Costco Wholesale (COST) 10-K risk factor changes: FY2018 vs FY2017

[added: Our] warehouse and online businesses depend upon the secure transmission of encrypted confidential information over public networks, including information permitting cashless payments.

A compromise of our security systems or [added: defects within our hardware or software, or] those of our business associates, that results in our members' [added: or employees'] information being obtained by unauthorized persons, could adversely affect our reputation with our members and others, as well as our operations, results of operations, financial condition and liquidity, and could result in [removed: litigation against us] [added: litigation, government actions,] or the imposition of penalties.

Privacy and information-security laws and regulations change, and compliance with them may result in cost increases due [removed: to necessary] [added: to, among other things,] systems changes and the development of new processes.

If we or those with whom we share information fail to comply with these laws and regulations, our reputation could be damaged, possibly resulting in lost future business, and we could be subjected to additional legal risk as a result of [removed: non-compliance.][added: non-compliance, including fines of up to 4% of our global revenue in the case of the General Data Protection Regulation (GDPR).]

[removed: Our security] [added: These] measures may be [removed: undermined] [added: undermined, however,] due to the actions of outside parties, employee error, internal or external malfeasance, or otherwise, and, as a result an unauthorized party may obtain access to our data systems and misappropriate business and personal information.

[removed: Because the techniques used to obtain unauthorized access, disable or degrade] service, or sabotage systems change frequently and may not immediately produce signs of intrusion, we may be unable to anticipate these techniques, timely discover or counter them, or implement adequate preventative measures.

Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation, and potentially have an adverse effect on our [removed: business.][added: business and results of operations.]

We might sell products that cause [removed: unexpected] illness or injury to our members, harm to our reputation, and expose us to litigation.

If our [removed: merchandise offerings,] [added: merchandise,] such as food and prepared food products for human consumption, drugs, children's products, pet [removed: products,] [added: products] and durable goods, do not meet or are perceived not to meet applicable safety standards or our members' expectations regarding safety, we could experience lost sales, increased costs, litigation or reputational harm.

[added: While we are subject to governmental inspection and regulations and work to comply in all material respects] with applicable laws and regulations, we cannot be sure that consumption or use of our products will not cause [removed: a health-related] illness or injury in the future or that we will not be subject to claims, lawsuits, or government investigations relating to such matters resulting in costly product recalls and other liabilities that could adversely affect our business and results of operations.

Failure to identify timely or effectively respond to changing consumer tastes, preferences (including those relating to sustainability of product sources and animal welfare) and spending patterns could negatively affect our relationship with our members, the demand for our products and [removed: services] [added: services,] and our market share.

If we do not successfully develop and maintain a relevant [removed: multichannel] [added: omnichannel] experience for our members, our results of operations could be adversely impacted.

[removed: Multichannel] [added: Omnichannel] retailing is rapidly [removed: evolving] [added: evolving,] and we must keep pace with changing member expectations and new developments by our competitors.

[removed: We are] [added: The Company is] predominantly [removed: self-insured, with insurance coverage for certain catastrophic risks,] [added: self-insured] for employee health care benefits, workers’ compensation, general liability, property damage, directors’ and officers’ liability, vehicle [removed: liability] [added: liability,] and inventory loss.

[removed: The occurrence of significant claims,] [added: Significant claims or events, regulatory changes,] a substantial rise in costs [added: of health care or costs] to maintain our [removed: insurance] [added: insurance,] or the failure to maintain adequate insurance coverage could have an adverse impact on our financial condition and results of operations.

Although we maintain specific coverages for [removed: losses from physical damages in excess of certain amounts to guard against] catastrophic losses, we still bear the risk of losses incurred as a result of any physical damage to, or the destruction of, any warehouses, depots, manufacturing or home office facilities, loss or spoilage of inventory, and business interruption caused by any such events to the extent they are below catastrophic levels of coverage, as well as any losses to the extent they exceed our aggregate limits of applicable coverages.

We compete for members, employees, sites, products and services and in other important respects with a wide range of local, regional and national wholesalers and retailers, both in the United States and in foreign countries, including other [removed: warehouse club] [added: warehouse-club] operators, supermarkets, supercenters, internet retailers, gasoline stations, hard discounters, [removed: and] department and specialty [removed: stores.][added: stores and operators selling a single category or narrow range of merchandise.]

Some competitors may have greater financial [removed: resources,] [added: resources and technology capabilities,] better access to [removed: merchandise] [added: merchandise,] and greater market penetration than we do.

[removed: Higher energy and gasoline costs, inflation, levels of unemployment, healthcare costs, consumer debt levels, foreign-currency exchange rates, unsettled financial markets, weaknesses in housing and real estate markets, reduced consumer confidence, changes and uncertainties related to government fiscal and tax] policies including [removed: increased] [added: changes in tax rates,] duties, tariffs, or other restrictions, sovereign debt crises, and other economic factors could adversely affect demand for our products and services, require a change in product mix, or impact the cost of or ability to purchase inventory.

Vendors may be unable to [added: timely] supply us with quality merchandise at competitive prices [removed: in a timely manner] or may fail to adhere to our high standards, resulting in adverse effects on our business, merchandise inventories, sales, and profit margins.

This failure could lead to recalls and [removed: litigation,] [added: litigation] and otherwise damage our reputation and our brands, increase our costs, and otherwise adversely impact our business.

During [removed: 2017,] [added: 2018,] our international operations, including Canada, generated [removed: 27%] [added: 28%] and [removed: 36%] [added: 38%] of our net sales and operating income, respectively.

To prepare our consolidated financial statements, we [removed: must] translate the financial statements of our international operations from local currencies into U.S. dollars using [removed: exchange rates for the] current [removed: period.][added: exchange rates.]

Future fluctuations in [removed: currency] exchange rates [removed: over time] that are unfavorable to us may adversely affect the financial performance of our Canadian and Other International operations and have a corresponding adverse period-over-period effect on our results of operations.

[removed: We may pay for] [added: A portion of the] products we purchase for sale in our warehouses around the world [removed: with] [added: is paid for in] a currency other than the local currency of the country in which the goods [removed: will be] [added: are] sold.

U.S. and foreign government regulations limiting carbon dioxide and other greenhouse gas emissions may result in increased compliance [removed: costs] and [added: merchandise costs, and] legislation or regulation affecting energy inputs that could materially affect [added: our profitability.]

Climate change [added: and extreme weather conditions, such as intense hurricanes, thunderstorms, tornadoes, and snow or ice storms, as well as rising sea levels] could affect our ability to procure needed commodities at costs and in quantities we currently experience.

Failure to meet [added: financial] market expectations [removed: for our financial performance] could adversely affect the market price and volatility of our stock.

Our international operations subject us to risks associated with the legislative, judicial, accounting, regulatory, political and economic factors specific to the countries or regions in which we [removed: operate] [added: operate,] which could adversely affect our business, financial condition and results of operations.

During [removed: 2017,] [added: 2018,] we operated [removed: 227] [added: 235] warehouses [removed: in 10 countries] outside of the U.S., and we plan to continue expanding our international operations.

Other factors that may impact international operations include foreign [removed: trade,] [added: trade (including tariffs),] monetary and fiscal policies and the laws and regulations of the U.S. and foreign governments, agencies and similar organizations, and risks associated with having major facilities [removed: located] in [removed: countries] [added: locations] which have been historically less stable than the U.S. Risks inherent in international operations also include, among others, the costs and difficulties of managing international operations, adverse tax consequences, and [removed: greater] difficulty in enforcing intellectual property rights.

Accounting principles and related pronouncements, implementation guidelines, and interpretations we apply to a wide range of matters that are relevant to our business, [removed: including, but not limited to, revenue recognition, merchandise inventories, vendor rebates and other vendor consideration, impairment of long-lived assets,] [added: including] self-insurance [removed: liabilities,] [added: liabilities] and income [removed: taxes] [added: taxes,] are highly complex and involve subjective assumptions, estimates and judgments by our management.

Changes in [removed: these] rules or [removed: their] interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial [removed: performance.][added: performance and have a material impact on our consolidated financial statements.]

The risks described below could materially and adversely affect our business, financial condition and results of operations.

We could also be affected by additional risks that apply to all companies operating in the U.S. and globally, as well as other risks that are not presently known to us or that we currently consider to be immaterial.

These Risk Factors should be carefully reviewed in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and our consolidated financial statements and related notes in Item 8 of this Report.

Business and Operating Risks

We are highly dependent on the financial performance of our U.S. and Canadian operations.

Our financial and operational performance is highly dependent on our U.S. and Canadian operations, which comprised 87% and 83% of net sales and operating income in 2018, respectively.

Within the U.S., we are highly dependent on our California operations, which comprised 30% of U.S. net sales in 2018.

Our California market, in general, has a larger percentage of higher volume warehouses as compared to our other domestic markets.

Any substantial slowing or sustained decline in these operations could materially adversely affect our business and financial results.

Declines in financial performance of our U.S. operations, particularly in California, and our Canadian operations could arise from, among other things: slow growth or declines in comparable warehouse sales (comparable sales); negative trends in operating expenses, including increased labor, healthcare and energy costs; failing to meet targets for warehouse openings; cannibalizing existing locations with new warehouses; shifts in sales mix toward lower gross margin products; changes or uncertainties in economic conditions in our markets, including higher levels of unemployment and depressed home values; and failing to consistently provide high quality and innovative new products.

We may be unsuccessful implementing our growth strategy, including expanding our business in existing markets and new markets, which could have an adverse impact on our business, financial condition and results of operations.

Our growth is dependent, in part, on our ability to acquire property and build or lease new warehouses and depots.

We compete with other retailers and businesses for suitable locations.

Local land use and other regulations restricting the construction and operation of our warehouses and depots, as well as local community actions opposed to the location of our warehouses or depots at specific sites and the adoption of local laws restricting our operations and environmental regulations, may impact our ability to find suitable locations and increase the cost of sites and of constructing, leasing and operating warehouses and depots.

We also may have difficulty negotiating leases or purchase agreements on acceptable terms.

In addition, certain jurisdictions have enacted or proposed laws and regulations that would prevent or restrict the operation or expansion plans of certain large retailers and warehouse clubs, including us.

Failure to effectively manage these and other similar factors may affect our ability to timely build or lease and operate new warehouses and depots, which could have a material adverse effect on our future growth and profitability.

We seek to expand in existing markets to attain a greater overall market share.

A new warehouse may draw members away from our existing warehouses and adversely affect their comparable sales performance, member traffic, and profitability.

We intend to continue to open warehouses in new markets.

Associated risks include difficulties in attracting members due to a lack of familiarity with us, attracting members of other wholesale club operators, our lack of familiarity with local member preferences, and seasonal differences in the market.

Entry into new markets may bring us into competition with new competitors or with existing competitors with a large, established market presence.

We cannot ensure that new warehouses and new websites will be profitable and, as a result, future profitability could be delayed or otherwise materially adversely affected.

Our failure to maintain membership growth, loyalty and brand recognition could adversely affect our results of operations.

Membership loyalty and growth are essential to our business.

The extent to which we achieve growth in our membership base, increase the penetration of our Executive members, and sustain high renewal rates materially influences our profitability.

Damage to our brands or reputation may negatively impact comparable sales, diminish member trust, and reduce member renewal rates and, accordingly, net sales and membership fee revenue, negatively impacting our results of operations.

We sell many products under our Kirkland Signature brand.

Maintaining consistent product quality, competitive pricing, and availability of these products is essential to developing and maintaining member loyalty.

These products also generally carry higher margins than national brand products carried in our warehouses and represent a growing portion of our overall sales.

If the Kirkland Signature brand experiences a loss of member acceptance or confidence, our sales and gross margin results could be adversely affected.

Disruptions in our merchandise distribution or processing, packaging, manufacturing, and other facilities could adversely affect sales and member satisfaction.

We depend on the orderly operation of the merchandise receiving and distribution process, primarily through our depots.

We also rely upon processing, packaging, manufacturing and other facilities to support our business, which includes the production of certain private-label items.

Although we believe that our operations are efficient, disruptions due to fires, tornadoes, hurricanes, earthquakes or other catastrophic events, labor issues or other shipping problems may result in delays in the production and delivery of merchandise to our warehouses, which could adversely affect sales and the satisfaction of our members.

We rely extensively on information technology to process transactions, compile results, and manage our businesses.

Failure or disruption of our primary and back-up systems could adversely affect our businesses.

A failure to adequately update our existing systems and implement new systems could harm our businesses and adversely affect our results of operations.

Given the very high volume of transactions we process each year it is important that we maintain uninterrupted operation of our business-critical computer systems.

Our systems, including our back-up systems, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, catastrophic events such as fires, earthquakes, tornadoes and hurricanes, and errors by our employees.

While we are subject to governmental inspection and regulations and work to comply in all material respects

Item 1A—Risk Factors (Continued)

We are primarily self-insured as it relates to property damage, due to the substantial premiums required for insurance coverage over physical losses caused by certain natural disasters, as well as the limitations on available coverage for such losses.

our profitability.

Climate change may be associated with extreme weather conditions, such as more intense hurricanes, thunderstorms, tornadoes, and snow or ice storms, as well as rising sea levels.

Provisions for losses related to self-insured risks are generally based upon independent actuarially determined estimates.

The assumptions underlying the ultimate costs of existing claim losses can be highly unpredictable, which can affect the liability recorded for such claims.

For example, variability in health care cost inflation rates inherent in these claims can affect the amounts recognized.

Similarly, changes in legal trends and interpretations, as well as changes in the nature and method of how claims are settled can impact ultimate costs.

Although our estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, any changes could have a considerable effect upon future claim costs and currently recorded liabilities and could materially impact our consolidated financial statements.

[added: For those investments that are classified as available-for-sale, the unrealized gains or] losses related to fluctuations in market volatility and interest rates are reflected within stockholders’ equity in accumulated other comprehensive [removed: income.][added: income in the consolidated balance sheets.]

As of the end of [removed: 2017, the majority of our] [added: 2018,] long-term debt [removed: has] [added: with] fixed interest rates [removed: and is carried at $6,632.][added: was $6,577.]

[removed: See Note] [added: For additional information related to the Company's forward foreign-exchange contracts, see Notes] 1 and [removed: Note] 3 to the consolidated financial statements included in Item 8 of this [removed: Report for additional information on the fair value of unsettled forward foreign-exchange contracts at the end of 2017 and 2016.][added: Report.]

A hypothetical 10% strengthening of the functional currency compared to the non-functional currency exchange rates at September [removed: 3, 2017] [added: 2, 2018,] would have decreased the fair value of the contracts by [removed: $69] [added: $80] and resulted in an unrealized loss in the consolidated statements of income for the same amount.

We are exposed to fluctuations in prices for [removed: energy that we consume,] [added: energy,] particularly electricity and natural gas, which we seek to partially mitigate through fixed-price contracts for certain of our warehouses and other facilities, predominantly in the U.S. and Canada.

Our exposure to financial market risk results from fluctuations in interest rates and foreign currency exchange rates.

We do not engage in speculative or leveraged transactions or hold or issue financial instruments for trading purposes.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment holdings that are diversified among various instruments considered to be cash equivalents, as defined in Note 1 to the consolidated financial statements included in Item 8 of this Report, as well as short-term investments in government and agency securities with effective maturities of generally three months to five years at the date of purchase.

The primary objective of our investment activities is to preserve principal and secondarily to generate yields.

The majority of our short-term investments are in fixed interest-rate securities.

These securities are subject to changes in fair value due to interest rate fluctuations.

Our policy limits investments in the U.S. to direct U.S. government and government agency obligations, repurchase agreements collateralized by U.S. government and government agency obligations, and U.S. government and government agency money market funds.

Our wholly-owned captive insurance subsidiary invests in U.S. government and government agency obligations and U.S. government and government agency money market funds.

Our Canadian and Other International subsidiaries’ investments are primarily in money market funds, bankers’ acceptances, and bank certificates of deposit, generally denominated in local currencies.

A 100 basis-point change in interest rates as of the end of 2018 would have had an immaterial incremental change in fair market value.

Currently, these contracts do not qualify for derivative hedge accounting.

These contracts do not contain any credit-risk-related contingent features.

We seek to manage counterparty risk associated with these contracts by limiting transactions to counterparties with which we have established banking relationships.

There can be no assurance that this practice is effective.

These contracts are limited to less than one year.

Our average warehouse space is approximately 145,000 square feet, with newer units [added: being] slightly larger.

Because shoppers are attracted principally by the quality of merchandise and [removed: low prices, our warehouses are not elaborate.]

By strictly controlling the entrances and exits [removed: of our warehouses] and using a membership format, we [removed: have] [added: believe our] inventory losses (shrinkage) [added: are] well below those of typical retail operations.

We carry an average of approximately [removed: 3,800] [added: 3,700] active stock keeping units (SKUs) per warehouse in our core warehouse business, significantly less than other broadline retailers.

| • | [removed: Foods] [added: Food and Sundries] (including dry foods, packaged foods, [added: groceries, snack foods, candy, alcoholic] and [removed: groceries)] [added: nonalcoholic beverages, and cleaning supplies)] |

| • | Ancillary (including [removed: gas stations] [added: gasoline] and [removed: pharmacy)] [added: pharmacy businesses)] |

These businesses include [removed: our] gas stations, [removed: pharmacy,] [added: pharmacies,] optical dispensing centers, food courts, and hearing-aid centers.

[removed: We sell gasoline in all countries except Korea and France, with the] [added: The] number of warehouses with gas stations [removed: varying] [added: vary] significantly by [removed: country.][added: country, and we do not operate our gasoline business in Korea or France.]

[removed: Online businesses provide] [added: Our e-commerce operations allow us to connect with] our members [added: online and provide] additional products and services, many not found in our warehouses.

We generally have not experienced difficulty in obtaining sufficient quantities of merchandise and believe that if [removed: one or more of our] current sources of supply became unavailable, we would be able to obtain alternative sources without substantial disruption of our business.

We also purchase [added: and manufacture] private-label merchandise, as long as quality and member demand are comparable and the value to our members is significant.

Our members may utilize their memberships at [removed: any of] our warehouses worldwide.

Business members have the ability to add additional cardholders [removed: (add-ons).][added: (affiliates), to which the same annual fee applies.]

[removed: Add-ons] [added: Affiliates] are not available for Gold Star members.

Our member renewal rate was 90% in the U.S. and Canada and [removed: 87%] [added: 88%] on a worldwide basis [removed: in 2017.][added: at the end of 2018.]

| | [removed: 2017] [added: 2018] | | | [removed: 2016] [added: 2017] | | | [removed: 2015] [added: 2016] | |

| Gold Star | [removed: 38,600] [added: 40,700] | | | [removed: 36,800] [added: 38,600] | | | [removed: 34,000] [added: 36,800] | |

| Total paid members | [removed: 49,400] [added: 51,600] | | | [removed: 47,600] [added: 49,400] | | | [removed: 44,600] [added: 47,600] | |

| Household cards | [removed: 40,900] [added: 42,700] | | | [removed: 39,100] [added: 40,900] | | | [removed: 36,700] [added: 39,100] | |

| Total cardholders | [removed: 90,300] [added: 94,300] | | | [removed: 86,700] [added: 90,300] | | | [removed: 81,300] [added: 86,700] | |

Paid cardholders (except Business [removed: add-ons)] [added: affiliates)] are eligible to upgrade to an Executive membership in the [removed: U.S., Canada, Mexico] [added: U.S.] and [removed: the U.K.] [added: Canada] for an additional annual [removed: fee, which varies by country.][added: fee of $60.]

[removed: Executive members have] [added: This program also offers (except in Mexico),] access to additional savings and benefits on various business and consumer [removed: services (except in Mexico),] [added: services,] such as auto and home insurance, the Costco auto purchase [removed: program] [added: program,] and check printing services.

[removed: The] [added: These] services are generally provided by [removed: third-parties] [added: third parties] and vary by state and country.

| Full-time employees | [removed: 133,000] [added: 143,000] | | | [removed: 126,000] [added: 133,000] | | | [removed: 117,000] [added: 126,000] | |

| Part-time employees | [removed: 98,000] [added: 102,000] | | | [removed: 92,000] [added: 98,000] | | | [removed: 88,000] [added: 92,000] | |

| Total employees | [removed: 231,000] [added: 245,000] | | | [removed: 218,000] [added: 231,000] | | | [removed: 205,000] [added: 218,000] | |

Approximately [removed: 15,600] [added: 15,900] employees are union employees.

[removed: Wal-Mart,] [added: Walmart,] Target, Kroger, and Amazon.com are among our significant general [removed: merchandise retail competitors.]

We also compete with warehouse club operations (primarily [removed: Wal-Mart’s,] [added: Walmart’s] Sam’s Club and BJ’s Wholesale Club), and nearly every major U.S. and Mexico metropolitan area has multiple club operations.

We believe that Kirkland Signature products are high [removed: quality products,] [added: quality,] offered to our members at prices that are generally lower than [removed: those for similar] national [removed: brand products] [added: brands,] and that they help lower costs, differentiate our merchandise [removed: offerings from other retailers,] [added: offerings,] and generally earn higher margins.

We rely on trademark and copyright laws, trade-secret protection, and confidentiality, license and other agreements with our suppliers, employees and others to protect our intellectual [removed: property rights.][added: property.]

The availability and duration of trademark registrations vary by country; however, trademarks are generally valid and may be renewed indefinitely as long as they are in use and [removed: their] registrations are properly maintained.

Our U.S. [removed: internet] website is www.costco.com.

We make available through the Investor Relations section of that site, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5, and any amendments to those reports, as soon as reasonably practicable after filing such materials [removed: with,] [added: with] or furnishing such documents [removed: to,] [added: to] the Securities and Exchange Commission (SEC).

[removed: In addition, the] [added: The] public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.

The SEC also maintains [removed: an internet] [added: a] site that contains reports, proxy and information statements, and other information regarding issuers, such as the Company, that file electronically with the SEC at www.sec.gov.

All executive officers have [added: over] 25 [removed: or more] years of service with the Company.

| W. Craig Jelinek | President and Chief Executive Officer. Mr. Jelinek has been President and Chief Executive Officer since January 2012 and a director since February 2010. He was President and Chief Operating Officer from February 2010 to December 2011. Prior to that he was Executive Vice President, Chief Operating Officer, Merchandising since 2004. | 1995 | [removed: 65] [added: 66] |

| Richard A. Galanti | Executive Vice President and Chief Financial Officer. Mr. Galanti has been a director since January 1995. | 1993 | [removed: 61] [added: 62] |

| Franz E. Lazarus | Executive Vice President, Administration. Mr. Lazarus was Senior Vice President, Administration-Global [removed: Operations] [added: Operations,] from 2006 to September 2012. | 2012 | [removed: 70] [added: 71] |

Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983, in Seattle, Washington.

We are principally engaged in the operation of membership warehouses in the United States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan, Korea, Australia, Spain, France, Iceland, and through a majority-owned subsidiary in Taiwan.

Costco operated 762, 741, and 715 warehouses worldwide at September 2, 2018, September 3, 2017, and August 28, 2016, respectively.

Our common stock trades on the NASDAQ Global Select Market, under the symbol “COST.”

We report on a 52/53-week fiscal year, consisting of thirteen four-week periods and ending on the Sunday nearest the end of August.

The first three quarters consist of three periods each, and the fourth quarter consists of four periods (five weeks in the thirteenth period in a 53-week year).

The material seasonal impact in our operations is increased net sales and earnings during the winter holiday season.

References to 2018 and 2016 relate to the 52-week fiscal years ended September 2, 2018, and August 28, 2016, respectively.

References to 2017 relate to the 53-week fiscal year ended September 3, 2017.

General

We operate membership warehouses based on the concept that offering our members low prices on a limited selection of nationally branded and private-label products in a wide range of categories will produce high sales volumes and rapid inventory turnover.

When combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, these volumes and turnover enable us to operate profitably at significantly lower gross margins (net sales less merchandise costs) than most other retailers.

We generally sell inventory before we are required to pay for it, even while taking advantage of early payment discounts.

We buy most of our merchandise directly from manufacturers and route it to cross-docking consolidation points (depots) or directly to our warehouses.

Our depots receive large shipments from manufacturers and quickly ship these goods to warehouses.

This process creates freight volume and handling efficiencies, lowering costs associated with traditional multiple-step distribution channels.

low prices, our warehouses are not elaborate.

We operated 567 gas stations at the end of 2018.

We operate e-commerce websites in the U.S., Canada, Mexico, U.K., Korea, and Taiwan.

Net sales for e-commerce represented approximately 4% of total net sales in 2018.

Additionally, we offer business delivery, travel and various other services online in certain countries.

Our annual fee for these memberships is $60 in our U.S. and Canadian operations and varies in other countries.

| Business, including affiliates | 10,900 | | | 10,800 | | | 10,800 | |

Executive memberships are also available in Mexico and the U.K., for which the additional annual fee varies.

Executive members earn a 2% reward on qualified purchases (up to a maximum reward of $1,000 per year in U.S. and Canada and varies in Mexico and the U.K.), and can be redeemed only at Costco warehouses.

Executive members, who represented 37% of paid members at the end of 2018, generally shop more frequently and spend more than other members.

| | 2018 | | | 2017 | | | 2016 | |

merchandise retail competitors.

| Jim C. Klauer | Executive Vice President, Chief Operating Officer, Northern Division. Mr. Klauer was Senior Vice President, Non Foods and E-commerce merchandise, from 2013 to January 2018. | 2018 | 56 |

| Russ D. Miller | Executive Vice President, Chief Operating Officer, Southern Division and Mexico. Mr. Miller was Senior Vice President, Western Canada Region, from 2001 to January 2018. | 2018 | 61 |

| | |

| --- | --- |

| • | Sundries (including snack foods, candy, alcoholic and nonalcoholic beverages, and cleaning supplies) |

We operated 536, 508, and 472 gas stations at the end of 2017, 2016, and 2015, respectively.

Our online businesses, which include e-commerce, business delivery, and travel, vary by country.

In the U.S. and Canada, we offer all of our online businesses.

We operate e-commerce websites in all countries except Japan, Australia, Spain, Iceland, and France.

Net sales for our online business were approximately 4% of our total net sales in 2017 and 2016, respectively, and 3% in 2015.

Item 1—Business (Continued)

Effective June 1, 2017, we increased our annual membership fees in the U.S. and Canada for Gold Star (individual), Business and Business add-on by $5 to $60 per year.

The Executive membership fee increased from $110 to $120 (annual membership fee of $60, plus Executive upgrade of $60), and the maximum annual 2% reward, which is earned on qualified purchases and can be redeemed only at Costco warehouses, increased from $750 to $1,000.

Our annual membership fees in our Other International operations vary by country.

| Business, including add-ons | 10,800 | | | 10,800 | | | 10,600 | |

Executive members represented 38% of paid members at the end of 2017.

Executive members generally spend more than other members, and the percentage of our net sales attributable to these members continues to increase.

| Ron M. Vachris | Executive Vice President, Chief Operating Officer, Merchandising. Mr. Vachris was Senior Vice President, Real Estate Development, from August 2015 to June 2016, and Senior Vice President, General Manager, Northwest Region from 2010 to July 2015. | 2016 | 52 |

| Dennis R. Zook | Executive Vice President, Chief Operating Officer, Southwest Division and Mexico. | 1993 | 68 |

Item 1A—Risk Factors

The risks described below could materially and adversely affect our business, financial condition and results of operations.

We could also be affected by additional risks that apply to all companies operating in the U.S. and globally, as well as other risks that are not presently known to us or that we currently consider to be immaterial.

These Risk Factors should be carefully reviewed in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and our consolidated financial statements and related notes in Item 8 of this Report.

Business and Operating Risks

We are highly dependent on the financial performance of our U.S. and Canadian operations.

Our financial and operational performance is highly dependent on our U.S. and Canadian operations, which comprised 87% and 85% of net sales and operating income in 2017, respectively.

Within the U.S., we are highly dependent on our California operations, which comprised 30% of U.S. net sales in 2017.

Our California market, in general, has a larger percentage of higher volume warehouses as compared to our other domestic markets.

Any substantial slowing or sustained decline in these operations could materially adversely affect our business and financial results.

Declines in financial performance of our U.S. operations, particularly in California, and our Canadian operations could arise from, among other things: slow growth or declines in comparable warehouse sales (comparable sales); negative trends in operating expenses, including increased labor, healthcare and energy costs; failing to meet targets for warehouse openings; cannibalizing existing locations with new warehouses; shifts in sales mix toward lower gross margin products; changes or uncertainties in economic conditions in our markets, including higher levels of unemployment and depressed home values; and failing to consistently provide high quality and innovative new products to retain our existing member base and attract new members.

We may be unsuccessful implementing our growth strategy, including expanding our business in existing markets and new markets, which could have an adverse impact on our business, financial condition and results of operations.

Our growth is dependent, in part, on our ability to acquire property and build or lease new warehouses and regional depots.

We compete with other retailers and businesses for suitable locations.

Local land use and other regulations restricting the construction and operation of our warehouses and depots, as well as local community actions opposed to the location of our warehouses or depots at specific sites and the adoption of local laws restricting our operations and environmental regulations, may impact our ability to find suitable locations, and increase the cost of sites and of constructing, leasing and operating our warehouses and depots.

We also may have difficulty negotiating leases or purchase agreements on acceptable terms.

In addition, certain jurisdictions have enacted or proposed laws and regulations that would prevent or restrict the operation or expansion plans of certain large retailers and warehouse clubs, including us, within their jurisdictions.

Failure to effectively manage these and other similar factors may affect our ability to timely build or lease and operate new warehouses and depots, which could have a material adverse effect on our future growth and profitability.

We seek to expand in existing markets to attain a greater overall market share.

A new warehouse may draw members away from our existing warehouses and adversely affect their comparable sales performance and member traffic.

We intend to continue to open warehouses in new markets.

Associated risks include difficulties in attracting members due to a lack of familiarity with us, attracting members of other wholesale club operators, our lack of familiarity with local member preferences, and seasonal differences in the market.

Entry into new markets may bring us into competition with new competitors or with existing competitors with a large, established market presence.

For the fiscal year ended September [removed: 3, 2017][added: 2, 2018]

Indicate by check mark whether the registrant has submitted electronically [removed: and posted on its corporate Web site, if any,] every Interactive Data File required to be submitted [removed: and posted] pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit [removed: and post] such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, [removed: or] a smaller reporting [added: company, or an emerging growth] company.

See the definitions of “large accelerated filer,” “accelerated [removed: filer” and] [added: filer”,] “smaller reporting [removed: company”] [added: company”, and "emerging growth company"] in Rule 12b-2 of the Exchange Act.

| Non-accelerated filer ☐ [removed: (Do not check if a smaller company)] | | Smaller reporting company ☐ |

The aggregate market value of the voting stock held by non-affiliates of the registrant as of February [removed: 12, 2017] [added: 18, 2018] was [removed: $74,963,307,820.][added: $83,850,253,577.]

The number of shares outstanding of the registrant’s common stock as of October [removed: 10, 2017] [added: 18, 2018] was [removed: 436,989,606.][added: 438,208,376.]

Portions of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on January [removed: 30, 2018,] [added: 24, 2019,] are incorporated by reference into Part III of this Form 10-K.

ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER [removed: 3, 2017][added: 2, 2018]

| Item 1. | [removed: [Business](#s7021DAA379AEF7256C606A0B56788999)] [added: [Business](#sE0E89D50A91059A8B98A5260AC56E74A)] | [removed: [3](#s7021DAA379AEF7256C606A0B56788999)] [added: [3](#sE0E89D50A91059A8B98A5260AC56E74A)] |

| Item 1A. | [Risk [removed: Factors](#s5B1D8F89662AB35539196A0B793AF4F1)] [added: Factors](#s6BE81E62DFFB5CA0AD2EA597ADE6DCF2)] | [removed: [8](#s5B1D8F89662AB35539196A0B793AF4F1)] [added: [8](#s6BE81E62DFFB5CA0AD2EA597ADE6DCF2)] |

| Item 1B. | [Unresolved Staff [removed: Comments](#sB1A247D4A910C17CFF516A0B796CD562)] [added: Comments](#s87C1AFC8BCCE5EB0A33C4E677D773414)] | [removed: [15](#sB1A247D4A910C17CFF516A0B796CD562)] [added: [15](#s87C1AFC8BCCE5EB0A33C4E677D773414)] |

| Item 2. | [removed: [Properties](#sA17174D1AE7C3E4CEE2F6A0B798E6DC0)] [added: [Properties](#sB7C2BA5831435E409906549BACAA1ECF)] | [removed: [16](#sA17174D1AE7C3E4CEE2F6A0B798E6DC0)] [added: [16](#sB7C2BA5831435E409906549BACAA1ECF)] |

| Item 3. | [Legal [removed: Proceedings](#s7FB5DDF29F494258B2226A0B79C05231)] [added: Proceedings](#s94687C8ECB5351189F6504BF1F4BE3A8)] | [removed: [16](#s7FB5DDF29F494258B2226A0B79C05231)] [added: [17](#s94687C8ECB5351189F6504BF1F4BE3A8)] |

| Item 4. | [Mine Safety [removed: Disclosures](#s538DD4E06FA7A40312C46A0B79E1C8CC)] [added: Disclosures](#s5D32CCB910EA540D8F20222DD67B3077)] | [removed: [16](#s538DD4E06FA7A40312C46A0B79E1C8CC)] [added: [17](#s5D32CCB910EA540D8F20222DD67B3077)] |

| Item 5. | [Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity [removed: Securities](#sB1BE3E8245AA93B2DC966A0B7A35D2D4)] [added: Securities](#sC460B5DF1D6F58CC929DFB04A886605F)] | [removed: [17](#sB1BE3E8245AA93B2DC966A0B7A35D2D4)] [added: [17](#sC460B5DF1D6F58CC929DFB04A886605F)] |

| Item 6. | [Selected Financial [removed: Data](#s8BF4AC128FE65A90B72B6A0B7A678B4F)] [added: Data](#sAD7EDD35146854D3AE570A10A6BA3C67)] | [removed: [18](#s8BF4AC128FE65A90B72B6A0B7A678B4F)] [added: [20](#sAD7EDD35146854D3AE570A10A6BA3C67)] |

| Item 7. | [Management’s Discussion and Analysis of Financial Condition and Results of [removed: Operations](#sB0CE2BFDA9ED5C9085616A0B7A942427)] [added: Operations](#s292A37D574A255258C530DC713B5C79B)] | [removed: [19](#sB0CE2BFDA9ED5C9085616A0B7A942427)] [added: [21](#s292A37D574A255258C530DC713B5C79B)] |

| Item 7A. | [Quantitative and Qualitative Disclosures About Market [removed: Risk](#sA7660C2D88CC1061AED06A0B7BD57351)] [added: Risk](#s1B92789F641857B3B0C6C1E87A02C00C)] | [removed: [30](#sA7660C2D88CC1061AED06A0B7BD57351)] [added: [31](#s1B92789F641857B3B0C6C1E87A02C00C)] |

| Item 8. | [Financial Statements and Supplementary [removed: Data](#s2B2726A2F9236B4C13516A0B7C073944)] [added: Data](#sD9AD6A429D4852E382CE3F87E47D80F3)] | [removed: [32](#s2B2726A2F9236B4C13516A0B7C073944)] [added: [33](#sD9AD6A429D4852E382CE3F87E47D80F3)] |

| Item 9. | [Changes in and Disagreements with Accountants on Accounting and Financial [removed: Disclosure](#sB6F7675053D8FF37B7EF6A0B7C298E54)] [added: Disclosure](#s13A38237C99E5EB98946398A92616518)] | [removed: [32](#sB6F7675053D8FF37B7EF6A0B7C298E54)] [added: [62](#s13A38237C99E5EB98946398A92616518)] |

| Item 9A. | [Controls and [removed: Procedures](#sD28A1E3B54925CC836146A0B7C5AFA73)] [added: Procedures](#s23DD922567125CDE8C2710C4DBE7123F)] | [removed: [32](#sD28A1E3B54925CC836146A0B7C5AFA73)] [added: [62](#s23DD922567125CDE8C2710C4DBE7123F)] |

| Item 9B. | [Other [removed: Information](#sE16DFAA126BF413F12DB6A0B7C7D738A)] [added: Information](#sFCCA6E5D83E25A748B0DA5ED5776B7A5)] | [removed: [33](#sE16DFAA126BF413F12DB6A0B7C7D738A)] [added: [64](#sFCCA6E5D83E25A748B0DA5ED5776B7A5)] |

| [PART [removed: III](#sA5433F7382972BFD2B8C6A0B7CAD1791)] [added: III](#sA2E44558AC9D5AD2A46460C0F091BB7D)] | | |

| Item 10. | [Directors, Executive Officers and Corporate [removed: Governance](#sFED2537827D056A6DDAF6A0B7CCE602E)] [added: Governance](#sF5009EA91D305632987CB3AB08E7C41E)] | [removed: [33](#sFED2537827D056A6DDAF6A0B7CCE602E)] [added: [64](#sF5009EA91D305632987CB3AB08E7C41E)] |

| Item 11. | [Executive [removed: Compensation](#s7EFC5682139ED51772216A0B7D02CB4D)] [added: Compensation](#sCBD6A9095B5D5A949C12F47466167199)] | [removed: [33](#s7EFC5682139ED51772216A0B7D02CB4D)] [added: [64](#sCBD6A9095B5D5A949C12F47466167199)] |

| Item 12. | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder [removed: Matters](#sC5A6F21E01C8724B99B66A0B7D23B80D)] [added: Matters](#s44D6A1DEE4765FED98A5C7C5B13624A5)] | [removed: [34](#sC5A6F21E01C8724B99B66A0B7D23B80D)] [added: [64](#s44D6A1DEE4765FED98A5C7C5B13624A5)] |

| Item 13. | [Certain Relationships and Related Transactions, and Director [removed: Independence](#s795AF4FF540531FDA6496A0B7D54B8B6)] [added: Independence](#s5256542007B7528AA4DCE7896EDF571C)] | [removed: [34](#s795AF4FF540531FDA6496A0B7D54B8B6)] [added: [64](#s5256542007B7528AA4DCE7896EDF571C)] |

| Item 14. | [Principal Accounting Fees and [removed: Services](#s53467940D1321A763A656A0B7D76DAF8)] [added: Services](#s0269B74EFE72596BAA05ADD76C08CF94)] | [removed: [34](#s53467940D1321A763A656A0B7D76DAF8)] [added: [64](#s0269B74EFE72596BAA05ADD76C08CF94)] |

| Item 15. | [Exhibits, Financial Statement [removed: Schedules](#s13BB950C0CF77DE58D6F6A0B7DC8C4AD)] [added: Schedules](#s787F9FEC693859CD91FA250F9D6D2AB9)] | [removed: [34](#s13BB950C0CF77DE58D6F6A0B7DC8C4AD)] [added: [65](#s787F9FEC693859CD91FA250F9D6D2AB9)] |

| Item 16. | [Form 10-K [removed: Summary](#s2960e74129804ad79a675bc789ef1246)] [added: Summary](#s6B0219A14C8850F8A191080FD8FFD064)] | [removed: [36](#s2960e74129804ad79a675bc789ef1246)] [added: [67](#s6B0219A14C8850F8A191080FD8FFD064)] |

They include statements that address activities, events, conditions or developments that we expect or anticipate may occur in the future and may relate to such matters as sales growth, changes in comparable sales, cannibalization of existing locations by new openings, price or fee changes, earnings performance, earnings per share, stock-based compensation expense, warehouse openings and closures, capital spending, the effect of adopting certain accounting standards, future financial reporting, financing, margins, return on invested capital, strategic direction, expense controls, membership renewal rates, shopping frequency, litigation, [removed: modernization of information systems,] and the demand for our products and services.

Forward-looking statements may also be identified by the words [removed: “believe,” “project,” “expect,”] “anticipate,” [added: “believe,” “continue,” “could,”] “estimate,” [added: “expect,”] “intend,” [removed: “strategy,” “future,” “opportunity,” “plan,”] “may,” [added: “might,” “likely,” “plan,” “potential,” “predict,” “project,” “seek,”] “should,” [added: “target,”] “will,” “would,” [removed: “will be,” “will continue,” “will likely result,” and] [added: or] similar [removed: expressions.][added: expressions and the negatives of those terms.]

Forward-looking statements speak only as of the date they are made, and we do not undertake to update [removed: them,] [added: these statements,] except as required by law.

10-K 1 cost10k9218.htm 10-K

| [PART I](#s963EFDC191B45B0386B6BE2FC22550B7) | | |

| [PART II](#sA6958BC74E4A54D4AD77581509F16FEB) | | |

| [PART IV](#s718EF0DE02D25FA8AD9AEADD1DE5A005) | | |

| | [Signatures](#s5CB20137432556CAA421BABCBADD9956) | [68](#s5CB20137432556CAA421BABCBADD9956) |

10-K 1 cost10k90317.htm 10-K

| [PART I](#sD6E9AD219CB9FCA6EB2F6A0B78E8AE4F) | | |

| [PART II](#sBC3F01574F6EF5CDF0326A0B7A14B395) | | |

| [PART IV](#sBCBE7D0DAA780CFBA42D6A0B7DA70782) | | |

| | [Signatures](#s670FC087EA8FB911A6806A0B7DFB46C6) | [37](#s670FC087EA8FB911A6806A0B7DFB46C6) |

Item 1—Business

Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983, in Seattle, Washington.

We are principally engaged in the operation of membership warehouses in the United States (U.S.) and Puerto Rico, Canada, United Kingdom (U.K.), Mexico, Japan, Australia, Spain, France, Iceland and through majority-owned subsidiaries in Taiwan and Korea.

Costco operated 741, 715, and 686 warehouses worldwide at September 3, 2017, August 28, 2016, and August 30, 2015, respectively.

Our common stock trades on the NASDAQ Global Select Market, under the symbol “COST.”

We report on a 52/53-week fiscal year, consisting of thirteen, four-week periods and ending on the Sunday nearest the end of August.

The first three quarters consist of three periods each, and the fourth quarter consists of four periods (five weeks in the thirteenth period in a 53-week year).

The material seasonal impact in our operations is increased net sales and earnings during the winter holiday season.

References to 2017 relate to the 53-week fiscal year ended September 3, 2017.

References to 2016 and 2015 relate to the 52-week fiscal years ended August 28, 2016, and August 30, 2015, respectively.

General

We operate membership warehouses based on the concept that offering our members low prices on a limited selection of nationally branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover.

When combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, these volumes and turnover enable us to operate profitably at significantly lower gross margins (net sales less merchandise costs) than most other retailers.

We generally sell inventory before we are required to pay for it, even while taking advantage of early payment discounts when available.

We buy most of our merchandise directly from manufacturers and route it to cross-docking consolidation points (depots) or directly to our warehouses.

Our depots receive large shipments from manufacturers and quickly ship these goods to individual warehouses.

This process creates freight volume and handling efficiencies, eliminating many costs associated with traditional multiple-step distribution channels.

At September [removed: 3, 2017] [added: 2, 2018,] we operated [removed: 741] [added: 762] membership warehouses:

| United States and Puerto Rico | [removed: 416] [added: 426] | | | [removed: 98] [added: 101] | | | [removed: 514] [added: 527] | |

| Canada | [removed: 85] [added: 86] | | | [removed: 12] [added: 14] | | | [removed: 97] [added: 100] | |

| Mexico | [removed: 37] [added: 38] | | | [removed: —] [added: 1] | | | [removed: 37] [added: 39] | |

| [removed: Korea] [added: Korea(2)] | [removed: 6] [added: 11] | | | [removed: 7] [added: 4] | | | [removed: 13] [added: 15] | |

| Australia | [removed: 6] [added: 7] | | | 3 | | | [removed: 9] [added: 10] | |

| (1) | [removed: 102] [added: 106] of the [removed: 154] [added: 157] leases are land-only leases, where Costco owns the building. |

The following schedule shows warehouse openings, net of closings and relocations, and expected openings through December 31, [removed: 2017:][added: 2018:]

| [removed: 2018] [added: 2019] (expected through [removed: 12/31/2017)] [added: 12/31/2018)] | [removed: 4] [added: 6] | | | [removed: 1] [added: —] | | | [removed: —] [added: 1] | | | [removed: 5] [added: 7] | | | [removed: 746] [added: 769] | |

At the end of fiscal [removed: 2017,] [added: 2018,] our warehouses contained approximately [removed: 107.3] [added: 110.7] million square feet of operating floor space: [removed: 75.4] [added: 77.5] million in the U.S.; [removed: 13.5] [added: 13.9] million in Canada; and [removed: 18.4] [added: 19.3] million in Other International.

| Total | 605 | | | 157 | | | 762 | |

| | |

| --- | --- |

| (2) | In fiscal 2018, Costco purchased the remaining equity interest and three formerly leased locations from its former joint-venture partner in Korea. |

| 2014 and prior | 468 | | | 88 | | | 107 | | | 663 | | | 663 | |

| 2018 | 13 | | | 3 | | | 5 | | | 21 | | | 762 | |

| Total | 533 | | | 100 | | | 136 | | | 769 | | | | |

We operate 24 depots, with approximately 11.0 million square feet, for the consolidation and distribution of most merchandise shipments to the warehouses.

Additionally, we operate various processing, packaging, manufacturing and other facilities to support our business, which includes the production of certain private-label items.

| Total | 587 | | | 154 | | | 741 | |

| 2013 and prior | 451 | | | 85 | | | 98 | | | 634 | | | 634 | |

| 2014 | 17 | | | 3 | | | 9 | | | 29 | | | 663 | |

| Total | 518 | | | 98 | | | 130 | | | 746 | | | | |

We operate depots for the consolidation and distribution of most merchandise shipments to the warehouses, and various processing, packaging, and other facilities to support ancillary and other businesses, including our online business.

We operate 24 depots, consisting of approximately 11.0 million square feet.

Our common stock is traded on the NASDAQ Global Select Market under the symbol “COST.” On October [removed: 10, 2017,] [added: 18, 2018,] we had [removed: 8,629] [added: 8,829] stockholders of record.

The following table sets forth information on our common stock repurchase program activity for the fourth quarter of fiscal [removed: 2017] [added: 2018] (dollars in millions, except per share data):

| Period | | | Total Number of Shares Purchased | | | Average Price Paid per Share | | | [added: |] Total Number of Shares Purchased as Part of Publicly Announced Program(1) | | | Maximum Dollar Value of Shares that May Yet be Purchased under the Program | [added: | |]

| Total fourth quarter | | | [removed: 1,512,000] [added: 419,000] | | | [removed: $159.21] [added: $] | [added: 211.35] | | [removed: 1,512,000] | [added: 419,000] | | | [added: | | |]

| 2018: | | | | | | | | | | | | |

| Fourth Quarter | $ | 233.13 | | | $ | 195.48 | | | $ | 0.570 | | |

| Third Quarter | 197.16 | | | | 180.84 | | | | 0.570 | | | |

| Second Quarter | 198.91 | | | | 172.61 | | | | 0.500 | | | |

| First Quarter | 173.42 | | | | 154.61 | | | | 0.500 | | | |

| | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | | | | |

| May 14—June 10, 2018 | | | 96,000 | | | $ | 198.61 | | | 96,000 | | | $ | 2,497 | |

| June 11—July 8, 2018 | | | 134,000 | | | 208.49 | | | | 134,000 | | | 2,469 | | |

| July 9—August 5, 2018 | | | 111,000 | | | 216.06 | | | | 111,000 | | | 2,445 | | |

| August 6—September 2, 2018 | | | 78,000 | | | 225.20 | | | | 78,000 | | | 2,427 | | |

Performance Graph

The following graph compares the cumulative total shareholder return (stock price appreciation plus dividends) on our common stock for the last five years with the cumulative total return of the S&P 500 Index, the S&P 500 Retail Index, and a peer group previously selected by the Company.

The S&P 500 Retail Index is intended to replace the previously selected peer group to allow for a more broad representation of industry performance.

The transition to a larger retail index provides a better representation of total retail market performance.

For the year ended September 2, 2018, the cumulative total return of the previous peer group is provided pursuant to SEC rules requiring presentation in the year of change, and consists of: Amazon.com Inc.; The Home Depot Inc.; Lowe's Companies; Best Buy Co., Inc.; Staples Inc.; Target Corporation; Kroger Company; and Walmart Stores, Inc. This group will not be presented in future periods.

The information provided is from September 1, 2013, through September 2, 2018.

The graph assumes the investment of $100 in Costco common stock, the S&P 500 Index, the S&P 500 Retail Index, and the previously selected peer group on September 1, 2013, and reinvestment of all dividends.


| | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| 2016: | | | | | | | | | | | | |

| Fourth Quarter | 169.04 | | | | 141.29 | | | | 0.450 | | | |

| Third Quarter | 158.25 | | | | 146.44 | | | | 0.450 | | | |

| Second Quarter | 168.87 | | | | 143.28 | | | | 0.400 | | | |

| First Quarter | 163.10 | | | | 138.30 | | | | 0.400 | | | |

| May 8—June 4, 2017 | | | 92,000 | | | $171.87 | | | 92,000 | | | $2,973 |

| June 5—July 2, 2017 | | | 573,000 | | | 162.00 | | | 573,000 | | | $2,881 |

| July 3—July 30, 2017 | | | 451,000 | | | 155.06 | | | 451,000 | | | $2,811 |

| July 31—September 3, 2017 | | | 396,000 | | | 156.95 | | | 396,000 | | | $2,749 |

| | Sept. [added: 2, 2018 | | | | Sept.] 3, 2017 | | | | Aug. 28, 2016 | | | | Aug. 30, 2015 | | | | Aug. 31, 2014 | | | [removed: | Sept. 1, 2013 | | |]

| As of and for the year ended | [removed: (53] [added: (52] weeks) | | | | [removed: (52] [added: (53] weeks) | | | | (52 weeks) | | | | (52 weeks) | | | | (52 weeks) | | |

| Net sales | $ | [removed: 126,172] [added: 138,434] | | | $ | [removed: 116,073] [added: 126,172] | | | $ | [removed: 113,666] [added: 116,073] | | | $ | [removed: 110,212] [added: 113,666] | | | $ | [removed: 102,870] [added: 110,212] | |

| Membership fees | [removed: 2,853] [added: 3,142] | | | | [removed: 2,646] [added: 2,853] | | | | [removed: 2,533] [added: 2,646] | | | | [removed: 2,428] [added: 2,533] | | | | [removed: 2,286] [added: 2,428] | | |

| Gross margin(1) as a percentage of net sales | [removed: 11.33] [added: 11.04] | | % | | [removed: 11.35] [added: 11.33] | | % | | [removed: 11.09] [added: 11.35] | | % | | [removed: 10.66] [added: 11.09] | | % | | [removed: 10.62] [added: 10.66] | | % |

| Selling, general and administrative expenses as a percentage of net sales | [removed: 10.26] [added: 10.02] | | % | | [removed: 10.40] [added: 10.26] | | % | | [removed: 10.07] [added: 10.40] | | % | | [removed: 9.89] [added: 10.07] | | % | | [removed: 9.82] [added: 9.89] | | % |

| Operating income | $ | [removed: 4,111] [added: 4,480] | | | $ | [removed: 3,672] [added: 4,111] | | | $ | [removed: 3,624] [added: 3,672] | | | $ | [removed: 3,220] [added: 3,624] | | | $ | [removed: 3,053] [added: 3,220] | |

| Net income attributable to Costco | [removed: 2,679] [added: 3,134] | | | | [removed: 2,350] [added: 2,679] | | | | [removed: 2,377] [added: 2,350] | | | | [removed: 2,058] [added: 2,377] | | | | [removed: 2,039] [added: 2,058] | | |

| Net income per diluted common share attributable to Costco | [removed: 6.08] [added: 7.09] | | | | [removed: 5.33] [added: 6.08] | | | | [removed: 5.37] [added: 5.33] | | | | [removed: 4.65] [added: 5.37] | | | | [removed: 4.63] [added: 4.65] | | |

| Cash dividends declared per common share | [removed: 8.90] [added: 2.14] | | | | [removed: 1.70] [added: 8.90] | | | | [removed: 6.51] [added: 1.70] | | | | [removed: 1.33] [added: 6.51] | | | | [removed: 8.17] [added: 1.33] | | |

| United States | [removed: 4] [added: 9] | | % | | [removed: 1] [added: 4] | | % | | [removed: 3] [added: 1] | | % | | [removed: 5] [added: 3] | | % | | [removed: 6] [added: 5] | | % |

| Canada | [added: 9 | | % | |] 5 | | % | | (3 | | )% | | (5 | | )% | | 2 | | % | [removed: | 9 | | % |]

| Other International | [removed: 2] [added: 11] | | % | | [removed: (3] [added: 2] | | [removed: )%] [added: %] | | (3 | | )% | | [removed: 3] [added: (3] | | [removed: %] [added: )%] | | [removed: 1] [added: 3] | | % |

| Total Company | [removed: 4] [added: 9] | | % | | [removed: 0] [added: 4] | | % | | [removed: 1] [added: 0] | | % | | [removed: 4] [added: 1] | | % | | [removed: 6] [added: 4] | | % |

| [removed: Increase] [added: Changes] in Total Company comparable sales excluding the impact of [removed: changes in] foreign currency and gasoline prices | [removed: 4] [added: 7] | | % | | 4 | | % | | [removed: 7] [added: 4] | | % | | [removed: 6] [added: 7] | | % | | 6 | | % |

| Net property and equipment | $ | [removed: 18,161] [added: 19,681] | | | $ | [removed: 17,043] [added: 18,161] | | | $ | [removed: 15,401] [added: 17,043] | | | $ | [removed: 14,830] [added: 15,401] | | | $ | [removed: 13,881] [added: 14,830] | |

| Total assets | [removed: 36,347] [added: 40,830] | | | | [removed: 33,163] [added: 36,347] | | | | [removed: 33,017] [added: 33,163] | | | | [removed: 32,662] [added: 33,017] | | | | [removed: 29,936] [added: 32,662] | | |

| Long-term debt, excluding current portion | [removed: 6,573] [added: 6,487] | | | | [removed: 4,061] [added: 6,573] | | | | [removed: 4,852] [added: 4,061] | | | | [removed: 5,084] [added: 4,852] | | | | [removed: 4,986] [added: 5,084] | | |

| Costco stockholders’ equity | [removed: $] [added: 12,799] | [added: | | |] 10,778 | | | [removed: $] | 12,079 | | | [removed: $] | 10,617 | | | [removed: $] | 12,303 | | | [removed: $ | 10,833 | |]

| Beginning of year | [removed: 715] [added: 741] | | | | [removed: 686] [added: 715] | | | | [removed: 663] [added: 686] | | | | [removed: 634] [added: 663] | | | | [removed: 608] [added: 634] | | |

| Opened | [removed: 28] [added: 25] | | | | [removed: 33] [added: 28] | | | | [removed: 26] [added: 33] | | | | [removed: 30] [added: 26] | | | | [removed: 26] [added: 30] | | |

| Closed due to relocation | [removed: (2] [added: (4] | | ) | | [removed: (4] [added: (2] | | ) | | [removed: (3] [added: (4] | | ) | | [removed: (1] [added: (3] | | ) | | [removed: 0] [added: (1] | | [added: )] |

| End of year | [removed: 741] [added: 762] | | | | [removed: 715] [added: 741] | | | | [removed: 686] [added: 715] | | | | [removed: 663] [added: 686] | | | | [removed: 634] [added: 663] | | |

| Total paid members (000's) | [removed: 49,400] [added: 51,600] | | | | [removed: 47,600] [added: 49,400] | | | | [removed: 44,600] [added: 47,600] | | | | [removed: 42,000] [added: 44,600] | | | | [removed: 39,000] [added: 42,000] | | |

Item [removed: 7—Management’s] [added: 7—Management's] Discussion and Analysis of Financial [removed: Condition] [added: Conditions] and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data)

We believe that the most important driver of our profitability is sales growth, particularly comparable [added: warehouse] sales [added: (comparable sales)] growth.

Sales comparisons can also be particularly influenced by certain factors that are beyond our control: fluctuations in currency exchange rates (with respect to the consolidation of the results of our international operations); and changes in the cost of gasoline and associated competitive [removed: conditions (primarily impacting our U.S. and Canadian operations).][added: conditions.]

Another substantial factor in sales growth is the health of the economies in which we do business, [added: including the effects of inflation or deflation,] especially the United States.

Sales growth and gross margins are also impacted by our competition, which is vigorous and widespread, across a wide range of global, national and regional wholesalers and [removed: retailers.][added: 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 to our merchandise mix, including increasing the penetration of our private label [removed: items.][added: items, and through our online offerings.]

Our philosophy is to provide our members with quality goods and services at [removed: the most] competitive prices.

We do not focus in the short term on maximizing prices charged, but instead seek to maintain what we believe is a perception among our members of our “pricing authority” [added: on quality goods] – consistently providing the most competitive values.

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 [removed: increasingly less significant relative] [added: continuing] to [added: decline in significance as they relate to] the results of our total operations.

Our e-commerce business [removed: growth both] [added: growth,] domestically and [removed: internationally] [added: internationally,] has also increased our sales.

Our membership format is an integral part of our business [removed: model] and has a significant effect on our profitability.

The extent to which we achieve growth in our membership base, increase [added: the] penetration of our Executive members, and sustain high renewal rates, materially influences our profitability.

While we believe that we have achieved successes in this [removed: area historically,] [added: area,] some significant costs are partially outside our control, most [added: particularly health care and utility expenses.]

Because our business is operated on very low [removed: gross] margins, modest changes in various items in the income statement, particularly merchandise costs and [removed: SG&A] [added: selling, general and administrative] expenses, can have substantial impacts on net income.

Certain countries in the Other International segment have relatively higher rates of square footage growth, lower wages and [removed: benefit] [added: benefits] costs as a percentage of country sales, and/or less or no direct membership warehouse competition.

Fiscal year [removed: 2017 was a 53-week fiscal year ending on September 3, 2017, while 2016] [added: 2018] and [removed: 2015] [added: 2016] were 52-week fiscal years ending on [added: September 2, 2018 and] August 28, 2016, [added: respectively,] and [removed: August 30, 2015, respectively.][added: 2017 was a 53-week fiscal year ending on September 3, 2017.]

Our paid membership growth rate may be adversely impacted when warehouse openings occur in existing markets.

| • | Gross margin percentage decreased 29 basis points due to the impact of gasoline price inflation on net sales and a shift in sales penetration to certain lower margin warehouse ancillary businesses from our core merchandise categories; |

| • | Selling, general & administrative (SG&A) expenses as a percentage of net sales decreased 24 basis points, due to the impact of gasoline price inflation and leveraging increased sales; |

| • | The effective tax rate in 2018 was 28.4% and was favorably impacted by the 2017 Tax Act and net tax benefits of $57. The effective tax rate in 2017 was 32.8% and was favorably impacted by net tax benefits of $104; |

| • | Net income increased 17% to $3,134, or $7.09 per diluted share compared to $2,679, or $6.08 per diluted share in 2017; and |

2018 vs. 2017

Net sales increased $12,262 or 10% during 2018, primarily due to a 9% increase in comparable sales and sales at new warehouses opened in 2017 and 2018, partially offset by the impact of one additional week of sales in 2017.

| | 2018 | | | | 2017 | | | | 2016 | | |

2018 vs. 2017

These increases were partially offset by the impact of one additional week of membership fees in 2017.

These fee increases had a positive impact of approximately $178 in fiscal 2018 and will positively impact fiscal 2019, primarily the first two quarters, by approximately $70.

| | 2018 | | | | 2017 | | | | 2016 | | |

| Net sales | $ | 138,434 | | | $ | 126,172 | | | $ | 116,073 | |

2018 vs. 2017

This decrease was primarily due to a shift in sales penetration to certain lower margin warehouse ancillary and other businesses, which contributed to a 13 basis point decrease in our core merchandise categories, except hardlines which was flat.

Gross margin percentage was also negatively impacted by 10 basis points due to a non-recurring legal settlement benefiting 2017 and costs related to our centralized return centers in the U.S. These decreases were partially offset by a 13 basis point increase in our warehouse ancillary and other businesses, predominantly our gasoline business.

The segment gross margin percentage, when expressed as a percentage of the segment's own sales and excluding the impact of changes in gasoline prices on net sales (segment gross margin percentage), decreased in our U.S. operations, predominantly in our core merchandise categories, and as a result of the non-recurring legal settlement in 2017, and the costs related to our centralized return centers mentioned above.

The segment gross margin percentage in our Other International operations decreased, predominantly in food and sundries and softlines, partially offset by an increase in our gasoline business.

earned under the co-branded credit card arrangement and non-recurring legal settlements and other matters as discussed above.

| | 2018 | | | | 2017 | | | | 2016 | | |

2018 vs. 2017

Stock compensation expense was also lower by one basis point.

Central operating costs were higher by two basis points.

Effective in June 2018, a portion of the savings generated from the Tax Cuts and Jobs Act (the “2017 Tax Act”) were used to increase wages for the majority of our U.S. hourly employees.

The impact in fiscal 2018 was two basis points and the estimated annualized pre-tax cost of these increases is approximately $120.

| | 2018 | | | | 2017 | | | | 2016 | | |

| | 2018 | | | | 2017 | | | | 2016 | | |

Interest expense primarily relates to Senior Notes issued by the Company.

In March and June 2017, we repaid $2,200 in total outstanding principal of the 5.5% and 1.125% Senior Notes, respectively.

| | 2018 | | | | 2017 | | | | 2016 | | |

2018 vs. 2017

The increase in interest income in 2018 as compared to 2017 was primarily due to higher interest rates earned on higher average cash and investment balances.

In 2018, the increase was primarily due to a strengthening U.S. dollar relative to certain foreign currencies on forward foreign-exchange contracts.

Foreign-currency transaction gains (losses), net include the revaluation or settlement of monetary assets and liabilities and mark-to-market adjustments for forward foreign-exchange contracts by our Canadian and Other International operations.

| | 2018 | | | | 2017 | | | | 2016 | | |

Our effective tax rate for 2018 was favorably impacted by the 2017 Tax Act, which included a reduction in the U.S. federal corporate rate from 35% to 21%.

Due to the timing of our fiscal year relative to the effective date of the rate change, our U.S. corporate rate for 2018 resulted in a blended rate of 25.6%.

Other impacts from the 2017 Tax Act consisted of tax expense of $142 for the estimated tax on deemed repatriation of unremitted earnings and $43 for the reduction in foreign tax credits and other immaterial items, largely offset by a tax benefit of $166 for the provisional remeasurement of certain deferred tax liabilities.

In 2018, we also recognized net tax benefits of $76, which was largely driven by the adoption of an accounting standard related to stock-based compensation and other immaterial net benefits.

| | 2018 | | | | 2017 | | | | 2016 | | |

We operate our lower-margin gasoline business in all countries except Korea and France.

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (amounts in millions, except per share, share, membership fee, and warehouse count data) (Continued)

particularly health care and utility expenses.

| • | Net income increased 14% to $2,679, or $6.08 per diluted share compared to $2,350, or $5.33 per diluted share in 2016. The 2017 results were positively impacted by a $82 tax benefit, or $0.19 per diluted share, in connection with the special cash dividend paid to the Company's 401(k) Plan participants and other net benefits of approximately $51, or $0.07 per diluted share, for non-recurring net legal and other matters; |

2016 vs. 2015

Net sales increased $2,407 or 2% during 2016.

This was attributable to sales at new warehouses opened in 2015 and 2016.

Comparable sales were flat.

operations.

Effective June 1, 2017, we also increased our annual membership fees in the U.S. and Canada for Gold Star (individual), Business and Business add-on by $5 to $60 and for Executive Membership from$110 to $120 (annual membership fee of $60, plus the Executive upgrade of $60); and the maximum 2% reward associated with Executive Membership increased from $750 to $1,000 annually.

We expect these increases to positively impact membership fee revenue by approximately $175 in fiscal 2018.

These increases were partially offset by changes in foreign currencies relative to the U.S. dollar, which negatively impacted fees by approximately $52 in 2016.

Changes of comparable magnitude will not occur in subsequent years.

Total gross margin percentage increased 26 basis points compared to 2015.

A larger LIFO benefit in 2016 compared to 2015 positively contributed three basis points.

The LIFO benefit resulted largely from lower costs for merchandise inventories, primarily in food and sundries and gasoline.

Our core merchandise categories positively contributed one basis point, primarily due to an increase in hardlines, partially offset by food and sundries due to a decrease in sales penetration.

Segment gross margin percentage increased in our U.S. operations predominantly due to a positive contribution from our core merchandise categories, primarily hardlines and softlines, and the LIFO benefit discussed above.

The segment gross margin percentage in our Canadian operations decreased, primarily due to a decrease in all core merchandise categories, except hardlines, partially offset by increases in warehouse ancillary and other businesses, primarily pharmacy and e-commerce businesses.

The segment gross margin percentage in Other International operations decreased in all merchandise categories, except fresh foods, which was higher.

This was largely due to: higher central operating costs of six basis points, predominantly due to costs associated with our information systems modernization, including increased depreciation for projects placed in service, incurred by our U.S. operations; and higher stock compensation expense of four basis points, due to appreciation in the trading price of our stock at the time of grant.

Operating costs related to warehouses, ancillary, and other businesses, which includes e-commerce and travel, were higher by one basis point due to higher payroll and employee benefit costs, primarily health care, in our U.S. operations.

This increase was partially offset by lower payroll expense as a percentage of net sales in our Canadian operations.

Changes in foreign currencies relative to the U.S. dollar decreased our SG&A expenses by approximately $211 in 2016.

Interest expense primarily relates to Senior Notes issued by the Company (described in further detail under the heading “Cash Flows from Financing Activities” and in Note 4 to the consolidated financial statements included in Item 8 of this Report).

The decrease in interest income in 2016 is attributable to lower average cash and investment balances, due in part to the payment of the outstanding principal balance and interest on the 0.65% Senior Notes in the second quarter of 2016.

We have not provided for U.S. deferred taxes on cumulative undistributed earnings of certain non-U.S. consolidated subsidiaries, including the remaining undistributed earnings of our Canadian operations, because our subsidiaries have invested or will invest the undistributed earnings indefinitely, or the earnings if repatriated would not result in an adverse tax consequence.

Although we have historically asserted that certain non-U.S. undistributed earnings will be permanently reinvested, we may repatriate such earnings to the extent we can do so without an adverse tax consequence.

If we determine that such earnings are no longer indefinitely reinvested, deferred taxes, to the extent required and applicable, are recorded at that time.

During 2017, we changed our position regarding an additional portion of the undistributed earnings of our Canadian operations, as we determined such earnings could be repatriated without adverse tax consequences.

Subsequent to the end of 2017, we repatriated a portion of our undistributed earnings in our Canadian operations without adverse tax consequences.

Cash and cash equivalents and short-term investments held at these subsidiaries with earnings considered to be indefinitely reinvested totaled $1,463 at September 3, 2017.

Cash flow used in investing activities is primarily related to funding warehouse expansion and remodeling.

Capital Expenditure Plans

The primary uses of cash in 2017 were related to dividend payments, predominantly the special dividend paid in May 2017, and the repayments of debt totaling $2,200 representing the aggregate principal balances of the 5.5% and 1.125% Senior Notes.

Net cash used in financing activities in 2016 includes a $1,200 repayment of our 0.65% Senior Notes in December 2015.

| Long-term debt(2) | 230 | | | | 2,060 | | | | 2,588 | | | | 2,650 | | | | 7,528 | | |

| Operating leases (3) | 216 | | | | 429 | | | | 345 | | | | 2,123 | | | | 3,113 | | |

| Other(6) | 38 | | | | 17 | | | | 13 | | | | 72 | | | | 140 | | |

| Total | $ | 9,670 | | | $ | 2,774 | | | $ | 3,058 | | | $ | 5,427 | | | $ | 20,929 | |

[removed: | [Reports of Independent Registered Public Accounting Firm](#s46329FC0FA40161B74D36A0B7E1DC914) | [39](#s46329FC0FA40161B74D36A0B7E1DC914) |][added: REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM]

| [removed: [Consolidated Balance Sheets, as of] [added: |] September [added: 2, 2018 | | | | September] 3, 2017 [removed: and] [added: | | | |] August 28, [removed: 2016](#s972158F7B7285F6A0A2A6A0B567A055A)] [added: 2016] | [removed: [41](#s972158F7B7285F6A0A2A6A0B567A055A)] | [added: |]

[removed: | [Notes to Consolidated Financial Statements](#s8ADE0DA14BBCDED5B3186A0B7F6EDD4A) | [46](#s8ADE0DA14BBCDED5B3186A0B7F6EDD4A) |][added: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS]

[removed: Management’s Report] [added: Opinion] on the Consolidated Financial Statements

To the Stockholders and Board of Directors

Costco Wholesale Corporation:

We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation and subsidiaries (the Company) as of September 2, 2018 and September 3, 2017, the related consolidated statements of income, comprehensive income, equity, and cash flows for the 52-week period ended September 2, 2018, the 53-week period ended September 3, 2017 and the 52-week period ended August 28, 2016, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 2, 2018 and September 3, 2017, and the results of its operations and its cash flows for the 52-week period ended September 2, 2018, the 53-week period ended September 3, 2017 and the 52-week period ended August 28, 2016, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 2, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated October 25, 2018 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2002.

Seattle, Washington

October 25, 2018

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors

Costco Wholesale Corporation:

Opinion on Internal Control Over Financial Reporting

We have audited Costco Wholesale Corporation and subsidiaries’ (the Company) internal control over financial reporting as of September 2, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of September 2, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 2, 2018 and September 3, 2017, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the 52-week period ended September 2, 2018, the 53-week period ended September 3, 2017 and the 52-week period ended August 28, 2016, and the related notes (collectively, the consolidated financial statements), and our report dated October 25, 2018 expressed an unqualified opinion on those consolidated financial statements.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The following material weakness has been identified and included in management’s assessment:

There were ineffective information technology general controls (ITGCs) in the areas of user access and program change-management over certain information technology (IT) systems that support the Company’s financial reporting processes.

As a result, business process automated and manual controls that were dependent on the affected ITGCs were ineffective because they could have been adversely impacted.

These control deficiencies were a result of: IT control processes lacked sufficient documentation; insufficient knowledge and training of certain individuals with IT expertise; and risk-assessment processes inadequate to identify and assess changes in IT environments and personnel that could impact internal control over financial reporting.

The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the fiscal year 2018 consolidated financial statements, and this report does not affect our report on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting (Item 9A).

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal

control based on the assessed risk.

The following documents are filed as part of Item 8 of this Report on the pages listed below:

| | Page |

| [Consolidated Statements of Income, for the 53 weeks ended September 3, 2017 and 52 weeks ended August 28, 2016 and August 30, 2015](#s106DBF2B4C461DA8C7C76A0B56962FDD) | [42](#s106DBF2B4C461DA8C7C76A0B56962FDD) |

| [Consolidated Statements of Comprehensive Income, for the 53 weeks ended September 3, 2017 and 52 weeks ended August 28, 2016 and August 30, 2015](#s5F3F6D033A426DBE29C96A0B56A775C2) | [43](#s5F3F6D033A426DBE29C96A0B56A775C2) |

| [Consolidated Statements of Equity, for the 53 weeks ended September 3, 2017 and 52 weeks ended August 28, 2016 and August 30, 2015](#s71BE60831FBC49DC7BF16A0B56AD95A2) | [44](#s71BE60831FBC49DC7BF16A0B56AD95A2) |

| [Consolidated Statements of Cash Flows, for the 53 weeks ended September 3, 2017 and 52 weeks ended August 28, 2016 and August 30, 2015](#sC09F61E6A08A87512AF16A0B56F07860) | [45](#sC09F61E6A08A87512AF16A0B56F07860) |

Costco’s management is responsible for the preparation, integrity and objectivity of the accompanying consolidated financial statements and the related financial information.

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) and necessarily include certain amounts that are based on estimates and informed judgments.

The Company’s management is also responsible for the preparation of the related financial information included in this Annual Report on Form 10-K and its accuracy and consistency with the consolidated financial statements.

The consolidated financial statements have been audited by KPMG LLP, an independent registered public accounting firm, who conducted their audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).

The independent registered public accounting firm’s responsibility is to express an opinion as to the fairness with which such consolidated financial statements present our financial position, results of operations and cash flows in accordance with U.S. GAAP.

Item 9A—Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report on Form 10-K, we performed an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities and Exchange Act of 1934 (the Exchange Act)).

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures are effective.

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our fiscal quarter ended September 3, 2017, that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act.

Our internal control over financial reporting

[added: Our internal control over financial reporting] is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Under the supervision [added: of] and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of September [removed: 3, 2017,] [added: 2, 2018,] using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013).

Based on [removed: its assessment,] [added: this material weakness, the Company’s] management [removed: has] concluded that [removed: our] [added: at September 2, 2018, the Company’s] internal control over financial reporting was [removed: effective as of September 3, 2017.][added: not effective.]

The [removed: attestation of KPMG LLP, our] [added: Company’s] independent registered public accounting firm, [added: KPMG LLP has issued an adverse audit report] on the effectiveness of [removed: our] [added: the Company’s] internal control over financial reporting [removed: is included with the consolidated financial statements] [added: as of September 2, 2018, which appears] in Item 8 of this [removed: Report.][added: Form 10-K.]

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 (CEO) and the Chief Financial Officer (CFO), with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of September 2, 2018 and, based on their evaluation, have concluded that the disclosure controls and procedures were not effective as of such date due to a material weakness in internal control over financial reporting, described below.

Management's Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act.

Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

We identified a material weakness in internal control related to ineffective information technology general controls (ITGCs) in the areas of user access and program change-management over certain information technology (IT) systems that support the Company’s financial reporting processes.

Our business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted.

We believe that these control deficiencies were a result of: IT control processes lacking sufficient documentation such that the successful operation of ITGCs was overly dependent upon knowledge and actions of certain individuals with IT expertise, which led to failures resulting from changes in IT personnel; insufficient training of IT personnel on the importance of ITGCs; and risk-assessment processes inadequate to identify and assess changes in IT environments that could impact internal control over financial reporting.

The material weakness did not result in any identified misstatements

to the financial statements, and there were no changes to previously released financial results.

Following identification of the material weakness and prior to filing this Annual Report on Form 10-K, we completed substantive procedures for the year ended September 2, 2018.

Based on these procedures, management believes that our consolidated financial statements included in this Form 10-K have been prepared in accordance with U.S. GAAP.

Our CEO and CFO have certified that, based on their knowledge, the financial statements, and other financial information included in this Form 10-K, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Form 10-K.

KPMG LLP has issued an unqualified opinion on our financial statements, which is included in Item 8 of this Form 10-K.

Remediation

Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively.

The remediation actions include: (i) creating and filling an IT Compliance Oversight function; (ii) developing a training program addressing ITGCs and policies, including educating control owners concerning the principles and requirements of each control, with a focus on those related to user access and change-management over IT systems impacting financial reporting; (iii) developing and maintaining documentation underlying ITGCs to promote knowledge transfer upon personnel and function changes; (iv) developing enhanced risk assessment procedures and controls related to changes in IT systems; (v) implementing an IT management review and testing plan to monitor ITGCs with a specific focus on systems supporting our financial reporting processes; and (vi) enhanced quarterly reporting on the remediation measures to the Audit Committee of the Board of Directors.

We believe that these actions will remediate the material weakness.

The weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

We expect that the remediation of this material weakness will be completed prior to the end of fiscal 2019.

Changes in Internal Control Over Financial Reporting

Except for the material weakness identified during the quarter, as of September 2, 2018, there have been no other 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 fourth quarter of fiscal 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The information required by this Item concerning our directors and nominees for director is incorporated herein by reference to the sections entitled “Proposal 1: Election of Directors,” “Directors,” “Committees of the Board” and “Section 16(a) Beneficial Ownership Reporting Compliance” in Costco’s Proxy Statement for its [removed: 2018] [added: 2019] annual meeting of stockholders, which will be filed with the SEC within 120 days of the end of our fiscal year (“Proxy Statement”).

| [3.1](http://www.sec.gov/Archives/edgar/data/909832/000090983215000003/costex3110q21515.htm) | | [Articles of Incorporation as amended of Costco [removed: Wholesale](http://www.sec.gov/Archives/edgar/data/909832/000090983215000003/costex3110q21515.htm) Corporation] [added: Wholesale Corporation](http://www.sec.gov/Archives/edgar/data/909832/000090983215000003/costex3110q21515.htm)] | | | | 10-Q | | 2/15/2015 | | 3/11/2015 |

| [removed: [3.2](http://www.sec.gov/Archives/edgar/data/909832/000119312516727544/d66078dex32.htm)] [added: [3.2](http://www.sec.gov/Archives/edgar/data/909832/000119312517330827/d482406dex32.htm)] | | [Bylaws as amended [removed: of](http://www.sec.gov/Archives/edgar/data/909832/000119312516727544/d66078dex32.htm)] [added: of] Costco Wholesale [removed: Corporation] [added: Corporation](http://www.sec.gov/Archives/edgar/data/909832/000119312517330827/d482406dex32.htm)] | | | | 8-K | | | | [removed: 9/30/2016] [added: 11/2/2017] |

| [removed: [10.1.2*](http://www.sec.gov/Archives/edgar/data/909832/000119312510059399/dex10113.htm)] [added: [10.2.1*](http://www.sec.gov/Archives/edgar/data/909832/000119312510059399/dex10113.htm)] | | [Fifth Restated 2002 Stock Incentive Plan](http://www.sec.gov/Archives/edgar/data/909832/000119312510059399/dex10113.htm) | | | | 10-Q | | 2/14/2010 | | 3/17/2010 |

| [removed: [10.1.3*](http://www.sec.gov/Archives/edgar/data/909832/000119312512030161/d292236dex42.htm)] [added: [10.2.2*](http://www.sec.gov/Archives/edgar/data/909832/000119312512030161/d292236dex42.htm)] | | [Sixth Restated 2002 Stock Incentive Plan](http://www.sec.gov/Archives/edgar/data/909832/000119312512030161/d292236dex42.htm) | | | | 8-K | | | | 1/31/2012 |

| [removed: [10.1.4*](http://www.sec.gov/Archives/edgar/data/909832/000090983214000028/costdefproxy2014.htm#sADEFC67A06AE143EB0AD50BB166A9871)] [added: [10.2.3*](http://www.sec.gov/Archives/edgar/data/909832/000090983214000028/costdefproxy2014.htm#sADEFC67A06AE143EB0AD50BB166A9871)] | | [Seventh Restated 2002 Stock Incentive Plan](http://www.sec.gov/Archives/edgar/data/909832/000090983214000028/costdefproxy2014.htm#sADEFC67A06AE143EB0AD50BB166A9871) | | | | DEF 14A | | | | 12/19/2014 |

| [removed: [10.1.5*](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011110q112215.htm)] [added: [10.2.4*](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011110q112215.htm)] | | [Seventh Restated 2002 Stock Incentive Plan Restricted Stock Unit Award Agreement-U.S. Employee](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011110q112215.htm) | | | | 10-Q | | 11/22/2015 | | 12/17/2015 |

| [removed: [10.1.6*](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011210q112215.htm)] [added: [10.2.5*](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011210q112215.htm)] | | [Seventh Restated 2002 Stock Incentive Plan Restricted Stock Unit Award Agreement-Non-U.S. Employee](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011210q112215.htm) | | | | 10-Q | | 11/22/2015 | | 12/17/2015 |

| [removed: [10.1.7*](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011310q112215.htm)] [added: [10.2.6*](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011310q112215.htm)] | | [Seventh Restated 2002 Stock Incentive Plan Restricted Stock Unit Award Agreement-Non-Executive Director](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011310q112215.htm) | | | | 10-Q | | 11/22/2015 | | 12/17/2015 |

| [removed: [10.1.8*](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011410q112215.htm)] [added: [10.2.7*](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011410q112215.htm)] | | [Seventh Restated 2002 Stock Incentive Plan Letter Agreement for 2016 Performance-Based Restricted Stock Units-Executive](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011410q112215.htm) | | | | 10-Q | | 11/22/2015 | | 12/17/2015 |

| [removed: [10.1.9*](http://www.sec.gov/Archives/edgar/data/909832/000090983216000032/costex101910k82816.htm)] [added: [10.3.1*](http://www.sec.gov/Archives/edgar/data/909832/000090983216000040/costex10110q112016.htm)] | | [removed: [Amendment to Executive] [added: [Executive] Employment Agreement, [removed: dated July 21, 2016,] [added: effective January 1, 2017,] between W. Craig Jelinek and Costco Wholesale [removed: Corporation](http://www.sec.gov/Archives/edgar/data/909832/000090983216000032/costex101910k82816.htm)] [added: Corporation](http://www.sec.gov/Archives/edgar/data/909832/000090983216000040/costex10110q112016.htm)] | | | | [removed: 10-K] [added: 10-Q] | | [removed: 8/28/2016] [added: 11/20/2016] | | [removed: 10/12/2016] [added: 12/16/2016] |

| [removed: [10.1.10*](http://www.sec.gov/Archives/edgar/data/909832/000090983215000014/costex1011510k83015.htm)] [added: [10.3.2*](http://www.sec.gov/Archives/edgar/data/909832/000090983217000022/costex10210q112617.htm)] | | [removed: [Executive] [added: [Letter Dated December 18, 2017, Regarding an Extension of the Term of the Executive] Employment Agreement, [removed: dated August 31, 2015,] [added: effective January 1, 2017,] between [removed: Costco Wholesale Corporation and] W. Craig [removed: Jelinek](http://www.sec.gov/Archives/edgar/data/909832/000090983215000014/costex1011510k83015.htm)] [added: Jelinek and Costco Wholesale Corporation](http://www.sec.gov/Archives/edgar/data/909832/000090983217000022/costex10210q112617.htm)] | | | | [removed: 10-K] [added: 10-Q] | | [removed: 8/30/2015] [added: 11/26/2017] | | [removed: 10/14/2015] [added: 12/21/2017] |

| [removed: [10.2*](http://www.sec.gov/Archives/edgar/data/909832/000103221099001718/0001032210-99-001718.txt)] [added: [10.4*](http://www.sec.gov/Archives/edgar/data/909832/000103221099001718/0001032210-99-001718.txt)] | | [Form of Indemnification Agreement](http://www.sec.gov/Archives/edgar/data/909832/000103221099001718/0001032210-99-001718.txt) | | | | 14A | | | | 12/13/1999 |

| [removed: [10.4*](http://www.sec.gov/Archives/edgar/data/909832/000144530513002422/costex10510k2013.htm)] [added: [10.5*](http://www.sec.gov/Archives/edgar/data/909832/000144530513002422/costex10510k2013.htm)] | | [Deferred Compensation Plan](http://www.sec.gov/Archives/edgar/data/909832/000144530513002422/costex10510k2013.htm) | | | | 10-K | | 9/1/2013 | | 10/16/2013 |

| [removed: [10.5](http://www.sec.gov/Archives/edgar/data/909832/000090983215000012/costex10110qa51015.htm)] [added: [10.6.1](http://www.sec.gov/Archives/edgar/data/909832/000090983215000012/costex10110qa51015.htm)] | | [Citibank, N.A. Co-Branded Credit Card Agreement](http://www.sec.gov/Archives/edgar/data/909832/000090983215000012/costex10110qa51015.htm) | | | | 10-Q/A | | 5/10/2015 | | 8/31/2015 |

| [removed: [10.5.1](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex10210q112215.htm)] [added: [10.6.2](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex10210q112215.htm)] | | [First Amendment to Citi, N.A. Co-Branded Credit Card Agreement](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex10210q112215.htm) | | | | 10-Q | | 11/22/2015 | | 12/17/2015 |

| [removed: [10.5.2](http://www.sec.gov/Archives/edgar/data/909832/000090983216000023/costex10110q21416.htm)] [added: [10.6.3](http://www.sec.gov/Archives/edgar/data/909832/000090983216000023/costex10110q21416.htm)] | | [Second Amendment to Citi, N.A. Co-Branded Credit Card Agreement](http://www.sec.gov/Archives/edgar/data/909832/000090983216000023/costex10110q21416.htm) | | | | 10-Q | | 2/14/2016 | | 3/9/2016 |

| [removed: [10.5.3](http://www.sec.gov/Archives/edgar/data/909832/000090983216000032/costex105310k82816.htm)] [added: [10.6.4](http://www.sec.gov/Archives/edgar/data/909832/000090983216000032/costex105310k82816.htm)] | | [Third Amendment to Citi, N.A. Co-Branded Credit Card Agreement](http://www.sec.gov/Archives/edgar/data/909832/000090983216000032/costex105310k82816.htm) | | | | 10-K | | 8/28/2016 | | 10/12/2016 |

| [removed: [10.7*](http://www.sec.gov/Archives/edgar/data/909832/000119312516758884/d280773dex101.htm)] [added: [10.7*](http://www.sec.gov/Archives/edgar/data/909832/000119312517327404/d485001dex101.htm)] | | [Fiscal [removed: 2017] [added: 2018] Executive Bonus [removed: Plan](http://www.sec.gov/Archives/edgar/data/909832/000119312516758884/d280773dex101.htm)] [added: Plan](http://www.sec.gov/Archives/edgar/data/909832/000119312517327404/d485001dex101.htm)] | | | | 8-K | | | | [removed: 11/3/2016] [added: 10/31/2017] |

| [removed: [21.1](https://www.sec.gov/Archives/edgar/data/909832/000090983217000014/costex21110k90317.htm)] [added: [21.1](https://www.sec.gov/Archives/edgar/data/909832/000090983218000013/costex21110k9218.htm)] | | [Subsidiaries of the [removed: Company](https://www.sec.gov/Archives/edgar/data/909832/000090983217000014/costex21110k90317.htm)] [added: Company](https://www.sec.gov/Archives/edgar/data/909832/000090983218000013/costex21110k9218.htm)] | | x | | | | | | |

| [removed: [23.1](https://www.sec.gov/Archives/edgar/data/909832/000090983217000014/costex23110k90317.htm)] [added: [23.1](https://www.sec.gov/Archives/edgar/data/909832/000090983218000013/costex23110k9218.htm)] | | [Consent of Independent Registered Public Accounting [removed: Firm](https://www.sec.gov/Archives/edgar/data/909832/000090983217000014/costex23110k90317.htm)] [added: Firm](https://www.sec.gov/Archives/edgar/data/909832/000090983218000013/costex23110k9218.htm)] | | x | | | | | | |

| [removed: [31.1](https://www.sec.gov/Archives/edgar/data/909832/000090983217000014/costex31110k90317.htm)] [added: [31.1](https://www.sec.gov/Archives/edgar/data/909832/000090983218000013/costex31110k9218.htm)] | | [Rule 13a – 14(a) [removed: Certifications](https://www.sec.gov/Archives/edgar/data/909832/000090983217000014/costex31110k90317.htm)] [added: Certifications](https://www.sec.gov/Archives/edgar/data/909832/000090983218000013/costex31110k9218.htm)] | | x | | | | | | |

| [removed: [32.1](https://www.sec.gov/Archives/edgar/data/909832/000090983217000014/costex32110k90317.htm)] [added: [32.1](https://www.sec.gov/Archives/edgar/data/909832/000090983218000013/costex32110k9218.htm)] | | [Section 1350 [removed: Certifications](https://www.sec.gov/Archives/edgar/data/909832/000090983217000014/costex32110k90317.htm)] [added: Certifications](https://www.sec.gov/Archives/edgar/data/909832/000090983218000013/costex32110k9218.htm)] | | x | | | | | | |

| [10.6.5](http://www.sec.gov/Archives/edgar/data/909832/000090983218000002/costex10110q21818.htm) | | [Fourth Amendment to Citi, N.A. Co-Branded Credit Card Agreement](http://www.sec.gov/Archives/edgar/data/909832/000090983218000002/costex10110q21818.htm) | | | | 10-Q | | 2/18/2018 | | 3/15/2018 |

| [10.1.11*](http://www.sec.gov/Archives/edgar/data/909832/000090983216000040/costex10110q112016.htm) | | [Executive Employment Agreement, effective January 1, 2017, between W. Craig Jelinek and Costco Wholesale Corporation](http://www.sec.gov/Archives/edgar/data/909832/000090983216000040/costex10110q112016.htm) | | | | 10-Q | | 11/20/2016 | | 12/16/2016 |

| | | W. Craig Jelinek President, Chief Executive Officer and Director | | | | [added: Hamilton E. James Chairman of the Board] |

| | | Richard A. Galanti Executive Vice President, Chief Financial Officer and Director (Principal Financial Officer) | | | | [added: Daniel M. Hines Senior Vice President and Corporate Controller (Principal Accounting Officer)] |

| | | Susan L. Decker Director | | | | [added: Kenneth D. Denman Director] |

| [added: By] | | [removed: Kenneth D. Denman Director] [added: /s/ SUSAN L. DECKER] | | [added: By] | | [added: /s/ KENNETH D. DENMAN] |

| | | John W. Meisenbach Director | | | | [added: Charles T. Munger Director] |

| [added: By] | | [removed: Charles T. Munger Director] [added: /s/ JOHN W. MEISENBACH] | | [added: By] | | [added: /s/ CHARLES T. MUNGER] |

| | | Jeffrey S. Raikes Director | | | | [added: John W. Stanton Director] |

| [added: By] | | [removed: John W. Stanton Director] [added: /s/ JEFFREY S. RAIKES] | | [added: By] | | [added: /s/ JOHN W. STANTON] |

| By | | [removed: /S/ MAGGIE] [added: /s/ MARY (MAGGIE) A.] WILDEROTTER | | | | [removed: October 17, 2017] |

| | | [removed: Maggie] [added: Mary (Maggie) A.] Wilderotter Director | | | | |

[removed: |] [added: October 25,] 2018 [removed: | $ | 86 | |]

October 25, 2018

| By | | /s/ W. CRAIG JELINEK | | By | | /s/ HAMILTON E. JAMES |

| By | | /s/ RICHARD A. GALANTI | | By | | /s/ DANIEL M. HINES |

October 17, 2017

| | | | |

| --- | --- | --- | --- |

| | | | | | | |

| --- | --- | --- | --- | --- | --- | --- |

| By | | /s/ W. CRAIG JELINEK | | | | October 17, 2017 |

| By | | /s/ HAMILTON E. JAMES | | | | October 17, 2017 |

| | | Hamilton E. James Chairman of the Board | | | | |

| By | | /s/ RICHARD A. GALANTI | | | | October 17, 2017 |

| By | | /s/ DANIEL M. HINES | | | | October 17, 2017 |

| | | Daniel M. Hines Senior Vice President and Corporate Controller (Principal Accounting Officer) | | | | |

| By | | /s/ SUSAN L. DECKER | | | | October 17, 2017 |

| By | | /s/ KENNETH D. DENMAN | | | | October 17, 2017 |

| By | | /s/ DANIEL J. EVANS | | | | October 17, 2017 |

| | | Daniel J. Evans Director | | | | |

| By | | /s/ JOHN W. MEISENBACH | | | | October 17, 2017 |

| By | | /s/ CHARLES T. MUNGER | | | | October 17, 2017 |

| By | | /S/ JEFFREY S. RAIKES | | | | October 17, 2017 |

| By | | /S/ JAMES D. SINGEGAL | | | | October 17, 2017 |

| | | James D. Sinegal Director | | | | |

| By | | /S/ JOHN W. STANTON | | | | October 17, 2017 |

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Costco Wholesale Corporation:

We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation as of September 3, 2017 and August 28, 2016, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the 53-week period ended September 3, 2017 and the 52-week periods ended August 28, 2016 and August 30, 2015.

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Costco Wholesale Corporation and subsidiaries as of September 3, 2017 and August 28, 2016, and the results of their operations and their cash flows for the 53-week period ended September 3, 2017, and the 52-week periods ended August 28, 2016 and August 30, 2015, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Costco Wholesale Corporation’s internal control over financial reporting as of September 3, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 17, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Seattle, Washington

We have audited Costco Wholesale Corporation’s (the Company) internal control over financial reporting as of September 3, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting included in Item 9A.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).