Costco Wholesale (COST) 10-K risk factor changes: FY2019 vs FY2018

These Risk Factors should be carefully reviewed in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in [removed: Item 7] [added: [Item 7](#s00B188113CCE50CBAB7104E57E24687D)] and our consolidated financial statements and related notes in [removed: Item 8] [added: [Item 8](#sB10969D315195D4EA69BEEE9342E1495)] of this Report.

Our financial and operational performance is highly dependent on our U.S. and Canadian operations, which comprised 87% and [removed: 83%] [added: 84%] of net sales and operating income in [removed: 2018,] [added: 2019,] respectively.

Within the U.S., we are highly dependent on our California operations, which comprised 30% of U.S. net sales in [removed: 2018.][added: 2019.]

We intend to continue to open warehouses in new [removed: markets.][added: markets, including China.]

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

We cannot ensure that new warehouses and new [added: e-commerce] websites will be profitable and, as a result, future profitability could be delayed or otherwise materially adversely affected.

The extent to which we achieve growth in our membership base, increase the penetration of [removed: 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 [removed: member] renewal rates and, accordingly, net sales and membership fee revenue, negatively impacting our results of operations.

We rely extensively on information technology to process transactions, compile results, and manage our [removed: businesses.][added: business.]

Failure or disruption of our primary and back-up systems could adversely affect our [removed: businesses.][added: business.]

A failure to adequately update our existing systems and implement new systems could harm our [removed: businesses] [added: business] and adversely affect our results of operations.

Given the very high volume of transactions we process [removed: each year] it is important that we maintain uninterrupted operation of our business-critical [removed: 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 [added: or misfeasance] by our employees.

If our systems are damaged or cease to function properly, we may have to make significant investments to fix or replace them, and we may suffer interruptions in our [removed: operations in the interim.][added: operations.]

We are currently [removed: making,] [added: making] and will continue to [removed: make,] [added: make] investments to improve or advance critical information systems and processing capabilities.

Failure to monitor and choose the right investments and implement them at the right pace [removed: would] [added: could] be harmful.

The risk of system disruption is increased when significant system changes are undertaken, although we believe that our change management process [removed: will] [added: should] mitigate this risk.

Excessive technological change could impact the effectiveness of adoption, and could make it more [removed: difficult]

[added: difficult] for us to realize benefits.

We [added: previously] identified a material weakness in our internal control related to ineffective information technology general controls [removed: which,] [added: and] if [removed: not remediated appropriately or timely,] [added: we fail to maintain an effective system of internal control in the future, this] could result in loss of investor confidence and adversely impact our stock price.

[removed: As disclosed] [added: We reported] in [removed: Part II, Item 9A, during the fourth quarter] [added: our Annual Report on Form 10-K as] of [removed: fiscal] [added: September 2,] 2018, [removed: management 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 [removed: (IT)] systems that support the Company’s financial reporting processes.

[removed: As a result, management] [added: During 2019, we completed the remediation measures related to the material weakness and] concluded that our internal control over financial reporting was [removed: not] effective as of September [removed: 2, 2018.][added: 1, 2019.]

If we are unable to [removed: remediate the material weakness, or are otherwise unable to] maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately, and to prepare financial statements within required time [removed: periods,] [added: periods] could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price.

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

A compromise of our security systems or defects within our hardware or software, or those of our business associates, that results in our members' or employees' information being obtained by unauthorized [removed: persons,] [added: 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 litigation, government actions, or the imposition of penalties.

In addition, a breach could require [removed: that we expend] [added: expending] significant additional resources related to the security of information systems and could disrupt our operations.

The use of data by our business and our business associates is [added: highly] regulated [removed: at the national and state or local level] in all of our operating countries.

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

[added: 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 [removed: preventative measures.]

We accept payments using a variety of methods, including cash and checks, [removed: a] select [removed: variety of] credit and debit cards, and our [removed: proprietary cash] [added: shop] card.

For certain payment methods, we pay interchange and other related [removed: card] acceptance fees, along with additional transaction processing fees.

[removed: We rely on third parties to provide payment transaction processing services, including the processing of credit and debit cards, and our proprietary cash card, and it] [added: It] could disrupt our business if these companies become unwilling or unable to provide these services to us.

We are also subject to [added: evolving] payment card association and network operating rules, including data security rules, certification requirements and rules governing electronic funds [removed: transfers, which could change over time.][added: transfers.]

[removed: In addition, if] [added: If] our internal systems are breached or compromised, we may be liable for card re-issuance costs, subject to fines and higher transaction fees and lose our ability to accept [removed: credit and/or debit] card payments from our members, and our business and operating results could be adversely affected.

Our [removed: vendors] [added: suppliers] are generally contractually required to comply with product safety laws, and we are dependent on them to ensure that the products we buy comply with [removed: all] safety [added: and other] standards.

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

We are making [removed: technology] investments in our websites and mobile applications.

Failure to identify and implement a succession plan for key senior management could negatively impact [removed: the] [added: our] business.

Insurance coverage is maintained in certain instances to limit [removed: the exposure] [added: exposures] arising from [removed: catastrophic events.][added: very large losses.]

Significant claims or events, regulatory changes, a substantial rise in costs 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.

Completion of remediation does not provide assurance that our remediation or other controls will continue to operate properly.

preventative measures.

We rely on third parties to provide payment transaction processing services for credit and debit cards and our shop card.

Additionally, actions in various countries, particularly China and the United States, have created uncertainty with respect to tariff impacts on the costs of some of our merchandise.

The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs.

The impact to our business, including net sales and gross margin, will be influenced in part by merchandising and pricing strategies in response to potential cost increases by us and our competitors.

While these potential impacts are uncertain, they could have an adverse impact on our financial results.

managing international operations, adverse tax consequences, and difficulty in enforcing intellectual property rights.

We are subject to a variety of taxes and tax collection and remittance obligations in the U.S. and numerous foreign jurisdictions.

Additionally, at any point in time, we may be under examination for value added, sales-based, payroll, product, import or other non-income taxes.

We may recognize additional tax expense, be subject to additional tax liabilities, or incur losses and penalties, due to changes in laws, regulations, administrative practices, principles, assessments by authorities and interpretations related to tax, including tax rules in various jurisdictions.

We are implementing remedial measures and, while there can be no assurance that our efforts will be successful, we plan to remediate the material weakness prior to the end of fiscal 2019.

These measures will result in additional technology and other expenses.

We do not maintain cyber-insurance for these risks.

Because the techniques used to obtain unauthorized access, disable or degrade

We are primarily self-insured as it relates to property damage.

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 [removed: Note 1] [added: [Note 1](#s4AEC290A0D185EC486E86148CF4931E4)] 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.

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, [removed: and] U.S. government and government agency money market [removed: funds.][added: funds, and insured bank balances.]

A 100 basis-point change in interest rates as of the end of [removed: 2018] [added: 2019] would have had an immaterial incremental change in fair market value.

As of the end of [removed: 2018,] [added: 2019,] long-term debt with fixed interest rates was [removed: $6,577.][added: $6,852.]

See [removed: Note 4] [added: [Note 4](#sF2875645BF505273AC15EE9E32FEF9EA)] to the consolidated financial statements included in Item 8 of this Report for more information on our long-term debt.

Foreign [removed: Currency-Exchange] [added: Currency] Risk

Our foreign subsidiaries conduct certain transactions in [removed: their] non-functional currencies, which exposes us to fluctuations in exchange rates.

For additional information related to the Company's forward foreign-exchange contracts, see [removed: Notes 1] [added: [Notes 1](#s4AEC290A0D185EC486E86148CF4931E4)] and [removed: 3] [added: [3](#s76E8B80B941D593CBB830B765AAF636B)] to the consolidated financial statements included in Item 8 of this Report.

A hypothetical 10% strengthening of the functional currency compared to the non-functional currency exchange rates at September [removed: 2, 2018,] [added: 1, 2019,] would have decreased the fair value of the contracts by [removed: $80] [added: $79] and resulted in an unrealized loss in the consolidated statements of income for the same amount.

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

These contracts meet the characteristics of derivative instruments, but generally qualify for the “normal purchases [removed: or] [added: and] normal sales” exception under authoritative guidance and require no mark-to-market adjustment.

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, [added: China,] and through a majority-owned subsidiary in Taiwan.

Costco operated [added: 782,] 762, [removed: 741,] and [removed: 715] [added: 741] warehouses worldwide at September [added: 1, 2019, September] 2, 2018, [added: and] September 3, 2017, [removed: and August 28, 2016,] respectively.

References to [removed: 2018] [added: 2019] and [removed: 2016] [added: 2018] relate to the 52-week fiscal years ended September [added: 1, 2019, and September] 2, 2018, [removed: and August 28, 2016,] respectively.

Our average warehouse space is approximately [removed: 145,000] [added: 146,000] square feet, with newer units being slightly larger.

Floor plans are designed for economy and efficiency in the use of selling space, the handling of merchandise, [removed: and the control of inventory.]

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

In general, with variations by country, our warehouses accept certain [removed: credit,] [added: credit cards,] including [removed: the] Costco co-branded [removed: card, and] [added: cards,] debit cards, cash, [added: checks,] and [removed: checks.][added: our proprietary stored-value card (shop card).]

The number of warehouses with gas stations [removed: vary] [added: varies] significantly by country, and we do not [added: currently] operate our gasoline business in [removed: Korea] [added: Korea, France] or [removed: France.][added: China.]

We operated [removed: 567] [added: 593] gas stations at the end of [removed: 2018.][added: 2019.]

[removed: We operate] [added: At the end of 2019, we operated] 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 [removed: 2018.][added: 2019.]

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

Certain financial information for our segments and geographic areas is included in [removed: Note 11] [added: [Note 11](#s594B4BAC1AAB5FFFBBE3D38A2CEE3A51)] to the consolidated financial statements included in Item 8 of this Report.

Gold Star memberships are available to individuals; Business memberships are limited to businesses, including individuals with a business license, retail sales license or comparable [removed: evidence.][added: document.]

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

Our member renewal rate was [removed: 90%] [added: 91%] in the U.S. and Canada and 88% on a worldwide basis at the end of [removed: 2018.][added: 2019.]

[removed: Therefore, our] [added: Our] renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date.

| | [removed: 2018] [added: 2019] | | | [removed: 2017] [added: 2018] | | | [removed: 2016] [added: 2017] | |

| Gold Star | [removed: 40,700] [added: 42,900] | | | [removed: 38,600] [added: 40,700] | | | [removed: 36,800] [added: 38,600] | |

| Business, including affiliates | [removed: 10,900] [added: 11,000] | | | [removed: 10,800] [added: 10,900] | | | 10,800 | |

| Total paid members | [removed: 51,600] [added: 53,900] | | | [removed: 49,400] [added: 51,600] | | | [removed: 47,600] [added: 49,400] | |

| Household cards | [removed: 42,700] [added: 44,600] | | | [removed: 40,900] [added: 42,700] | | | [removed: 39,100] [added: 40,900] | |

| Total cardholders | [removed: 94,300] [added: 98,500] | | | [removed: 90,300] [added: 94,300] | | | [removed: 86,700] [added: 90,300] | |

Paid cardholders (except [removed: Business] affiliates) are eligible to upgrade to an Executive membership in the U.S. and [removed: Canada] [added: Canada,] for an additional annual fee of $60.

Executive memberships are also available in [removed: Mexico and] [added: Mexico,] the U.K., [added: and Korea,] 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 [added: the] U.S. and Canada and varies in [removed: Mexico and] [added: Mexico,] the [removed: U.K.),] [added: U.K.] and [added: Korea), which] can be redeemed only at Costco warehouses.

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

Executive members, who represented [removed: 37%] [added: 39%] of paid members at the end of [removed: 2018,] [added: 2019,] generally shop more frequently and spend more than other members.

| Full-time employees | [removed: 143,000] [added: 149,000] | | | [removed: 133,000] [added: 143,000] | | | [removed: 126,000] [added: 133,000] | |

| Part-time employees | [removed: 102,000] [added: 105,000] | | | [removed: 98,000] [added: 102,000] | | | [removed: 92,000] [added: 98,000] | |

| Total employees | [removed: 245,000] [added: 254,000] | | | [removed: 231,000] [added: 245,000] | | | [removed: 218,000] [added: 231,000] | |

Approximately [removed: 15,900] [added: 16,000] employees are union employees.

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

We also compete with [added: other] warehouse [removed: club operations] [added: clubs] (primarily Walmart’s Sam’s Club and BJ’s Wholesale Club), and [removed: nearly every] [added: many of the] major [added: metropolitan areas in the] U.S. and [removed: Mexico metropolitan area has] [added: certain of our Other International locations have] multiple club operations.

We believe that, to varying degrees, our trademarks, trade names, copyrights, proprietary processes, trade secrets, [removed: patents,] trade dress, domain names and similar intellectual property add significant value to our business and are important to our success.

We expect to continue to increase the sales penetration of our [removed: private label] [added: private-label] items.

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

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

If the Company makes any amendments to this code (other than technical, administrative, or non-substantive amendments) or grants any waivers, including implicit waivers, [removed: from this code] to the CEO, chief financial officer or principal accounting officer and controller, we will disclose (on our website or in a Form 8-K report filed with the SEC) the nature of the amendment or waiver, its effective date, and to whom it applies.

| 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: 66] [added: 67] |

and the control of inventory.

Net sales for our gasoline business represented approximately 11% of total net sales in 2019.

| | 2019 | | | 2018 | | | 2017 | |

Information about our Executive Officers

| Patrick J. Callans | Executive Vice President, Administration. Mr. Callans was Senior Vice President, Human Resources and Risk Management, from 2013 to December 2018. | 2019 | 57 |

low prices, our warehouses are not elaborate.

merchandise retail competitors.

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 public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Executive Officers of the Registrant

| Franz E. Lazarus | Executive Vice President, Administration. Mr. Lazarus was Senior Vice President, Administration-Global Operations, from 2006 to September 2012. | 2012 | 71 |

See discussion of Legal Proceedings in [removed: Note 10] [added: [Note 10](#s1C749172260D544993F92E848552A8DB)] to the consolidated financial statements included in Item 8 of this Report.

For the fiscal year ended September [removed: 2, 2018][added: 1, 2019]

| Title of each class | | [added: Trading Symbol | |] Name of each exchange on which registered |

| Common Stock, $.01 Par Value | | [added: COST | |] The NASDAQ Global Select Market |

The aggregate market value of the voting stock held by non-affiliates of the registrant as of February [removed: 18, 2018] [added: 17, 2019] was [removed: $83,850,253,577.][added: 95,005,703,244.]

The number of shares outstanding of the registrant’s common stock as of October [removed: 18, 2018] [added: 3, 2019] was [removed: 438,208,376.][added: 439,656,950.]

Portions of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on January [removed: 24, 2019,] [added: 22, 2020,] are incorporated by reference into [removed: Part III] [added: [Part III](#sED6D321C20A75064A90E6CDF30DC7A96)] of this Form 10-K.

ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER [removed: 2, 2018][added: 1, 2019]

| Item 1. | [removed: [Business](#sE0E89D50A91059A8B98A5260AC56E74A)] [added: [Business](#s7CDC93349AB05CEF950F7715B432771E)] | [removed: [3](#sE0E89D50A91059A8B98A5260AC56E74A)] [added: [3](#s7CDC93349AB05CEF950F7715B432771E)] |

| Item 1A. | [Risk [removed: Factors](#s6BE81E62DFFB5CA0AD2EA597ADE6DCF2)] [added: Factors](#s203E8DC8D22C53C798341F0E88A79196)] | [removed: [8](#s6BE81E62DFFB5CA0AD2EA597ADE6DCF2)] [added: [8](#s203E8DC8D22C53C798341F0E88A79196)] |

| Item 1B. | [Unresolved Staff [removed: Comments](#s87C1AFC8BCCE5EB0A33C4E677D773414)] [added: Comments](#s37939109C3FA5167A07D988AD4E7CFFC)] | [removed: [15](#s87C1AFC8BCCE5EB0A33C4E677D773414)] [added: [16](#s37939109C3FA5167A07D988AD4E7CFFC)] |

| Item 2. | [removed: [Properties](#sB7C2BA5831435E409906549BACAA1ECF)] [added: [Properties](#s9FFEFC5161625FA3A90CF4664383F963)] | [removed: [16](#sB7C2BA5831435E409906549BACAA1ECF)] [added: [16](#s9FFEFC5161625FA3A90CF4664383F963)] |

| Item 3. | [Legal [removed: Proceedings](#s94687C8ECB5351189F6504BF1F4BE3A8)] [added: Proceedings](#s80339AF8EB8950799243E887771CB747)] | [removed: [17](#s94687C8ECB5351189F6504BF1F4BE3A8)] [added: [17](#s80339AF8EB8950799243E887771CB747)] |

| Item 4. | [Mine Safety [removed: Disclosures](#s5D32CCB910EA540D8F20222DD67B3077)] [added: Disclosures](#sE6A75D0F08C15686B008ACAFDB50AD7F)] | [removed: [17](#s5D32CCB910EA540D8F20222DD67B3077)] [added: [17](#sE6A75D0F08C15686B008ACAFDB50AD7F)] |

| Item 5. | [Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity [removed: Securities](#sC460B5DF1D6F58CC929DFB04A886605F)] [added: Securities](#s1A12124EB0795E74B8359C31F14778A1)] | [removed: [17](#sC460B5DF1D6F58CC929DFB04A886605F)] [added: [17](#s1A12124EB0795E74B8359C31F14778A1)] |

| Item 6. | [Selected Financial [removed: Data](#sAD7EDD35146854D3AE570A10A6BA3C67)] [added: Data](#sBD0E0737722751F492C994EC65AA54AB)] | [removed: [20](#sAD7EDD35146854D3AE570A10A6BA3C67)] [added: [19](#sBD0E0737722751F492C994EC65AA54AB)] |

| Item 7. | [Management’s Discussion and Analysis of Financial Condition and Results of [removed: Operations](#s292A37D574A255258C530DC713B5C79B)] [added: Operations](#s00B188113CCE50CBAB7104E57E24687D)] | [removed: [21](#s292A37D574A255258C530DC713B5C79B)] [added: [20](#s00B188113CCE50CBAB7104E57E24687D)] |

| Item 7A. | [Quantitative and Qualitative Disclosures About Market [removed: Risk](#s1B92789F641857B3B0C6C1E87A02C00C)] [added: Risk](#s7AB7666F814A5DE38E64036FB34A7C95)] | [removed: [31](#s1B92789F641857B3B0C6C1E87A02C00C)] [added: [28](#s7AB7666F814A5DE38E64036FB34A7C95)] |

| Item 8. | [Financial Statements and Supplementary [removed: Data](#sD9AD6A429D4852E382CE3F87E47D80F3)] [added: Data](#sB10969D315195D4EA69BEEE9342E1495)] | [removed: [33](#sD9AD6A429D4852E382CE3F87E47D80F3)] [added: [30](#sB10969D315195D4EA69BEEE9342E1495)] |

| Item 9. | [Changes in and Disagreements with Accountants on Accounting and Financial [removed: Disclosure](#s13A38237C99E5EB98946398A92616518)] [added: Disclosure](#s480EBBD3A2B651BBB257EDD76B93ED43)] | [removed: [62](#s13A38237C99E5EB98946398A92616518)] [added: [62](#s480EBBD3A2B651BBB257EDD76B93ED43)] |

| Item 9A. | [Controls and [removed: Procedures](#s23DD922567125CDE8C2710C4DBE7123F)] [added: Procedures](#s066E7EA18CCE561895BBFD3FCA80809C)] | [removed: [62](#s23DD922567125CDE8C2710C4DBE7123F)] [added: [62](#s066E7EA18CCE561895BBFD3FCA80809C)] |

| Item 9B. | [Other [removed: Information](#sFCCA6E5D83E25A748B0DA5ED5776B7A5)] [added: Information](#s0B194CCC542F5690A4FDEF50C3CBA0E4)] | [removed: [64](#sFCCA6E5D83E25A748B0DA5ED5776B7A5)] [added: [63](#s0B194CCC542F5690A4FDEF50C3CBA0E4)] |

| [PART [removed: III](#sA2E44558AC9D5AD2A46460C0F091BB7D)] [added: III](#sED6D321C20A75064A90E6CDF30DC7A96)] | | |

| Item 10. | [Directors, Executive Officers and Corporate [removed: Governance](#sF5009EA91D305632987CB3AB08E7C41E)] [added: Governance](#sC4A9B0383C6356D49DBCDE89CE810382)] | [removed: [64](#sF5009EA91D305632987CB3AB08E7C41E)] [added: [63](#sC4A9B0383C6356D49DBCDE89CE810382)] |

| Item 11. | [Executive [removed: Compensation](#sCBD6A9095B5D5A949C12F47466167199)] [added: Compensation](#sCA8116DCFDD55A53A979F4E565BE650A)] | [removed: [64](#sCBD6A9095B5D5A949C12F47466167199)] [added: [63](#sCA8116DCFDD55A53A979F4E565BE650A)] |

| Item 12. | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder [removed: Matters](#s44D6A1DEE4765FED98A5C7C5B13624A5)] [added: Matters](#sE7184A6EE3655B7DAB7E9F10B6AF34F0)] | [removed: [64](#s44D6A1DEE4765FED98A5C7C5B13624A5)] [added: [63](#sE7184A6EE3655B7DAB7E9F10B6AF34F0)] |

| Item 13. | [Certain Relationships and Related Transactions, and Director [removed: Independence](#s5256542007B7528AA4DCE7896EDF571C)] [added: Independence](#s76277223BC90502EAF0D991EDC0CB63F)] | [removed: [64](#s5256542007B7528AA4DCE7896EDF571C)] [added: [64](#s76277223BC90502EAF0D991EDC0CB63F)] |

| Item 14. | [Principal Accounting Fees and [removed: Services](#s0269B74EFE72596BAA05ADD76C08CF94)] [added: Services](#s981A5247B4E15347B5ABD72DFED4ACE1)] | [removed: [64](#s0269B74EFE72596BAA05ADD76C08CF94)] [added: [64](#s981A5247B4E15347B5ABD72DFED4ACE1)] |

| Item 15. | [Exhibits, Financial Statement [removed: Schedules](#s787F9FEC693859CD91FA250F9D6D2AB9)] [added: Schedules](#s8A33A6F52F7A53E5B7CD8781082BEBD4)] | [removed: [65](#s787F9FEC693859CD91FA250F9D6D2AB9)] [added: [64](#s8A33A6F52F7A53E5B7CD8781082BEBD4)] |

| Item 16. | [Form 10-K [removed: Summary](#s6B0219A14C8850F8A191080FD8FFD064)] [added: Summary](#s34A50F128E385081811837CCB228F980)] | [removed: [67](#s6B0219A14C8850F8A191080FD8FFD064)] [added: [65](#s34A50F128E385081811837CCB228F980)] |

Such forward-looking statements involve risks and uncertainties that may cause actual events, results, or performance to differ materially from those indicated by such statements, including, without limitation, the factors set forth in the section titled [removed: “Item] [added: “[Item] 1A-Risk [removed: Factors”,] [added: Factors](#s203E8DC8D22C53C798341F0E88A79196)”,] and other factors noted in the section titled [removed: “Item] [added: “[Item] 7-Management's Discussion and Analysis of Financial Condition and Results of [removed: Operations”] [added: Operations](#s00B188113CCE50CBAB7104E57E24687D)”] and in the consolidated financial statements and related notes in [removed: Item 8] [added: [Item 8](#sB10969D315195D4EA69BEEE9342E1495)] of this Report.

10-K 1 cost10k9119.htm 10-K

| | | | | |

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

| | | | | |

| [PART I](#s1DF8033513FE59559ECE38F30EEE5548) | | |

| [PART II](#s580DE563891D575295F9B1E0E3FE49FA) | | |

| [PART IV](#sDBDD2AC6CEC6514BB375B1883A8F1ACE) | | |

| | [Signatures](#s557CF5C2362B5CABB1AC26CA80BAE545) | [66](#s557CF5C2362B5CABB1AC26CA80BAE545) |

10-K 1 cost10k9218.htm 10-K

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

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

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

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

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

At September [removed: 2, 2018,] [added: 1, 2019,] we operated [removed: 762] [added: 782] membership warehouses:

| United States and Puerto Rico | [removed: 426] [added: 437] | | | [removed: 101] [added: 106] | | | [removed: 527] [added: 543] | |

| United Kingdom | [removed: 22] [added: 23] | | | 6 | | | [removed: 28] [added: 29] | |

| Japan | [removed: 12] [added: 13] | | | [removed: 14] [added: 13] | | | 26 | |

| [removed: Korea(2)] [added: Korea] | [removed: 11] [added: 12] | | | 4 | | | [removed: 15] [added: 16] | |

| Australia | [removed: 7] [added: 8] | | | 3 | | | [removed: 10] [added: 11] | |

| (1) | [removed: 106] [added: 114] of the [removed: 157] [added: 162] 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: 2018:][added: 2019:]

| [removed: 2019] [added: 2020] (expected through [removed: 12/31/2018)] [added: 12/31/2019)] | [removed: 6] [added: 3] | | | — | | | [removed: 1] [added: —] | | | [removed: 7] [added: 3] | | | [removed: 769] [added: 785] | |

At the end of [removed: fiscal 2018,] [added: 2019,] our warehouses contained approximately [removed: 110.7] [added: 113.9] million square feet of operating floor space: [removed: 77.5] [added: 79.9] million in the U.S.; [removed: 13.9] [added: 14.0] million in Canada; and [removed: 19.3] [added: 20.0] million in Other International.

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

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

Our executive offices are located in Issaquah, Washington, and we maintain [removed: 18] [added: 19] regional offices in the U.S., Canada and Other International locations.

| China | — | | | 1 | | | 1 | |

| Total | 620 | | | 162 | | | 782 | |

| 2015 and prior | 480 | | | 89 | | | 117 | | | 686 | | | 686 | |

| 2019 | 16 | | | — | | | 4 | | | 20 | | | 782 | |

| Total | 546 | | | 100 | | | 139 | | | 785 | | | | |

| 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 | |

| 2015 | 12 | | | 1 | | | 10 | | | 23 | | | 686 | |

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

Our common stock is traded on the NASDAQ Global Select Market under the symbol “COST.” On October [removed: 18, 2018,] [added: 3, 2019,] we had [removed: 8,829] [added: 9,115] stockholders of record.

Payment of [removed: future] dividends is subject to declaration by the Board of Directors.

The following table sets forth information on our common stock repurchase [removed: program] activity for the fourth quarter of [removed: fiscal 2018] [added: 2019] (dollars in millions, except per share data):

| Total fourth quarter | | | [removed: 419,000] [added: 194,000] | | | $ | [removed: 211.35] [added: 268.08] | | | [removed: 419,000] [added: 194,000] | | | | | |

| (1) | The repurchase program is conducted under a $4,000 authorization approved by our Board of Directors in April [removed: 2015,] [added: 2019,] which expires in April [removed: 2019.] [added: 2023. This authorization revoked previously authorized but unused amounts, totaling $2,237.] |

The following graph compares the cumulative total shareholder return (stock price appreciation [removed: plus] [added: and the reinvestment of] dividends) on [removed: our common stock for the last five years with the cumulative total return] [added: an investment] of [removed: the] [added: $100 in Costco common stock,] S&P 500 Index, [added: and] the S&P 500 Retail [removed: Index, and a peer group previously selected by] [added: Index over] the [removed: Company.][added: five years from August 31, 2014, through September 1, 2019.]

[removed: ][added: ]

| May 13—June 9, 2019 | | | 39,000 | | | $ | 246.12 | | | 39,000 | | | $ | 3,985 | |

| June 10—July 7, 2019 | | | 36,000 | | | 263.30 | | | | 36,000 | | | 3,976 | | |

| July 8—August 4, 2019 | | | 54,000 | | | 278.15 | | | | 54,000 | | | 3,961 | | |

| August 5—September 1, 2019 | | | 65,000 | | | 275.37 | | | | 65,000 | | | 3,943 | | |

The following table shows the quarterly high and low closing prices of our common stock as reported by NASDAQ for each quarter during the last two fiscal years and the quarterly cash dividend declared per share.

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

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

| | Price Range | | | | | | | | Cash Dividends Declared | | | |

| | High | | | | Low | | | | | | | |

| 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 | | | |

| 2017: | | | | | | | | | | | | |

| Fourth Quarter | $ | 182.20 | | | $ | 150.44 | | | $ | 0.500 | | |

| Third Quarter | 182.45 | | | | 164.55 | | | | 7.500 | | | (1) |

| Second Quarter | 172.00 | | | | 150.11 | | | | 0.450 | | | |

| First Quarter | 163.98 | | | | 142.24 | | | | 0.450 | | | |

_______________

| | |

| --- | --- |

| (1) | Includes a special cash dividend of $7.00 per share. |

| 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 | | |

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.

This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in [removed: Item 7] [added: [Item 7](#s00B188113CCE50CBAB7104E57E24687D)] of this Report, and our consolidated financial statements and notes thereto, included in [removed: Item 8] [added: [Item 8](#sB10969D315195D4EA69BEEE9342E1495)] of this Report.

| | Sept. [added: 1, 2019 | | | | Sept.] 2, 2018 | | | | Sept. 3, 2017 | | | | Aug. 28, 2016 | | | | Aug. 30, 2015 | | | [removed: | Aug. 31, 2014 | | |]

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

| Net sales | $ | [removed: 138,434] [added: 149,351] | | | $ | [removed: 126,172] [added: 138,434] | | | $ | [removed: 116,073] [added: 126,172] | | | $ | [removed: 113,666] [added: 116,073] | | | $ | [removed: 110,212] [added: 113,666] | |

| Membership fees | [removed: 3,142] [added: 3,352] | | | | [removed: 2,853] [added: 3,142] | | | | [removed: 2,646] [added: 2,853] | | | | [removed: 2,533] [added: 2,646] | | | | [removed: 2,428] [added: 2,533] | | |

| Gross margin(1) as a percentage of net sales | [removed: 11.04] [added: 11.02] | | % | | [removed: 11.33] [added: 11.04] | | % | | [removed: 11.35] [added: 11.33] | | % | | [removed: 11.09] [added: 11.35] | | % | | [removed: 10.66] [added: 11.09] | | % |

| Selling, general and administrative expenses as a percentage of net sales | [removed: 10.02] [added: 10.04] | | % | | [removed: 10.26] [added: 10.02] | | % | | [removed: 10.40] [added: 10.26] | | % | | [removed: 10.07] [added: 10.40] | | % | | [removed: 9.89] [added: 10.07] | | % |

| Operating income | $ | [removed: 4,480] [added: 4,737] | | | $ | [removed: 4,111] [added: 4,480] | | | $ | [removed: 3,672] [added: 4,111] | | | $ | [removed: 3,624] [added: 3,672] | | | $ | [removed: 3,220] [added: 3,624] | |

| Net income attributable to Costco | [removed: 3,134] [added: 3,659] | | | | [removed: 2,679] [added: 3,134] | | | | [removed: 2,350] [added: 2,679] | | | | [removed: 2,377] [added: 2,350] | | | | [removed: 2,058] [added: 2,377] | | |

| Net income per diluted common share attributable to Costco | [removed: 7.09] [added: 8.26] | | | | [removed: 6.08] [added: 7.09] | | | | [removed: 5.33] [added: 6.08] | | | | [removed: 5.37] [added: 5.33] | | | | [removed: 4.65] [added: 5.37] | | |

| Cash dividends declared per common share | [removed: 2.14] [added: 2.44] | | | | [removed: 8.90] [added: 2.14] | | | | [removed: 1.70] [added: 8.90] | | | | [removed: 6.51] [added: 1.70] | | | | [removed: 1.33] [added: 6.51] | | |

| United States | [removed: 9] [added: 8] | | % | | [removed: 4] [added: 9] | | % | | [removed: 1] [added: 4] | | % | | [removed: 3] [added: 1] | | % | | [removed: 5] [added: 3] | | % |

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

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

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

| Changes in Total Company comparable sales excluding the impact of [added: changes in] foreign currency and gasoline prices [added: (3)] | [removed: 7] [added: 6] | | % | | [removed: 4] [added: 7] | | % | | 4 | | % | | [removed: 7] [added: 4] | | % | | [removed: 6] [added: 7] | | % |

| Net property and equipment | $ | [removed: 19,681] [added: 20,890] | | | $ | [removed: 18,161] [added: 19,681] | | | $ | [removed: 17,043] [added: 18,161] | | | $ | [removed: 15,401] [added: 17,043] | | | $ | [removed: 14,830] [added: 15,401] | |

| Total assets | [removed: 40,830] [added: 45,400] | | | | [removed: 36,347] [added: 40,830] | | | | [removed: 33,163] [added: 36,347] | | | | [removed: 33,017] [added: 33,163] | | | | [removed: 32,662] [added: 33,017] | | |

| Long-term debt, excluding current portion | [removed: 6,487] [added: 5,124] | | | | [removed: 6,573] [added: 6,487] | | | | [removed: 4,061] [added: 6,573] | | | | [removed: 4,852] [added: 4,061] | | | | [removed: 5,084] [added: 4,852] | | |

| Costco stockholders’ equity | [removed: 12,799] [added: 15,243] | | | | [removed: 10,778] [added: 12,799] | | | | [removed: 12,079] [added: 10,778] | | | | [removed: 10,617] [added: 12,079] | | | | [removed: 12,303] [added: 10,617] | | |

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

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

| Closed due to relocation | [removed: (4] [added: (5] | | ) | | [removed: (2] [added: (4] | | ) | | [removed: (4] [added: (2] | | ) | | [removed: (3] [added: (4] | | ) | | [removed: (1] [added: (3] | | ) |

| End of year | [removed: 762] [added: 782] | | | | [removed: 741] [added: 762] | | | | [removed: 715] [added: 741] | | | | [removed: 686] [added: 715] | | | | [removed: 663] [added: 686] | | |

| Total paid members (000's) | [removed: 51,600] [added: 53,900] | | | | [removed: 49,400] [added: 51,600] | | | | [removed: 47,600] [added: 49,400] | | | | [removed: 44,600] [added: 47,600] | | | | [removed: 42,000] [added: 44,600] | | |

| (2) | Includes net sales from warehouses and websites operating for more than one year. For [removed: fiscal] 2017, the prior year includes the comparable 53 weeks. |

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

We define comparable sales as sales from warehouses open for more than one year, including remodels, relocations and expansions, [removed: as well as online] [added: and] sales related to e-commerce websites operating for more than one year.

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); [removed: and] changes in the cost of gasoline and associated competitive [removed: conditions.][added: conditions; and changes from the revenue recognition standard.]

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 [removed: private label] [added: private-label] items, and through [removed: our] online offerings.

Our investments in merchandise pricing [removed: can, from time to time,] [added: may] include reducing prices on merchandise to drive sales or meet competition and holding prices steady despite cost increases instead of passing the increases on to our members, all negatively impacting [removed: near-term] gross margin as a percentage of net sales (gross margin percentage).

As our warehouse base grows, available and desirable [removed: potential] sites become more difficult to secure, and square footage growth becomes a comparatively less substantial component of growth.

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

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

Our paid membership growth rate may be adversely impacted when warehouse openings occur in existing [added: markets as compared to new] markets.

Our financial performance depends heavily on [removed: our ability to control] [added: controlling] costs.

With respect to [removed: expenses relating to] the compensation of our employees, our philosophy is not to seek to minimize their wages and benefits.

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

Our operating model is generally the same across our U.S., Canada, and Other International operating segments (see [removed: Note 11] [added: [Note 11](#s594B4BAC1AAB5FFFBBE3D38A2CEE3A51)] to the consolidated financial statements included in Item 8 of this Report).

Highlights for [removed: fiscal year 2018] [added: 2019] included:

______________

| (3) | Excluding the impact of the revenue recognition standard for the year ended September 1, 2019. See [Note 1](#s4AEC290A0D185EC486E86148CF4931E4) in Item 8. |

Additionally, actions in various countries, particularly China and the United States, have created uncertainty with respect to how tariffs will affect the costs of some of our merchandise.

The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs.

The impact to our net sales and gross margin will be influenced in part by our merchandising and pricing strategies in response to cost increases.

While these potential impacts are uncertain, they could have an adverse impact on our results.

References to 2019 and 2018 relate to the 52-week fiscal years ended September 1, 2019, and September 2, 2018, respectively.

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

| • | Gross margin percentage decreased two basis points. Excluding the impact of the new revenue recognition standard on net sales, gross margin as a percentage of adjusted net sales increased eight basis points; |

| • | Selling, general & administrative (SG&A) expenses as a percentage of net sales increased two basis points. Excluding the impact of the new revenue recognition standard on net sales, SG&A as a percentage of adjusted net sales increased 11 basis points, primarily related to a $123 charge for a product tax assessment; |

| • | Effective March 2019, starting and supervisor wages were increased and paid bonding leave was made available for hourly employees in the U.S. and Canada. The estimated annualized pre-tax cost of these increases is approximately $50-$60; |

| • | In April 2019, the Board of Directors approved an increase in the quarterly cash dividend from $0.57 to $0.65 per share and authorized a new share repurchase program in the amount of $4,000. |

| (1) | Excluding the impact of the revenue recognition standard for the year ended September 1, 2019. See [Note 1](#s4AEC290A0D185EC486E86148CF4931E4) in Item 8. |

The revenue recognition standard positively impacted net sales by $1,332, or 96 basis points.

Changes in gasoline prices did not have a material impact on net sales.

| | 2019 | | | | 2018 | | | | 2017 | | |

| Net sales | $ | 149,351 | | | $ | 138,434 | | | $ | 126,172 | |

This increase was primarily due to a 19 basis point increase in our warehouse ancillary and other businesses, predominantly our gasoline business.

This increase was partially offset by decreases of four basis points in our core merchandise categories, four basis points due to an adjustment to our estimate of breakage on rewards earned under our co-branded credit card program and three basis points due to increased spending by members under the Executive Membership 2% reward program.

This increase was partially offset by decreases in our core merchandise categories and the breakage adjustment noted above.

This decrease was partially offset by an increase in our gasoline business.

| | 2019 | | | | 2018 | | | | 2017 | | |

This increase is largely due to a $123 charge, or eight basis points, recorded in the U.S. related to a product tax assessment.

Operating costs as a percent of adjusted net sales related to warehouses, ancillary, and other businesses, which includes e-commerce and travel, were flat despite the wage increases and bonding leave benefits for U.S. and Canadian hourly employees effective in March 2019.

| | 2019 | | | | 2018 | | | | 2017 | | |

In 2019, we opened our first warehouse in China.

Subsequent to year end, operations commenced at our new poultry processing plant.

| | 2019 | | | | 2018 | | | | 2017 | | |

Interest expense decreased in 2019 largely due to an increase in capitalized interest associated with our new poultry processing plant.

| | 2019 | | | | 2018 | | | | 2017 | | |

| | 2019 | | | | 2018 | | | | 2017 | | |

Net discrete tax benefits of $221 in 2019 included a benefit of $59 related to the stock-based compensation accounting standard adopted in the first quarter of 2018.

This also included a tax benefit of $105 related to U.S. taxation of deemed foreign dividends, offset by losses of foreign tax credits, which impacted the effective tax rate.

The tax rate for 2019 was 26.9%, excluding the net discrete tax benefits.

| | 2019 | | | | 2018 | | | | 2017 | | |

We believe that our U.S. current and projected asset position is sufficient to meet our U.S. liquidity requirements.

We no longer consider earnings after 2017 of our non-U.S. consolidated subsidiaries to be indefinitely reinvested.

Changes in our net investment in merchandise inventories (the difference between merchandise inventories and accounts payable) is impacted by several factors, including how fast inventory is sold, payment terms with our suppliers, and the amount of payables paid early to obtain discounts from our suppliers.

We opened 25 new warehouses, including five relocations, in 2019, and plan to open approximately 22 additional new warehouses, including three relocations, in 2020.

Cash flows used in financing activities primarily related to the payment of dividends, withholding taxes on stock-based awards, and repurchases of common stock.

Fiscal year 2018 and 2016 were 52-week fiscal years ending on September 2, 2018 and August 28, 2016, respectively, and 2017 was a 53-week fiscal year ending on September 3, 2017.

| • | 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; |

Net Sales

Changes in gasoline prices positively impacted net sales by approximately $2,267, or 180 basis points, due to a 19% increase in the average sales price per gallon.

The positive impact was driven by both our Canadian and Other International operations.

Comparable Sales

The average ticket and comparable sales results were positively impacted by an increase in gasoline prices and exchange rates in foreign currencies relative to the U.S. dollar.

2017 vs. 2016

Net sales increased $10,099 or 9% during 2017, primarily due to a 4% increase in comparable sales, new warehouses opened in 2016 and 2017, and the benefit of one additional week of sales in 2017.

Changes in gasoline prices positively impacted net sales by approximately $785, or 68 basis points, due to an 8% increase in the average sales price per gallon.

The negative impact was driven by Other International operations, partially offset by positive impacts attributable to our Canadian operations.

Comparable sales increased 4% during 2017 and were positively impacted by an increase in shopping frequency and, to a lesser extent, an increased average ticket.

The average ticket and comparable sales results were positively impacted by an increase in gasoline prices, offset by decreases in foreign currencies relative to the U.S. dollar.

Changes in comparable sales includes the negative impact of cannibalization.

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

The increase in membership fees was primarily due to membership sign-ups at existing and new warehouses, an extra week of membership fee revenue, the annual fee increase, and an increased number of upgrades to our higher-fee Executive Membership program.

Fee increases had a positive impact on membership fee revenues during 2017 of approximately $23.

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

The gross margin of our core merchandise categories, when expressed as a percentage of core merchandise sales, increased eight basis points due to increases in these categories other than fresh foods.

Total gross margin percentage decreased two basis points compared to 2016.

This increase was primarily due to amounts earned under the co-branded credit card arrangement in the U.S. of 15 basis points and a benefit of three basis points from non-recurring legal settlements and other matters.

The improvement in terms in our current co-brand agreement as compared to the prior co-brand arrangement led to substantial year over year benefits in fiscal 2017.

These increases were partially offset by a six basis point decrease in our core merchandise categories, primarily due to food and sundries as a result of a decrease in sales penetration.

The gross margin percentage was also negatively impacted by five basis points due to a LIFO benefit in 2016 and one basis point in warehouse ancillary and other businesses.

Gross margin on a segment basis, when expressed as a percentage of the segment's own sales and excluding the impact of changes in gasoline prices on net sales, increased in our U.S. operations, due to amounts

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

These increases were partially offset by a decrease in core merchandise categories, predominantly food and sundries as a result of a decrease in sales penetration, and a LIFO benefit in 2016.

The segment gross margin percentage in our Canadian operations increased, primarily due to increases in warehouse ancillary and other businesses, primarily our pharmacy business, partially offset by a decrease in our core merchandise categories, largely fresh foods.

Excluding the impact of gasoline price inflation on net sales, SG&A expenses as a percentage of adjusted net sales was 10.19%, a decrease of seven basis points.

Operating costs related to warehouses, ancillary, and other businesses, which includes e-commerce and travel, were lower by six basis points, predominantly in our U.S. and Other International operations, due to leveraging increased sales.

Charges related to certain non-recurring legal and other matters in 2017 positively impacted SG&A expense by two basis points.

Central operating costs were higher by two basis points.

Changes in foreign currencies relative to the U.S. dollar increased our SG&A expenses by approximately $98 in 2018.

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.

SG&A expenses as a percentage of net sales decreased 14 basis points compared to 2016.

Excluding the impact of gasoline price inflation on net sales, SG&A expenses as a percentage of adjusted net sales was 10.33%, a decrease of seven basis points.

We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation and subsidiaries (the Company) as of September [removed: 2, 2018] [added: 1, 2019] and September [removed: 3, 2017,] [added: 2, 2018,] the related consolidated statements of income, comprehensive income, equity, and cash flows for the 52-week period ended September [removed: 2, 2018,] [added: 1, 2019,] the [removed: 53-week] [added: 52-week] period ended September [removed: 3, 2017] [added: 2, 2018] and the [removed: 52-week] [added: 53-week] period ended [removed: August 28, 2016,] [added: September 3, 2017,] 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 [removed: 2, 2018] [added: 1, 2019] and September [removed: 3, 2017,] [added: 2, 2018,] and the results of its operations and its cash flows for the 52-week period ended September [removed: 2, 2018,] [added: 1, 2019,] the [removed: 53-week] [added: 52-week] period ended September [removed: 3, 2017] [added: 2, 2018] and the [removed: 52-week] [added: 53-week] period ended [removed: August 28, 2016,] [added: September 3, 2017,] 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 [removed: 2, 2018,] [added: 1, 2019,] 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 [removed: 25, 2018] [added: 10, 2019] expressed an [removed: adverse] [added: unqualified] opinion on the effectiveness of the Company’s internal control over financial reporting.

We have audited Costco Wholesale Corporation and subsidiaries’ (the Company) internal control over financial reporting as of September [removed: 2, 2018,] [added: 1, 2019,] based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, [removed: because of] the [removed: effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the] Company [removed: has not maintained] [added: maintained, in all material respects,] effective internal control over financial reporting as of September [removed: 2, 2018,] [added: 1, 2019,] 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 [removed: 2, 2018] [added: 1, 2019] and September [removed: 3, 2017, and] [added: 2, 2018,] the related consolidated statements of income, comprehensive income, equity, and cash flows for the 52-week period ended September [removed: 2, 2018,] [added: 1, 2019,] the [removed: 53-week] [added: 52-week] period ended September [removed: 3, 2017] [added: 2, 2018] and the [removed: 52-week] [added: 53-week] period ended [removed: August 28, 2016,] [added: September 3, 2017,] and the related notes (collectively, the consolidated financial statements), and our report dated October [removed: 25, 2018] [added: 10, 2019] expressed an unqualified opinion on those consolidated financial statements.

[removed: There were] [added: As of September 2, 2018, the Company 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.

[removed: As a result, business process automated] [added: Automated] and manual [added: business process] controls that [removed: were] [added: are] dependent on the affected ITGCs were [added: also deemed] ineffective because they could have been adversely impacted.

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 [removed: (Item 9A).][added: ([Item 9A](#s066E7EA18CCE561895BBFD3FCA80809C)).]

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 [added: control based on the assessed risk.]

| | September [added: 1, 2019 | | | | September] 2, 2018 | | | | September 3, 2017 | | |

| Cash and cash equivalents | $ | [removed: 6,055] [added: 8,384] | | | $ | [removed: 4,546] [added: 6,055] | |

| Short-term investments | [removed: 1,204] [added: 1,060] | | | | [removed: 1,233] [added: 1,204] | | |

| Receivables, net | [removed: 1,669] [added: 1,535] | | | | [removed: 1,432] [added: 1,669] | | |

| Merchandise inventories | [removed: 11,040] [added: 11,395] | | | | [removed: 9,834] [added: 11,040] | | |

| Other current assets | [removed: 321] [added: 1,111] | | | | [removed: 272] [added: 321] | | |

| Total current assets | [removed: 20,289] [added: 23,485] | | | | [removed: 17,317] [added: 20,289] | | |

| Land | [removed: 6,193] [added: 6,417] | | | | [removed: 5,690] [added: 6,193] | | |

| Buildings and improvements | [removed: 16,107] [added: 17,136] | | | | [removed: 15,127] [added: 16,107] | | |

| Equipment and fixtures | [removed: 7,274] [added: 7,801] | | | | [removed: 6,681] [added: 7,274] | | |

| Construction in progress | [removed: 1,140] [added: 1,272] | | | | [removed: 843] [added: 1,140] | | |

| Less accumulated depreciation and amortization | [removed: (11,033] [added: (11,736] | | ) | | [removed: (10,180] [added: (11,033] | | ) |

| Net property and equipment | [removed: 19,681] [added: 20,890] | | | | [removed: 18,161] [added: 19,681] | | |

| OTHER ASSETS | [removed: 860] [added: 1,025] | | | | [removed: 869] [added: 860] | | |

| TOTAL ASSETS | $ | [removed: 40,830] [added: 45,400] | | | $ | [removed: 36,347] [added: 40,830] | |

| Accounts payable | $ | [removed: 11,237] [added: 11,679] | | | $ | [removed: 9,608] [added: 11,237] | |

| Accrued salaries and benefits | [removed: 2,994] [added: 3,176] | | | | [removed: 2,703] [added: 2,994] | | |

| Accrued member rewards | [removed: 1,057] [added: 1,180] | | | | [removed: 961] [added: 1,057] | | |

| Deferred membership fees | [removed: 1,624] [added: 1,711] | | | | [removed: 1,498] [added: 1,624] | | |

| Other current liabilities | [removed: 3,014] [added: 3,792] | | | | [removed: 2,725] [added: 2,924] | | |

| Total current liabilities | [removed: 19,926] [added: 23,237] | | | | [removed: 17,495] [added: 19,926] | | |

| LONG-TERM DEBT, excluding current portion | [removed: 6,487] [added: 5,124] | | | | [removed: 6,573] [added: 6,487] | | |

| OTHER LIABILITIES | [removed: 1,314] [added: 1,455] | | | | [removed: 1,200] [added: 1,314] | | |

| Total liabilities | [removed: 27,727] [added: 29,816] | | | | [removed: 25,268] [added: 27,727] | | |

| Common stock $0.01 par value; 900,000,000 shares authorized; [removed: 438,189,000] [added: 439,625,000] and [removed: 437,204,000] [added: 438,189,000] shares issued and outstanding | 4 | | | | 4 | | |

| Additional paid-in capital | [removed: 6,107] [added: 6,417] | | | | [removed: 5,800] [added: 6,107] | | |

| Accumulated other comprehensive loss | [removed: (1,199] [added: (1,436] | | ) | | [removed: (1,014] [added: (1,199] | | ) |

| Retained earnings | [removed: 7,887] [added: 10,258] | | | | [removed: 5,988] [added: 7,887] | | |

| Total Costco stockholders’ equity | [removed: 12,799] [added: 15,243] | | | | [removed: 10,778] [added: 12,799] | | |

| Noncontrolling interests | [removed: 304] [added: 341] | | | | [removed: 301] [added: 304] | | |

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Evaluation of self-insurance liabilities

As discussed in [Note 1](#s4AEC290A0D185EC486E86148CF4931E4) to the consolidated financial statements, the Company estimates its self-insurance liabilities by considering historical claims experience, demographic factors, severity factors, and other actuarial assumptions.

The estimated self-insurance liabilities as of September 1, 2019 were $1,222 million.

We identified the evaluation of the Company’s self-insurance liabilities as a critical audit matter because of the specialized skills necessary to evaluate the Company’s actuarial models and the judgments required to assess the underlying assumptions made by the Company.

Key assumptions underlying the Company’s actuarial estimates include: reporting and payment patterns used in the projections of the ultimate loss; loss and exposure trends; the selected loss rates and initial expected losses used in the Paid and Incurred Bornhuetter-Ferguson methods; and the selection of the ultimate loss derived from the various methods.

The primary procedures we performed to address this critical audit matter included the following.

We tested certain internal controls over the Company’s self-insurance process.

Such controls included controls over the (a) evaluation of claims information sent to the actuary, (b) development and selection of the key assumptions used in the actuarial calculation, and (c) review of the actuarial report and evaluation of the external actuarial expert’s qualifications, competency, and objectivity.

We tested the claims data used in the actuarial calculation by selecting a sample and checking key attributes such as date of loss.

We involved actuarial professionals with specialized skills and knowledge who assisted in:

| • | Assessing the actuarial models used by the Company for consistency with generally accepted actuarial standards; |

| • | Evaluating the Company’s ability to estimate self-insurance liabilities by comparing its historical estimates with actual loss payments; |

| • | Evaluating the key assumptions underlying the Company’s actuarial estimates by developing an independent expectation of the self-insurance liabilities and comparing them to the amounts recorded by the Company; and |

| • | Evaluating the qualifications of the Company’s actuaries by assessing their certifications, and determining whether they met the Qualification Standards of the American Academy of Actuaries to render the statements of actuarial opinion implicit in their analyses. |

Performance of incremental audit procedures over IT financial reporting processes

While our report dated October 10, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of September 1, 2019, during a portion of the 52-week period ended September 1, 2019, the ITGCs were ineffective and the information or system generated reports produced by the affected financial reporting systems could not be relied upon without further testing.

We identified the performance of the necessary incremental audit procedures over the financial information reliant on the impacted IT systems as a critical audit matter.

Significant auditor judgment was required to design and execute the incremental audit procedures and to assess the sufficiency of the procedures performed and evidence obtained due to ineffective controls and the complexity of the Company’s IT environment.

The primary procedures we performed to address this critical audit matter included the following.

We involved IT professionals with specialized skills and knowledge to assist in the identification and design of the incremental procedures.

We modified the types of procedures that were performed, which included:

| • | Testing the underlying records of selected transaction data obtained from the impacted IT systems to support the use of the information in the conduct of the audit; and |

| • | Involving forensic professionals with specialized skills and knowledge in data analysis to perform an evaluation of the journal entry data, including assessing that the entire population of automated and manual transactions has been identified. Forensic professionals also assisted with the identification of certain entries that required additional testing and for all such entries, we agreed the journal entry data to source documents. |

We evaluated the collective results of the incremental audit procedures performed to assess the sufficiency of audit evidence obtained related to the information produced by the impacted IT systems.

Evaluation of the impact of the 2017 Tax Act

As discussed in [Note 8](#s3ABACBE024CF56B78B9F56C5EC4D1819) to the consolidated financial statements, H.R. 1, the "Tax Cuts and Jobs Act" (2017 Tax Act) contains numerous provisions impacting the computation of the Company’s U.S. federal and state corporate income tax provision, including the Global Intangible Low Tax Income (GILTI), Foreign Derived Intangibles Income (FDII) and Foreign Tax Credit (FTC) provisions.

For the year ended September 1, 2019, the Company recognized net tax benefits of $123 million related to the 2017 Tax Act.

We identified the evaluation of the Company’s implementation of the provisions of the 2017 Tax Act as a critical audit matter.

A high degree of judgment was required to interpret the impact of the new tax law on the Company, especially given the complexity of the 2017 Tax Act and related Treasury Regulations.

Further, evaluating the Company’s application of the GILTI, FDII and FTC provisions of the 2017 Tax Act required complex auditor judgment.

The primary procedures we performed to address this critical audit matter included the following.

We tested certain internal controls over the Company’s income tax process, including controls over the (a) identification and interpretation of the relevant provisions of the 2017 Tax Act and related Treasury Regulations and (b) calculation of the impact of the GILTI, FDII and FTC provisions.

We involved tax professionals with specialized skills and knowledge who assisted in evaluating the Company’s interpretation and application of the 2017 Tax Act.

They developed an independent assessment of the impact of the GILTI, FDII and FTC provisions based on our understanding and interpretation, and compared it to the net tax benefits the Company recognized related to the 2017 Tax Act.

October 10, 2019

| | September 1, 2019 | | | | September 2, 2018 | | |

| | 32,626 | | | | 30,714 | | |

October 25, 2018

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:

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.

control based on the assessed risk.

| | 30,714 | | | | 28,341 | | |

| BALANCE AT AUGUST 30, 2015 | 437,952 | | | $ | 2 | | | $ | 5,218 | | | $ | (1,121 | ) | | $ | 6,518 | | | $ | 10,617 | | | $ | 226 | | | $ | 10,843 | |

| Net income | — | | | — | | | | — | | | | — | | | | 2,350 | | | | 2,350 | | | | 26 | | | | 2,376 | | |

| Stock options exercised, including tax effects | 4 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | |

| Conversion of convertible notes | 3 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | |

| Repurchases of common stock | (3,184 | ) | | — | | | | (41 | | ) | | — | | | | (436 | | ) | | (477 | | ) | | — | | | | (477 | | ) |

| Repayments of short-term borrowings | — | | | | — | | | | (106 | | ) |

| Proceeds from short-term borrowings | — | | | | — | | | | 106 | | |

| Interest (reduced by $19, $16, and $19, interest capitalized in 2018, 2017, and 2016, respectively) | $ | 143 | | | $ | 131 | | | $ | 123 | |

| Property and equipment acquired, but not yet paid | $ | 113 | | | $ | — | | | $ | — | |

Due to net deflation, a benefit of $64 was recorded to merchandise costs in 2016.

the asset or the remaining term of the initial lease plus any renewals that are reasonably assured at the date the leasehold improvements are made.

than the U.S. dollar.

The Company generally recognizes sales, which include gross shipping fees where applicable, net of returns, at the time the member takes possession of merchandise or receives services.

When the Company collects payments from members prior to the transfer of ownership of merchandise or the performance of services, the amounts received are generally recorded as deferred sales, included in other current liabilities in the consolidated balance sheets, until the sale or service is completed.

The sales returns reserve is based on an estimate of the net realizable value of merchandise inventories expected to be returned.

Amounts collected from members for sales or value added taxes are recorded on a net basis.

Generally, when Costco is the primary obligor, is subject to inventory risk, has latitude in establishing prices and selecting suppliers, can influence product or service specifications, or has several but not all of these indicators, revenue is recorded on a gross basis.

It otherwise records the net amounts earned, which is reflected in net sales.

The Company's Executive members qualify for a 2% reward on qualified purchases

The Company accounts for this reward as a reduction in sales.

statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credits and loss carry-forwards.

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09 related to the accounting for share-based payment transactions.

The guidance relates to income taxes, forfeitures, and minimum statutory tax withholding requirements.

The Company adopted this guidance at the beginning of its first quarter of fiscal year 2018.

As a result, the Company recognized a net tax benefit in fiscal 2018 of $33 as part of its income tax provision in the accompanying consolidated statements of income, which includes the impact of the lower tax rate from the 2017 Tax Act.

Previously, tax benefits associated with the release of employee RSUs were reflected in equity.

These amounts are now reflected as cash flows from operations instead of cash flows from financing activities in the consolidated statements of cash flows on a prospective basis.

The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2017.

The Company plans to adopt this guidance at the beginning of its first quarter of fiscal 2019, using the modified retrospective approach through a cumulative effect adjustment to retained earnings.

The Company has substantially completed its assessment of the new standard and it does not believe the impacts to be material to the Company's consolidated financial statements.

The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted.

The adoption is expected to have a material impact on the Company's consolidated balance sheets, but not on the consolidated statements of income or cash flows.

Additionally, the Company is in the process of reviewing current accounting policies, changes to business processes, systems and controls to support adoption of the new standard, which includes implementing a new lease accounting system.

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 [removed: 2, 2018] [added: 1, 2019] and, based on their evaluation, have concluded that the disclosure controls and procedures were [removed: not] effective as of such [removed: date due to a material weakness in internal control over financial reporting, described below.][added: date.]

Under the supervision of and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of September [removed: 2, 2018,] [added: 1, 2019,] using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013).

[removed: We] [added: As disclosed in Part II Item 9A Controls and Procedures in our Annual Report on Form 10-K for the fiscal year ended September 2, 2018, during the fourth quarter of fiscal 2018 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.

[removed: The] [added: During 2019, management implemented our previously disclosed] remediation [removed: actions include:] [added: plan that included:] (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 [removed: 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.]

Except for the [removed: material weakness identified during the quarter, as] [added: changes in connection with our implementation] of [removed: September 2, 2018,] [added: the remediation plan discussed above,] 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 [removed: fiscal 2018] [added: 2019] that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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.

During the fourth quarter of 2019, we completed our testing of the operating effectiveness of the implemented controls and found them to be effective.

As a result we have concluded the material weakness has been remediated as of September 1, 2019.

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.

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.

Based on this material weakness, the Company’s management concluded that at September 2, 2018, the Company’s internal control over financial reporting was not effective.

The Company’s independent registered public accounting firm, KPMG LLP has issued an adverse audit report on the effectiveness of the Company’s internal control over financial reporting as of September 2, 2018, which appears in Item 8 of this Form 10-K.

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.

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.

Information relating to the availability of our code of ethics for senior financial officers and a list of our executive officers appear in Part I, [removed: Item 1] [added: [Item 1](#s7CDC93349AB05CEF950F7715B432771E)] of this Report.

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: 2019] [added: 2020] annual meeting of stockholders, which will be filed with the SEC within 120 days of the end of our fiscal year (“Proxy Statement”).

| Exhibit Number | | Exhibit Description | | Filed Herewith | | Form | | Period [removed: Ending] [added: Ended] | | Filing Date |

| [3.1](http://www.sec.gov/Archives/edgar/data/909832/000090983215000003/costex3110q21515.htm) | | [Articles of Incorporation as amended of Costco Wholesale Corporation](http://www.sec.gov/Archives/edgar/data/909832/000090983215000003/costex3110q21515.htm) | | | | 10-Q | | [removed: 2/15/2015] [added: 2/17/2019] | | [removed: 3/11/2015] [added: 3/13/2019] |

| [3.2](http://www.sec.gov/Archives/edgar/data/909832/000119312517330827/d482406dex32.htm) | | [Bylaws as amended of Costco Wholesale Corporation](http://www.sec.gov/Archives/edgar/data/909832/000119312517330827/d482406dex32.htm) | | | | 8-K | | | | [removed: 11/2/2017] [added: 4/30/2019] |

| [removed: [10.2.1*](http://www.sec.gov/Archives/edgar/data/909832/000119312510059399/dex10113.htm)] [added: [10.3*](http://www.sec.gov/Archives/edgar/data/909832/000090983214000028/costdefproxy2014.htm#sADEFC67A06AE143EB0AD50BB166A9871)] | | [removed: [Fifth] [added: [Seventh] Restated 2002 Stock Incentive [removed: Plan](http://www.sec.gov/Archives/edgar/data/909832/000119312510059399/dex10113.htm)] [added: Plan](http://www.sec.gov/Archives/edgar/data/909832/000090983214000028/costdefproxy2014.htm#sADEFC67A06AE143EB0AD50BB166A9871)] | | | | [removed: 10-Q] [added: DEF 14A] | | [removed: 2/14/2010] | | [removed: 3/17/2010] [added: 12/19/2014] |

| [removed: [10.2.2*](http://www.sec.gov/Archives/edgar/data/909832/000119312512030161/d292236dex42.htm)] [added: [10.3.1*](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011110q112215.htm)] | | [removed: [Sixth] [added: [Seventh] Restated 2002 Stock Incentive [removed: Plan](http://www.sec.gov/Archives/edgar/data/909832/000119312512030161/d292236dex42.htm)] [added: Plan Restricted Stock Unit Award Agreement-U.S. Employee](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011110q112215.htm)] | | | | [removed: 8-K] [added: 10-Q] | | [added: 11/22/2015] | | [removed: 1/31/2012] [added: 12/17/2015] |

| [removed: [10.2.3*](http://www.sec.gov/Archives/edgar/data/909832/000090983214000028/costdefproxy2014.htm#sADEFC67A06AE143EB0AD50BB166A9871)] [added: [10.3.2*](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011210q112215.htm)] | | [Seventh Restated 2002 Stock Incentive [removed: Plan](http://www.sec.gov/Archives/edgar/data/909832/000090983214000028/costdefproxy2014.htm#sADEFC67A06AE143EB0AD50BB166A9871)] [added: Plan Restricted Stock Unit Award Agreement-Non-U.S. Employee](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011210q112215.htm)] | | | | [removed: DEF 14A] [added: 10-Q] | | [added: 11/22/2015] | | [removed: 12/19/2014] [added: 12/17/2015] |

| [removed: [10.2.4*](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011110q112215.htm)] [added: [10.3.3*](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011310q112215.htm)] | | [Seventh Restated 2002 Stock Incentive Plan Restricted Stock Unit Award [removed: Agreement-U.S. Employee](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011110q112215.htm)] [added: Agreement-Non-Executive Director](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011310q112215.htm)] | | | | 10-Q | | 11/22/2015 | | 12/17/2015 |

| [removed: [10.2.5*](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011210q112215.htm)] [added: [10.3.4](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011410q112215.htm)] | | [Seventh Restated 2002 Stock Incentive Plan [added: Letter Agreement for 2016 Performance-Based] Restricted Stock [removed: Unit Award Agreement-Non-U.S. Employee](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011210q112215.htm)] [added: Units-Executive](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex1011410q112215.htm)] | | | | 10-Q | | 11/22/2015 | | 12/17/2015 |

| [removed: [10.3.1*](http://www.sec.gov/Archives/edgar/data/909832/000090983216000040/costex10110q112016.htm)] [added: [10.5.1*](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 |

| [removed: [10.3.2*](http://www.sec.gov/Archives/edgar/data/909832/000090983217000022/costex10210q112617.htm)] [added: [10.5.2*](http://www.sec.gov/Archives/edgar/data/909832/000090983218000022/costex10210q112518.htm)] | | [removed: [Letter Dated December 18, 2017, Regarding an Extension] [added: [Extension] of the Term of the Executive Employment Agreement, effective January 1, [removed: 2017,] [added: 2019,] between W. Craig Jelinek and Costco Wholesale [removed: Corporation](http://www.sec.gov/Archives/edgar/data/909832/000090983217000022/costex10210q112617.htm)] [added: Corporation](http://www.sec.gov/Archives/edgar/data/909832/000090983218000022/costex10210q112518.htm)] | | | | 10-Q | | [removed: 11/26/2017] [added: 11/25/2018] | | [removed: 12/21/2017] [added: 12/20/2018] |

| [removed: [10.4*](http://www.sec.gov/Archives/edgar/data/909832/000103221099001718/0001032210-99-001718.txt)] [added: [10.6](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: [10.5*](http://www.sec.gov/Archives/edgar/data/909832/000144530513002422/costex10510k2013.htm)] [added: [10.7*](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: [10.6.1](http://www.sec.gov/Archives/edgar/data/909832/000090983215000012/costex10110qa51015.htm)] [added: [10.8.1](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: [10.6.2](http://www.sec.gov/Archives/edgar/data/909832/000090983215000017/costex10210q112215.htm)] [added: [10.8.2](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: [10.6.3](http://www.sec.gov/Archives/edgar/data/909832/000090983216000023/costex10110q21416.htm)] [added: [10.8.3](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: [10.6.4](http://www.sec.gov/Archives/edgar/data/909832/000090983216000032/costex105310k82816.htm)] [added: [10.8.4](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: [10.6.5](http://www.sec.gov/Archives/edgar/data/909832/000090983218000002/costex10110q21818.htm)] [added: [10.8.5](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 |

| [removed: [10.7*](http://www.sec.gov/Archives/edgar/data/909832/000119312517327404/d485001dex101.htm)] [added: [10.4*](http://www.sec.gov/Archives/edgar/data/909832/000119312518308900/d645635dex101.htm)] | | [Fiscal [removed: 2018] [added: 2019] Executive Bonus [removed: Plan](http://www.sec.gov/Archives/edgar/data/909832/000119312517327404/d485001dex101.htm)] [added: Plan](http://www.sec.gov/Archives/edgar/data/909832/000119312518308900/d645635dex101.htm)] | | | | 8-K | | | | [removed: 10/31/2017] [added: 10/26/2018] |

| [removed: [21.1](https://www.sec.gov/Archives/edgar/data/909832/000090983218000013/costex21110k9218.htm)] [added: [21.1](https://www.sec.gov/Archives/edgar/data/909832/000090983219000019/costex21110k9119.htm)] | | [Subsidiaries of the [removed: Company](https://www.sec.gov/Archives/edgar/data/909832/000090983218000013/costex21110k9218.htm)] [added: Company](https://www.sec.gov/Archives/edgar/data/909832/000090983219000019/costex21110k9119.htm)] | | x | | | | | | |

| [removed: [23.1](https://www.sec.gov/Archives/edgar/data/909832/000090983218000013/costex23110k9218.htm)] [added: [23.1](https://www.sec.gov/Archives/edgar/data/909832/000090983219000019/costex23110k9119.htm)] | | [Consent of Independent Registered Public Accounting [removed: Firm](https://www.sec.gov/Archives/edgar/data/909832/000090983218000013/costex23110k9218.htm)] [added: Firm](https://www.sec.gov/Archives/edgar/data/909832/000090983219000019/costex23110k9119.htm)] | | x | | | | | | |

| [removed: [31.1](https://www.sec.gov/Archives/edgar/data/909832/000090983218000013/costex31110k9218.htm)] [added: [31.1](https://www.sec.gov/Archives/edgar/data/909832/000090983219000019/costex31110k9119.htm)] | | [Rule 13a – 14(a) [removed: Certifications](https://www.sec.gov/Archives/edgar/data/909832/000090983218000013/costex31110k9218.htm)] [added: Certifications](https://www.sec.gov/Archives/edgar/data/909832/000090983219000019/costex31110k9119.htm)] | | x | | | | | | |

| [removed: [32.1](https://www.sec.gov/Archives/edgar/data/909832/000090983218000013/costex32110k9218.htm)] [added: [32.1](https://www.sec.gov/Archives/edgar/data/909832/000090983219000019/costex32110k9119.htm)] | | [Section 1350 [removed: Certifications](https://www.sec.gov/Archives/edgar/data/909832/000090983218000013/costex32110k9218.htm)] [added: Certifications](https://www.sec.gov/Archives/edgar/data/909832/000090983219000019/costex32110k9119.htm)] | | x | | | | | | |

| [10.2*](http://www.sec.gov/Archives/edgar/data/909832/000090983218000018/costproxy2018.htm#sD1A6C6E2B97792177C11C8F81F35ABA5) | | [2019 Incentive Plan](http://www.sec.gov/Archives/edgar/data/909832/000090983218000018/costproxy2018.htm#sD1A6C6E2B97792177C11C8F81F35ABA5) | | | | DEF 14 | | | | 12/17/2019 |

| Exhibit Number | | Exhibit Description | | Filed Herewith | | Form | | Period Ended | | Filing Date |

| Exhibit Number | | Exhibit Description | | Filed Herewith | | Form | | Period Ended | | Filing Date |

| [10.8.6](http://www.sec.gov/Archives/edgar/data/909832/000090983219000003/costex10210q21719.htm) | | [Fifth Amendment to Citi, N.A. Co-Branded Credit Card Agreement](http://www.sec.gov/Archives/edgar/data/909832/000090983219000003/costex10210q21719.htm) | | | | 10-Q | | 2/17/2019 | | 3/13/2019 |

| [10.8.7](https://www.sec.gov/Archives/edgar/data/909832/000090983219000019/costex108710k9119.htm) | | [Sixth Amendment to Citi, N.A. Co-Branded Credit Card Agreement](https://www.sec.gov/Archives/edgar/data/909832/000090983219000019/costex108710k9119.htm) | | x | | | | | | |

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

| [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 |

| [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 |

October 10, 2019

October 10, 2019

October 25, 2018