
| Canada | 6 | % | 2 | % | |||||||||||||||||||
| Other International | 11 | % | (3) | % | |||||||||||||||||||
| Total Company | 4 | % | 7 | % | |||||||||||||||||||
| E-commerce | 6 | % | (4) | % | |||||||||||||||||||
Changes in comparable sales excluding the impact of changes in foreign-currency and gasoline prices: | |||||||||||||||||||||||
| U.S. | 3 | % | 7 | % | |||||||||||||||||||
| Canada | 8 | % | 8 | % | |||||||||||||||||||
| Other International | 7 | % | 9 | % | |||||||||||||||||||
| Total Company | 4 | % | 7 | % | |||||||||||||||||||
| E-commerce | 6 | % | (2) | % | |||||||||||||||||||
Net Sales
Net sales increased $3,280 or 6%, during the first quarter of 2024. The improvement was attributable to an increase in comparable sales of 4%, and sales at the 25 net new warehouses opened since the end of the first quarter of 2023. Sales increased $2,921, or 7% in core merchandise categories, led by fresh foods and foods and sundries. Sales in warehouse ancillary and other businesses increased $359, or 3%, led by pharmacy.
During the first quarter of 2024, lower gasoline prices negatively impacted net sales by $341, 64 basis points, compared to 2023, with a 4% decrease in the average price per gallon. Changes in foreign currencies relative to the U.S. dollar positively impacted net sales by approximately $195, 36 basis points, compared to the first quarter of 2023, attributable to our Other International operations, partially offset by our Canadian operations.
Comparable Sales
Comparable sales increased 4% in the first quarter of 2024 and were positively impacted by increases in shopping frequency, partially offset by a slight decrease in average ticket.
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Membership Fees
| 12 Weeks Ended | |||||||||||||||||||||||
| November 26, 2023 | November 20, 2022 | ||||||||||||||||||||||
| Membership fees | $ | 1,082 | $ | 1,000 | |||||||||||||||||||
| Membership fees increase | 8 | % | 6 | % | |||||||||||||||||||
| Total paid members (000s) | 72,000 | 66,900 | |||||||||||||||||||||
| Total cardholders (000s) | 129,500 | 120,900 | |||||||||||||||||||||
Membership fee revenue increased 8%, driven by new member sign-ups, upgrades to Executive Membership, and a higher renewal rate. At the end of the first quarter of 2024, our renewal rates were 92.8% 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 | |||||||||||||||||||||||
| November 26, 2023 | November 20, 2022 | ||||||||||||||||||||||
| Net sales | $ | 56,717 | $ | 53,437 | |||||||||||||||||||
| Less merchandise costs | 50,457 | 47,769 | |||||||||||||||||||||
| Gross margin | $ | 6,260 | $ | 5,668 | |||||||||||||||||||
Gross margin percentage | 11.04 | % | 10.61 | % | |||||||||||||||||||
Gross margin percentage increased 43 basis points. Excluding the impact of gasoline price deflation on net sales, gross margin percentage was 10.97%, an increase of 36 basis points. The 36 basis-point increase was positively impacted by: 22 basis points related to our warehouse ancillary and other businesses, primarily gasoline and e-commerce; 17 basis points due to the absence of a charge related to the discontinuation of our charter shipping activities that was recorded in the first quarter of 2023; and three basis points due to a LIFO benefit. These were partially offset by: three basis points due to core merchandise categories, predominantly fresh foods; and three basis points 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 five basis points. The increase was primarily due to non-foods, partially offset by fresh foods and foods and sundries. This measure eliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses.
Gross margin on a segment basis, when expressed as a percentage of the segment's own sales and excluding the impact of changes in gasoline prices on net sales (segment gross margin percentage), increased across all segments. Our U.S. segment performed similarly to the results above. The increases in our Canadian and Other International segments were primarily due to increases in warehouse ancillary and other businesses and core merchandise categories. All segments were negatively impacted by increased 2% rewards.
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Selling, General and Administrative Expenses
| 12 Weeks Ended | |||||||||||||||||||||||
| November 26, 2023 | November 20, 2022 | ||||||||||||||||||||||
| SG&A expenses | $ | 5,358 | $ | 4,917 | |||||||||||||||||||
| SG&A expenses as a percentage of net sales | 9.45 | % | 9.20 | % | |||||||||||||||||||
SG&A expenses as a percentage of net sales increased 25 basis points. SG&A expenses as a percentage of net sales excluding the impact of gasoline price deflation was 9.39%, an increase of 19 basis points. The comparison to last year was negatively impacted by 14 basis points in warehouse operations and other businesses which included the impact of wage increases in March and September 2023. Stock compensation and preopening costs were each higher by two basis points, and central operating costs were higher by one basis point.
Interest Expense
| 12 Weeks Ended | |||||||||||||||||||||||
| November 26, 2023 | November 20, 2022 | ||||||||||||||||||||||
| Interest expense | $ | 38 | $ | 34 | |||||||||||||||||||
Interest expense is primarily related to Senior Notes and financing leases.
Interest Income and Other, Net
| 12 Weeks Ended | |||||||||||||||||||||||
| November 26, 2023 | November 20, 2022 | ||||||||||||||||||||||
| Interest income | $ | 154 | $ | 54 | |||||||||||||||||||
| Foreign-currency transaction gains (losses), net | 3 | (9) | |||||||||||||||||||||
| Other, net | 3 | 8 | |||||||||||||||||||||
| Interest income and other, net | $ | 160 | $ | 53 | |||||||||||||||||||
The increase in interest income in the first quarter was due to higher global interest rates and higher average cash and investment balances. Foreign-currency transaction gains (losses), 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 | |||||||||||||||||||||||
| November 26, 2023 | November 20, 2022 | ||||||||||||||||||||||
| Provision for income taxes | $ | 517 | $ | 406 | |||||||||||||||||||
| Effective tax rate | 24.5 | % | 23.0 | % | |||||||||||||||||||
The effective tax rate for the first quarter of 2024 was impacted by net discrete tax benefits of $40, primarily due to excess tax benefits related to stock compensation. Excluding discrete net tax benefits, the tax rate was 26.4% for the first quarter of 2024.
The effective tax rate for the first quarter of 2023 was impacted by net discrete tax benefits of $56, primarily due to excess tax benefits related to stock compensation. Excluding discrete net tax benefits, the tax rate was 26.1% for the first quarter of 2023.
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LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our significant sources and uses of cash and cash equivalents:
| 12 Weeks Ended | |||||||||||
| November 26, 2023 | November 20, 2022 | ||||||||||
| Net cash provided by operating activities | $ | 4,651 | $ | 2,610 | |||||||
| Net cash used in investing activities | (366) | (1,057) | |||||||||
| Net cash used in financing activities | (974) | (863) | |||||||||
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 $17,864 and $15,234 at November 26, 2023, and September 3, 2023. Of these balances, unsettled credit and debit card receivables represented approximately $2,603 and $2,282 at November 26, 2023, and September 3, 2023. These receivables generally settle within four days.
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 $4,651 in the first quarter of 2024, compared to $2,610 in the first quarter 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 payroll and employee benefits, utilities, and credit and debit card processing fees. Cash used in operations also includes payments for income taxes. Changes in our net investment in merchandise inventories (the difference between merchandise inventories and accounts payable) is impacted by several factors, including inventory levels and turnover, the forward deployment of inventory to accelerate delivery times, payment terms with suppliers, and early payments to obtain discounts.
Cash Flows from Investing Activities
Net cash used in investing activities totaled $366 in the first quarter of 2024, compared to $1,057 in the first quarter 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 quarter of 2024, we spent $1,040 on capital expenditures, and it is our current intention to spend approximately $4,400 to $4,600 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 10 new warehouses, including one relocation, in the
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first quarter of 2024 and plan to open 23 additional new warehouses, including one relocation, 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 $974 in the first quarter of 2024, compared to $863 in the first quarter of 2023. Cash flow used in financing activities during the first quarter of 2024 was primarily related to the payment of dividends, withholding taxes on stock-based awards, and repurchases of common stock. In November 2023, our Japanese subsidiary issued four Guaranteed Senior Notes totaling approximately $500 at fixed interest rates ranging from 1.400% to 2.120%.
Dividends
A quarterly cash dividend of $1.02 per share was declared on October 18, 2023, payable to shareholders of record on November 3, 2023, which was paid on November 17, 2023.
Subsequent to the end of the quarter, on December 13, 2023, the Board of Directors declared a special cash dividend of $15.00 per share, payable January 12, 2024, to shareholders of record as of the close of business on December 28, 2023. The aggregate amount of payments will be approximately $6.7 billion.
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 quarter of 2024 and 2023, we repurchased 288,000 and 285,000 shares of common stock, at an average price per share of $564.06 and $495.94, totaling approximately $162 and $141. 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 $3,401 at the end of the first quarter.
Bank Credit Facilities and Commercial Paper Programs
We maintain bank credit facilities for working capital and general corporate purposes. At November 26, 2023, we had borrowing capacity under these facilities of $1,245. Our international operations maintain $757 of this capacity under bank credit facilities, of which $163 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 first 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 $223. The outstanding commitments under these facilities at the end of the first quarter of 2024 totaled $188, 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
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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 1, 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
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 November 26, 2023, 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 first 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.
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Item 2—Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
The following table sets forth information on our common stock repurchase program activity for the first 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) | |||||||||||||||||||
| September 4, 2023 — October 1, 2023 | 95,000 | $ | 558.12 | 95,000 | $ | 3,510 | |||||||||||||||||
| October 2, 2023 — October 29, 2023 | 100,000 | 561.76 | 100,000 | 3,454 | |||||||||||||||||||
| October 30, 2023 — November 26, 2023 | 93,000 | 572.60 | 93,000 | 3,401 | |||||||||||||||||||
| Total first quarter | 288,000 | $ | 564.06 | 288,000 | |||||||||||||||||||
_______________
(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.
Item 4—Mine Safety Disclosures
Not applicable.
Item 5—Other Information
On December 16, 2023, Costco Wholesale Corporation entered into an executive employment agreement, effective January 1, 2024, with Ron Vachris. He will be employed as President and Chief Executive Officer for a one-year term beginning January 1, 2024; the Agreement may be renewed for one or more additional one-year terms upon the written agreement of both parties. The agreement provides for, among other things, an annual base salary of $1.15 million and upon involuntary termination of employment (other than for cause, death or disability) or resignation for good reason severance of 1.5 times annual base salary and target bonus, and accelerated vesting of certain equity awards. This description is qualified in its entirety by reference to the full text of the agreement, which is filed as Exhibit 10.2 to this Form 10-Q.
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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 | 10-K | 8/28/2022 | 10/5/2022 | |||||||||||||||||||||||||||||
| 3.2 | 8-K | 8/10/2023 | ||||||||||||||||||||||||||||||
| 10.1* | 8-K | 11/24/2023 | ||||||||||||||||||||||||||||||
| 10.2* | x | |||||||||||||||||||||||||||||||
| 31.1 | x | |||||||||||||||||||||||||||||||
| 32.1 | x | |||||||||||||||||||||||||||||||
| 101.INS | Inline XBRL Instance Document | x | ||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | x | ||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | x | ||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | x | ||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | x | ||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | x | ||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | x | ||||||||||||||||||||||||||||||
* Management contract, compensatory plan or arrangement.
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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) | |||||||||||
| December 20, 2023 | By | /s/ W. CRAIG JELINEK | |||||||||
| Date | W. Craig Jelinek Chief Executive Officer and Director | ||||||||||
| December 20, 2023 | By | /s/ RICHARD A. GALANTI | |||||||||
| Date | Richard A. Galanti Executive Vice President, Chief Financial Officer and Director | ||||||||||
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Exhibit 10.2
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this “Agreement”), effective January 1, 2024 (the “Effective Date”), is made between Costco Wholesale Corporation, a Washington corporation (the “Company”), and Ron Vachris (“Executive”).
WHEREAS, Executive will be employed as the Company’s President and Chief Executive Officer effective January 1, 2024 and is expected to make major contributions to profitability, growth and financial strength of the Company; and
WHEREAS, in consideration of Executive’s employment with the Company, the Company desires to provide Executive with certain compensation and benefits as set forth in this Agreement and to define the parties’ respective rights and responsibilities.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth and intending to be legally bound hereby, the Company and Executive agree as follows:
1.Certain Defined Terms. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters:
(a)“Annual Base Salary” means Executive’s annual base salary rate, exclusive of bonuses, commissions and other incentive pay, as in effect immediately preceding the Termination Date. As of the Effective Date, Executive’s Annual Base Salary is $1,150,000.
(b)“Board” means the Board of Directors of the Company, including any authorized committee of the Board.
(c)“Cause” means:
(i)an intentional tort (excluding any tort relating to a motor vehicle) which causes substantial loss, damage or injury to the property or reputation of the Company or its subsidiaries;
(ii)any serious crime or intentional, material act of fraud or dishonesty against the Company;
(iii)the commission of a felony that results in other than immaterial harm to the Company’s business or to the reputation of the Company or Executive;
(iv)habitual neglect of Executive’s reasonable duties (for a reason other than illness or incapacity) which is not cured within ten (10) days after written notice thereof by the Board to Executive;
(v)the disregard of written, material policies of the Company or its subsidiaries which causes other than immaterial loss, damage or injury to the property or reputation of the Company or its subsidiaries which is not cured within ten (10) days after written notice thereof by the Board to Executive; or
(vi)any material breach of Executive’s ongoing obligation not to disclose confidential information and not to assign intellectual property developed during employment which, if capable of being cured, is not cured within ten (10) days after written notice thereof by the Board to Executive.
(d)“COBRA” means the Consolidated Omnibus Budget Reconciliation Act of 1986, as amended.
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(e)“Code” means the Internal Revenue Code of 1986, as amended.
(f)“Disability” means, in the opinion of the Company, the inability of Executive, because of physical or mental illness or incapacity, to perform substantially all of the duties and services required of him under this Agreement for a period of ninety (90) days in the aggregate during any twelve (12) month period; provided, however, for the Company to be able to terminate Executive’s employment with the Company on account of Disability the Company must provide at least ten (10) days’ prior written notice to Executive at any time after the expiration of such ninety (90) day period that confirms its intention to terminate Executive’s employment as of the date set forth in the notice.
(g)“Good Reason” means:
(i)a material diminution in Executive’s Annual Base Salary or Target Bonus below the amount as of the Effective Date or as increased during the course of his employment with the Company, excluding one or more reductions (totaling no more than twenty percent (20%) in the aggregate) generally applicable to all senior executives of the Company;
(ii)a material diminution in Executive’s authority, duties or responsibilities;
(iii)a requirement that that Executive report to a corporate officer or employee of the Company instead of reporting directly to the Board;
(iv)a material diminution in the budget over which Executive retains authority;
(v)a material change in the geographic location at which Executive must perform services; or
(vi)any action or inaction that constitutes a material breach by the Company of this Agreement;
provided, however, that for Executive to be able to terminate his employment with the Company on account of Good Reason he must provide notice of the occurrence of the event constituting Good Reason and his desire to terminate his employment with the Company on account of such within ninety (90) days following the initial existence of the condition constituting Good Reason, and the Company must have a period of thirty (30) days following receipt of such notice to cure the condition. If the Company does not cure the event constituting Good Reason within such thirty (30) day period, the Termination Date shall be the day immediately following the end of such thirty (30) day period, unless the Company provides for an earlier Termination Date.
(h)“Target Bonus” means the amount of annual cash bonus at target that Executive is eligible for, as in effect immediately preceding the Termination Date.
(i)“Termination Date” means the last day of Executive’s employment with the Company or a subsidiary or an affiliate of the Company.
2.Termination.
(a)Involuntary Termination. In the event of: (i) an involuntary termination of Executive’s employment by the Company for any reason other than Cause, death or Disability, or (ii) Executive’s resignation for Good Reason, subject to Section 4, Executive shall be entitled to the payments and benefits provided in Section 2(b).
(b)Compensation Upon Involuntary Termination. In the event a termination described in Section 2(a) occurs, subject to Section 4, the Company shall provide Executive with the following:
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(i)1.5 times the sum of Annual Base Salary and Target Bonus, paid in a single lump sum cash payment on the sixtieth (60th) day following the Termination Date. (For purposes of this subsection (i), Annual Base Salary will mean the largest among Executive’s Annual Base Salary immediately prior to (A) the Termination Date, or (B) any reduction of Executive’s base salary described in the first clause of subsection (i) in the definition of Good Reason. For purposes of this subsection (i), Target Bonus will mean the largest among Executive’s Target Bonus immediately prior to (A) the Termination Date, or (B) any reduction of Executive’s target bonus described in the first clause of subsection (i) in the definition of Good Reason.)
(ii)For the period following the Termination Date until Executive is first eligible for Medicare (currently at age sixty-five (65)), Executive, and where applicable, Executive’s spouse and eligible dependents, will continue to be eligible to receive medical coverage under the Company’s medical plans in accordance with the terms of the applicable plan documents; provided, that in order to receive such continued coverage at such rates, Executive will be required to pay the applicable premiums to the plan provider, and the Company will reimburse Executive, within sixty (60) days following the date such monthly premium payment is due, an amount equal to the monthly COBRA premium payment, less applicable tax withholdings. Notwithstanding the foregoing, if Executive obtains employment during this period that entitles him and his spouse and eligible dependents to comprehensive medical coverage, Executive must notify the Company, and no further reimbursements will be paid by the Company to Executive pursuant to this subsection. In addition, if Executive does not pay the applicable monthly COBRA premium for a particular month at any time and coverage is lost as a result, no further reimbursements will be paid by the Company to Executive pursuant to this subsection. Notwithstanding the above, if the Company determines in its sole discretion that it cannot provide the foregoing COBRA benefits without potentially violating applicable law (including, without limitation, section 2716 of the Public Health Service Act), the Company shall in lieu thereof provide to Executive a taxable lump-sum payment in an amount equal to the monthly (or then remaining) COBRA premium that Executive would be required to pay to continue his group health coverage in effect on the Termination Date (which amount shall be based on the premium for the first month of COBRA coverage).
(iii)Any outstanding stock options held by Executive that are vested and exercisable as of the Termination Date shall remain exercisable, notwithstanding anything in any other agreement governing such options, until the earlier of (A) a period of one year after the Termination Date, or (B) the original term of the option.
(iv)Any Restricted Stock Units held by Executive that are unvested as of the Termination Date shall vest. Notwithstanding anything to the contrary in the applicable Grant Detail and Restricted Stock Unit Award Agreement, any unvested Restricted Stock Units that so vest will be settled within three (3) business days following the sixtieth (60th) day following the Termination Date.
(v)Any of Executive’s performance-based Restricted Stock Units (“PRUs”) that remain outstanding as of the Termination Date shall be treated in accordance with the terms of a written letter agreement or other instrument between the Company and Executive (a “PRU Agreement”); provided, however, that notwithstanding anything to the contrary in the PRU Agreement, none of the PRUs will be settled until after the sixtieth (60th) day following the Termination Date, but in any event by the sixty-fifth (65th) day following the last day of the applicable performance period for the PRUs
3.Termination of Employment on Account of Disability, Death, Cause or Voluntary Resignation Without Good Reason.
(a)Termination on Account of Disability. Notwithstanding anything in this Agreement to the contrary, if Executive’s employment terminates on account of Disability, Executive shall be entitled
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to receive disability benefits subject to and under the terms of any disability plan or program maintained by the Company that covers Executive (including under the original terms of any stock option held by Executive), and Executive shall not receive payments or benefits pursuant to Section 2, except that Executive shall be entitled to the following benefits, subject to Section 4:
(i)For a period of up to eighteen (18) months following the Termination Date, Executive, and where applicable, Executive’s spouse and eligible dependents will continue to be eligible to receive medical coverage under the Company’s medical plans in accordance with the terms of the applicable plan documents; provided, that in order to receive such continued coverage at such rates, Executive will be required to pay the applicable premiums to the plan provider, and the Company will reimburse Executive, within 60 days following the date such monthly premium payment is due, an amount equal to the monthly COBRA premium payment, less applicable tax withholdings. Notwithstanding the foregoing, if Executive obtains employment during this eighteen (18) month period that entitles him and his spouse and eligible dependents to comprehensive medical coverage, Executive must notify the Company and no further reimbursements will be paid by the Company to Executive pursuant to this subsection. In addition, if Executive does not pay the applicable monthly COBRA premium for a particular month at any time during the eighteen (18) month period and coverage is lost as a result, no further reimbursements will be paid by the Company to Executive pursuant to this subsection. Notwithstanding the above, if the Company determines in its sole discretion that it cannot provide the foregoing COBRA benefits without potentially violating applicable law (including, without limitation, section 2716 of the Public Health Service Act), the Company shall in lieu thereof provide to Executive a taxable lump-sum payment in an amount equal to the monthly (or then remaining) COBRA premium that Executive would be required to pay to continue his group health coverage in effect on the Termination Date (which amount shall be based on the premium for the first month of COBRA coverage).
(ii)Any Restricted Stock Units held by Executive that are unvested as of the Termination Date shall vest. Notwithstanding anything to the contrary in the applicable Grant Detail and Restricted Stock Unit Award Agreement, any unvested Restricted Stock Units that so vest will be settled within three (3) business days following the sixtieth (60th) day following the Termination Date.
(iii)Any of Executive’s PRUs that remain outstanding as of the Termination Date shall be treated in accordance with the terms of the PRU Agreement; provided, however, that notwithstanding anything to the contrary in the PRU Agreement, none of the PRUs will be settled until after the sixtieth (60th) day following the Termination Date, but in any event by the sixty-fifth (65th) day following the last day of the applicable performance period for the PRUs.
(b)Termination on Account of Death. Notwithstanding anything in this Agreement to the contrary, if Executive’s employment terminates on account of death, Executive shall be entitled to receive death benefits under any death benefit program maintained by the Company that covers Executive (including under the original terms of any stock option or Restricted Stock Units held by Executive), and Executive shall not receive payments or benefits pursuant to Section 2, except that any of Executive’s PRUs that remain outstanding as of the date of death shall be treated in accordance with the terms of the PRU Agreement.
(c)Termination on Account of Cause. Notwithstanding anything in this Agreement to the contrary, if Executive’s employment terminates by the Company on account of Cause, Executive shall not receive benefits pursuant to Section 2.
(d)Termination on Account of Voluntary Resignation Without Good Reason. Notwithstanding anything in this Agreement to the contrary, if Executive’s employment terminates on account of a resignation by Executive for no reason or any reason other than on account of Good Reason, Executive shall not receive payments or benefits pursuant to Section 2, except that any of
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Executive’s PRUs that remain outstanding as of the Termination Date shall be treated in a manner consistent with Section 2(b)(v) of this Agreement.
4.Conditions on Certain Payments or Benefits.
(a)General Release of Claims. Notwithstanding anything to the contrary in this Agreement, in consideration of Executive’s receipt of the payments and benefits described under Section 2(b) or Section 3(a), as applicable, Executive agrees that, as a condition to his receipt of any such payments and benefits, he shall timely execute (and not revoke thereafter) a general release of claims (a “Release”), in a form to be provided by the Company, releasing any and all claims of any kind arising from his employment or the termination of his employment with the Company. To be timely, the Release must become effective and irrevocable no later than fifty-five (55) days following the date of Executive’s termination (the “Release Deadline”). If the Release does not become effective and irrevocable by the Release Deadline, Executive will forfeit any rights to the payments and benefits under Section 2(b) or Section 3(a), as applicable.
(b)Clawback Policies. All amounts payable under this Agreement shall be subject to the terms of the Company’s “clawback” policies as in effect from time to time.
5.Accrued Obligations. To the extent not modified by this Agreement, Executive shall receive any amounts and benefits earned, accrued, or owing but not yet paid to him as of the Termination Date in accordance with the terms of any applicable employee benefit plans, programs, policies and arrangements of the Company.
6.Tax Matters.
(a)Withholding of Taxes. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as the Company determines it is required to withhold pursuant to any applicable law.
(b)Parachute Excise Tax. In the event that any amounts payable under this Agreement or otherwise to Executive would (i) constitute “parachute payments” within the meaning of section 280G of the Code or any comparable successor provisions and (ii) but for this subsection would be subject to the excise tax imposed by section 4999 of the Code or any comparable successor provisions (the “Excise Tax”), then such amounts payable to Executive hereunder shall be either:
(i)provided to Executive in full; or
(ii)provided to Executive to the maximum extent that would result in no portion of such benefits being subject to the Excise Tax;
whichever of the foregoing amounts, when taking into account applicable federal, state, local and foreign income and employment taxes, the Excise Tax and any other applicable taxes, results in the receipt by Executive, on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be subject to the Excise Tax. Unless the Company and Executive otherwise agree in writing, any determination required under this subsection shall be made in writing in good faith by a nationally recognized accounting firm selected by the Company (the “Accountants”). In the event of a reduction in benefits hereunder, the reduction of the total payments shall apply as follows, notwithstanding anything to the contrary in Section 11.9 of the Company’s 2019 Incentive Plan, as it may be amended from time to time, unless the Company and Executive otherwise agree in writing, and to the extent required by section 409A: (i) any cash severance payment due under this Agreement shall be reduced; (ii) forfeiture of any acceleration of vesting of any equity-based awards subject to section 409A of the Code, with the tranche that would vest last (without any such acceleration) first being subject to forfeiture; (iii) any acceleration of vesting of any equity-based awards not subject to section 409A of the Code shall remain as originally scheduled to vest, with the tranche that would vest last (without any such acceleration) first remaining as originally scheduled to vest, and (iv) reduction of all other payments and
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benefits in a manner and order of priority that provides Executive with the largest net after-tax value; provided that such other payments and benefits of equal after-tax present value shall be reduced in the reverse order of payment. Notwithstanding anything to the contrary in this Agreement, any reduction under this subsection shall be structured in a manner intended to comply with section 409A of the Code. For purposes of making the calculations required by this subsection, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good-faith interpretations concerning the application of the Code and other applicable legal authority. The Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this subsection. The Company shall bear all costs that the Accountants may reasonably incur in connection with any calculations contemplated by this subsection.
If, notwithstanding any reduction described in this subsection, the Internal Revenue Service (“IRS”) determines that Executive is liable for the Excise Tax as a result of the receipt of amounts payable under this Agreement or otherwise as described above, then Executive shall be obligated to pay back to the Company, within thirty (30) days after a final IRS determination or, in the event that Executive challenges the final IRS determination, a final judicial determination, a portion of such amounts equal to the Repayment Amount. The “Repayment Amount” with respect to the payment of benefits shall be the smallest such amount, if any, that is required to be paid to the Company so that Executive’s net after-tax proceeds with respect to any payment of benefits (after taking into account the payment of the Excise Tax and all other applicable taxes imposed on such payment) are maximized. The Repayment Amount with respect to the payment of benefits shall be zero if a Repayment Amount of more than zero would not result in Executive’s net after-tax proceeds with respect to the payment of such benefits being maximized. If the Excise Tax is not eliminated pursuant to this paragraph, Executive shall pay the Excise Tax.
Notwithstanding any other provision of this subsection, if (i) there is a reduction in the payment of benefits as described in this subsection, (ii) the IRS later determines that Executive is liable for the Excise Tax, the payment of which would result in the maximization of Executive’s net after-tax proceeds (calculated as if Executive’s benefits had not previously been reduced), and (iii) Executive pays the Excise Tax, then the Company shall pay to Executive the amount by which those benefits which were reduced pursuant to this subsection as soon as administratively possible after Executive pays the Excise Tax; provided that, to the extent required by section 409A of the Code, the reimbursement is made on or before the last day of Executive’s taxable year following the taxable year in which the Excise Tax was paid; the right to reimbursement is not subject to liquidation or exchange for another benefit; and the amount subject to reimbursement in one year shall not affect any other amounts eligible for reimbursement in any other year.
7.Employment Rights; Term of Agreement.
(a)Employment Rights. Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or Executive to have Executive remain in the employment of the Company or any subsidiary or affiliate of the Company.
(b)Term of Agreement. The term of this Agreement shall be one year from the Effective Date, and may be renewed for one or more additional one-year terms upon the written agreement of both parties.
8.Successors and Binding Agreement.
(a)The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance reasonably satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation
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any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor will thereafter be deemed the “Company” for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company.
(b)This Agreement will inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. This Agreement will supersede the provisions of any employment, severance or other agreement between Executive and the Company that relate to any matter that is also the subject of this Agreement, and such provisions in such other agreements will be null and void.
(c)This Agreement is personal in nature, and neither of the parties hereto will, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 8(a) and 8(b). Without limiting the generality or effect of the foregoing, Executive’s right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive’s will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 8(c), the Company will have no liability to pay any amount so attempted to be assigned, transferred or delegated.
9.Notices. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand-delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five (5) business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three (3) business days after having been sent by a nationally recognized overnight courier service such as FedEx or UPS, addressed to the Company (to the attention of John Sullivan, Executive Vice President and General Counsel) at its principal executive office and to Executive at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt.
10.Section 409A of the Code.
(a)Interpretation. Notwithstanding the other provisions hereof, this Agreement is intended to comply with the requirements of section 409A of the Code, to the extent applicable, and this Agreement shall be interpreted to avoid any penalty sanctions under section 409A of the Code. Accordingly, all provisions herein, or incorporated by reference, shall be construed and interpreted to comply with section 409A of the Code and, if necessary, any such provision shall be deemed amended to comply with section 409A of the Code and the regulations thereunder. If any payment or benefit cannot be provided or made at the time specified herein without incurring sanctions under section 409A of the Code, then such benefit or payment shall be provided in full at the earliest time thereafter when such sanctions will not be imposed. Any amount payable under this Agreement that constitutes deferred compensation subject to section 409A of the Code shall be paid at the time provided under this Agreement or such other time as permitted under section 409A of the Code. No interest will be payable with respect to any amount paid within a time period permitted by, or delayed because of, section 409A of the Code. All payments to be made upon the Termination Date under this Agreement that are deferred compensation subject to section 409A of the Code may only be made upon a “separation from service” under section 409A of the Code. For purposes of section 409A of the Code, each payment made under this Agreement shall be treated as a separate payment. In no event may Executive, directly or indirectly, designate the calendar year of payment.
(b)Payment Delay. To the maximum extent permitted under section 409A of the Code, the payments and benefits provided under this Agreement are intended to comply with the “short-term deferral exception” under Treas. Reg. § 1.409A-1(b)(4), and any remaining amount is intended to comply with the “separation pay exception” under Treas. Reg. § 1.409A-1(b)(9)(iii); provided, however, if
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any amount payable to Executive during the six (6) month period following the Termination Date does not qualify within either of the foregoing exceptions and constitutes deferred compensation subject to the requirements of section 409A of the Code, then such amount shall hereinafter be referred to as the “Excess Amount.” If at the time of Executive’s separation from service, the Company’s (or any entity required to be aggregated with the Company under section 409A of the Code) stock is publicly-traded on an established securities market or otherwise and Executive is a “specified employee” (as defined in section 409A of the Code and determined in the sole discretion of the Company (or any successor thereto) in accordance with the Company’s (or any successor thereto) “specified employee” determination policy), then the Company shall postpone the commencement of the payment of the portion of the Excess Amount that is payable within the six (6) month period following the Termination Date with the Company (or any successor thereto) for six (6) months following the Termination Date with the Company (or any successor thereto). The delayed Excess Amount shall be paid in a lump sum to Executive within ten (10) days following the date that is six (6) months following the Termination Date with the Company (or any successor thereto). If Executive dies during such six (6) month period and prior to the payment of the portion of the Excess Amount that is required to be delayed on account of section 409A of the Code, such Excess Amount shall be paid to the personal representative of Executive’s estate within sixty (60) days after Executive’s death. The Company makes no representation that any or all of the payments and benefits provided under this Agreement will be exempt from or comply with section 409A of the Code and makes no undertaking to preclude section 409A of the Code from applying to any such payment or benefit.
(c)Reimbursements. All reimbursements provided under this Agreement shall be made or provided in accordance with the requirements of section 409A of the Code, including, where applicable, the requirement that (i) any reimbursement is for expenses incurred during Executive’s lifetime (or during a shorter period of time specified in this Agreement), (ii) the amount of expenses eligible for reimbursement during a calendar year may not affect the expenses eligible for reimbursement in any other calendar year, (iii) the reimbursement of an eligible expense will be made on or before the last day of the taxable year following the year in which the expense is incurred, and (iv) the right to reimbursement is not subject to liquidation or exchange for another benefit.
11.Governing Law; Arbitration.
(a)Governing Law. The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Washington, without giving effect to the principles of conflict of laws of such State.
(b)Arbitration. Any controversies or claims arising out of or relating to this Agreement or Executive’s employment shall be fully and finally settled by confidential arbitration in Seattle, Washington, before a single arbitrator. Judgment on an award issued by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall be chosen (i) by agreement of the parties and need not be affiliated with any particular organization, but (ii) absent agreement of the parties, the arbitrator shall be appointed by Judicial Dispute Resolution (“JDR”) in Seattle, Washington, and if JDR is unable to do so, by Judicial Arbitration & Mediation Services, in Seattle, Washington. Absent agreement of the parties to the contrary, discovery and motion practice in the arbitration shall be governed by the Washington Civil Rules and the Local Rules of King County Superior Court, with the understanding that the arbitrator may, at his or her discretion, limit the extent and scope of discovery, and determine the permissibility of pre-hearing dispositive motions. The arbitrator shall fully and finally determine any and all questions of arbitrability. Confidentiality of the arbitration is at the request of, and for the benefit of, both parties. The Company shall be responsible for payment of any and all costs and arbitrator fees of such arbitration. Either party shall have the right to seek emergency injunctive relief in court in aid of arbitration to preserve the status quo pending determination of the merits in arbitration. Venue and jurisdiction for any such action for injunctive relief shall exist exclusively in state and federal courts in King County, Washington.
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12.Validity. If any provision of this Agreement or the application of any provision hereof to any person or circumstance is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal.
13.Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in a writing signed by Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party that are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. Any reference in this Agreement to a provision of a statute, rule or regulation will also include any successor provision thereto.
14.Board Membership. At each meeting of the Company’s shareholders prior to the Termination Date at which Executive’s board term is expiring, the Company will nominate Executive to serve as a member of the Board, subject to required stockholder approval and compliance with the Company’s policies and procedures regarding service as a member of the Board. Upon the termination of Executive’s employment for any reason, unless otherwise requested by the Board, Executive agrees to resign from the Board (and all other positions held at the Company and its affiliates), and Executive, at the Board’s request, will execute any documents necessary to reflect his resignation.
15.Indemnification and D&O Insurance. Executive will be provided indemnification to the extent permitted by the Company’s and its subsidiaries’ and affiliates’ Articles of Incorporation or Bylaws, including, if applicable, any directors and officers insurance policies, and in accordance with his existing indemnification agreement with the Company.
16.Employee Benefits. Executive will be eligible to participate in the Company employee benefit plans, programs, policies and arrangements that are applicable to other executive officers of the Company, as such plans, programs, policies and arrangements may exist from time to time and on terms at least as favorable as provided to any other executive officer of the Company.
17.Business Expenses. Executive will be reimbursed for all reasonable expenses incurred by him in performing his duties hereunder provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company.
18.No Duplication of Benefits. The payments and benefits provided under this Agreement shall offset substantially similar benefits provided to Executive pursuant to another Company policy, plan or agreement.
19.Survival. Notwithstanding any provision of this Agreement to the contrary, the parties’ respective rights and obligations under Section 2 will survive any termination or expiration of this Agreement or the termination of Executive’s employment for any reason whatsoever.
20.Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same agreement.
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| COSTCO WHOLESALE CORPORATION | ||||||||
| By: | /s/ Hamilton James | 12/15/2023 | ||||||
| Hamilton E. James | ||||||||
| Chairman of the Board of Directors | ||||||||
| EXECUTIVE | ||||||||
| By: | /s/ Ron Vachris | 12/16/2023 | ||||||
| Ron Vachris | ||||||||
| President & Chief Operating Officer | ||||||||
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Exhibit 31.1
CERTIFICATIONS
I, W. Craig Jelinek, certify that:
1)I have reviewed this Quarterly Report on Form 10-Q of Costco Wholesale Corporation (“the registrant”);
2)Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4)The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5)The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
December 20, 2023
/s/ W. CRAIG JELINEK | |||||
| W. Craig Jelinek | |||||
| Chief Executive Officer and Director | |||||
CERTIFICATIONS
I, Richard A. Galanti, certify that:
1)I have reviewed this Quarterly Report on Form 10-Q of Costco Wholesale Corporation (“the registrant”);
2)Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4)The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5)The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
December 20, 2023
/s/ RICHARD A. GALANTI | |||||
| Richard A. Galanti | |||||
| Executive Vice President, Chief Financial Officer and Director | |||||
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Costco Wholesale Corporation (the Company) on Form 10-Q for the quarter ended November 26, 2023, as filed with the Securities and Exchange Commission (the Report), I, W. Craig Jelinek, Chief Executive Officer and Director of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ W. CRAIG JELINEK | Date: December 20, 2023 | |||||||
| W. Craig Jelinek | ||||||||
| Chief Executive Officer and Director | ||||||||
A signed original of this written statement has been provided to and will be retained by Costco Wholesale Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Costco Wholesale Corporation (the Company) on Form 10-Q for the quarter ended November 26, 2023, as filed with the Securities and Exchange Commission (the Report), I, Richard A. Galanti, Executive Vice President, Chief Financial Officer and Director of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ RICHARD A. GALANTI | Date: December 20, 2023 | |||||||
| Richard A. Galanti | ||||||||
| Executive Vice President, Chief Financial Officer and Director | ||||||||
A signed original of this written statement has been provided to and will be retained by Costco Wholesale Corporation and furnished to the Securities and Exchange Commission or its staff upon request.