Costco Wholesale (COST) 10-K risk factor changes: FY2020 vs FY2019

These Risk Factors should be carefully reviewed in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in [Item [removed: 7](#s00B188113CCE50CBAB7104E57E24687D)] [added: 7](#id2c7a27cc45a4341a7bdf88b9739d38b_46)] and our consolidated financial statements and related notes in [Item [removed: 8](#sB10969D315195D4EA69BEEE9342E1495)] [added: 8](#id2c7a27cc45a4341a7bdf88b9739d38b_73)] of this Report.

[removed: Business] [added: Business] and Operating [removed: Risks][added: Risks]

[removed: We] [added: We] are highly dependent on the financial performance of our U.S. and Canadian [removed: operations.][added: operations.]

Our financial and operational performance is highly dependent on our U.S. and Canadian operations, which comprised 87% and [removed: 84%] [added: 83%] of net sales and operating income in [removed: 2019,] [added: 2020,] respectively.

Within the U.S., we are highly dependent on our California operations, which comprised [removed: 30%] [added: 29%] of U.S. net sales in [removed: 2019.][added: 2020.]

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

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

[removed: Our] [added: Our] failure to maintain membership growth, loyalty and brand recognition could adversely affect our results of [removed: operations.][added: operations.]

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

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

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

[removed: We] [added: We] may not timely identify or effectively respond to consumer trends, which could negatively affect our relationship with our members, the demand for our products and services, and our market [removed: share.][added: share.]

If we are not successful at predicting our sales trends and adjusting our purchases accordingly, we may have excess inventory, which could result in additional [removed: markdowns] [added: markdowns, or we may experience out-of-stock positions] and [added: delivery delays, which could result in higher costs, both of which would] reduce our operating performance.

[removed: Our systems, including] [added: Given the high volume of transactions we process, it is important that we build strong digital resiliency for] our [removed: back-up systems, are subject] [added: business-critical systems] to [removed: damage or interruption] [added: prevent disruption] from [added: events such as] power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, [added: errors by employees, and] catastrophic events such as fires, [removed: earthquakes,] [added: earthquakes] tornadoes and [removed: hurricanes, and errors or misfeasance by our employees.][added: hurricanes.]

[removed: Targeting the wrong opportunities, failing] [added: Failure] to [removed: make the best investments, or making an investment commitment significantly above or below] [added: deliver] our [removed: needs] [added: IT transformation efforts efficiently and effectively] could result in the loss of our competitive position and adversely impact our financial condition and results of operations.

If we are unable to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information [removed: accurately,] [added: accurately] and to prepare financial statements within required time 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.

[removed: If we do not maintain] [added: Failure to meet] the [removed: privacy and security of personal and business information, we] [added: requirements] could damage our reputation with [removed: members] [added: members, suppliers] and employees, [added: cause us to] incur substantial additional costs, and become subject to [removed: litigation.][added: litigation.]

[removed: We] [added: We] are subject to payment-related [removed: risks.][added: risks.]

We accept payments using a variety of methods, including [removed: cash and checks,] select credit and debit cards, [added: cash] and [added: checks, co-brand cardholder rebates, executive member 2% reward certificates, and] our shop card.

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

It could disrupt our business if these [removed: companies] [added: parties] become unwilling or unable to provide these services to us.

For example, we are subject to Payment Card Industry Data Security [removed: Standards (“PCI DSS”),] [added: Standards,] which contain compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data.

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

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

The sale of these items involves the risk of [removed: health-related] illness or injury to our members.

Even if a product liability claim is unsuccessful or is not fully pursued, negative publicity could adversely affect our reputation with existing and potential members and our corporate and brand image, and these effects could be [removed: long term.][added: long-term.]

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

Our members are increasingly using mobile phones, tablets, computers, and other devices to shop and to interact with us through social [removed: media.][added: media, particularly in the wake of COVID-19.]

[removed: Inability] [added: Inability] to attract, train and retain highly qualified employees could adversely impact our business, financial condition and results of [removed: operations.][added: operations.]

Our success depends on the continued contributions of [added: our employees, including] members of our senior management and other key operations, [added: IT,] merchandising and administrative personnel.

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

[removed: We] [added: We] may incur property, casualty or other losses not covered by our [removed: insurance.][added: insurance.]

[removed: The Company is predominantly self-insured] [added: Claims] for employee health care benefits, workers’ compensation, general liability, property damage, directors’ and officers’ liability, vehicle liability, [removed: and] inventory [removed: loss.][added: loss, and other exposures are funded predominantly through self-insurance.]

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

[removed: Market] [added: Market] and Other External [removed: Risks][added: Risks]

[removed: We] [added: We] face strong competition from other retailers and warehouse club operators, which could adversely affect our business, financial condition and results of [removed: operations.][added: operations.]

Our inability to respond effectively to competitive pressures, changes in the retail markets and [removed: member] [added: customer] expectations could result in lost market share and negatively affect our financial results.

[removed: General] [added: General] economic factors, domestically and internationally, may adversely affect our business, financial condition, and results of [removed: operations.][added: operations.]

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

Additionally, actions in various countries, particularly China and the United States, have [added: raised the cost of many items and] created uncertainty with respect to tariff impacts on the costs of some of our merchandise.

We have made and may continue to make investments and acquisitions to improve the speed, accuracy and efficiency of our supply chains.

The effectiveness of these investments can be less predictable than opening new locations and might not provide the anticipated benefits or desired rates of return.

Our e-commerce business depends heavily on third-party logistics providers and that business is negatively affected when these providers are unable to provide services in a timely fashion.

Availability and performance of our information technology (IT) systems are vital for our business to operate efficiently.

Failure to execute complex IT projects, and have these IT systems available to our business will adversely impact our operations.

IT systems play a crucial role in conducting our business on a daily basis.

These systems are utilized to process a very high volume of transactions, conduct payment transactions, track and value our inventory and produce reports which are critical for making business decisions on a daily, weekly and periodic basis.

Failure or disruption of these IT systems could have an adverse impact on our ability to buy products from our suppliers, produce goods in our manufacturing plants, move the products in an efficient manner to our warehouses and sell products to our members.

We are undertaking large technology and IT transformation projects.

The failure of these projects could adversely impact our business plans and

potentially impair our day to day business operations.

Any debilitating failure of our critical IT systems, data centers and backup systems would require significant investments in resources to restore IT services and may cause serious impairment in our business operations including loss of business services, increased cost of moving merchandise and failure to provide service to our members.

We are currently making significant investments in enhancing our digital resiliency and failure or delay in execution of these projects could delay our ability to be resilient to disruptive events.

We are required to maintain the privacy and security of personal and business information amidst evolving threat landscapes and in compliance with emerging privacy and data protection regulations globally.

Increased IT security threats and more sophisticated computer crime pose a risk to our systems, networks, products and services.

We rely upon IT systems and networks, some of which are managed by third parties, in connection with a variety of business activities.

Additionally, we collect, store and process sensitive information relating to our business, members, suppliers and employees.

Operating these IT systems and networks, and processing and maintaining this data, in a secure manner, is critical to our business operations and strategy.

The increased use of remote work infrastructure due to the COVID-19 pandemic has also increased the possible attack surfaces.

Security threats designed to gain unauthorized access to our systems, networks and data, are increasing in frequency and sophistication.

Cybersecurity attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crimes and advanced persistent threats.

These threats pose a risk to the security of our systems and networks and the confidentiality, integrity, and availability of our data.

It is possible that our IT systems and networks, or those managed by third parties such as cloud providers, could have vulnerabilities, which could go unnoticed for a period of time.

While our cybersecurity and compliance posture seeks to mitigate such risks, there can be no guarantee that the actions and controls we and our third-party service providers have implemented and are implementing, will be sufficient to protect our systems, information or other property.

The potential impacts of a future material cybersecurity attack includes reputational damage, litigation, government enforcement actions, penalties, disruption to systems, unauthorized release of confidential or otherwise protected information, corruption of data, diminution in the value of our investment in IT systems and increased cybersecurity protection and remediation costs.

This could adversely affect our competitiveness, results of operations and financial condition and loss of member confidence.

Further, the amount of insurance coverage we maintain may be inadequate to cover claims or liabilities relating to a cybersecurity attack.

In addition, data we collect, store and process is subject to a variety of U.S. and international laws and regulations, such as the European Union's General Data Protection Regulation, California Consumer Privacy Act, Health Insurance Portability and Accountability Act, China cybersecurity law and other emerging privacy and cybersecurity laws across the various states and around the globe, which may carry significant potential penalties for noncompliance.

We rely on third parties to

Rapid and significant changes in commodity prices and

Such events could result in physical damage to our properties, limitations on store operating hours, less frequent visits by members to physical locations, the temporary closure of warehouses,

The COVID-19 pandemic is affecting our business, financial condition and results of operations in many respects.

The continuing impacts of the COVID-19 pandemic are highly unpredictable and volatile, and are affecting certain business operations, demand for our products and services, in-stock positions, costs of doing business, availability of labor, access to inventory, supply chain operations, our ability to predict future performance, exposure to litigation, and our financial performance, among other things.

The COVID-19 pandemic has resulted in widespread and continuing impacts on the global economy and on our employees, members, suppliers and other people and entities with which we do business.

There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and business and government shutdowns.

We are taking precautionary measures intended to help minimize the risk of the virus to our employees, including temporarily requiring some employees to work remotely.

To reward our employees for exemplary service in difficult times we temporarily increased compensation levels and otherwise incurred increased spending for wages and benefits, including overtime pay.

The pandemic and any preventative or protective actions that governments or we may take are likely to result in a period of business disruption, reduced member traffic and reduced sales in certain merchandise categories, and increased operating expenses.

The pandemic has significantly impacted the global supply chain, with restrictions and limitations on business activities causing disruption and delay.

These disruptions and delays have strained certain domestic and international supply chains, which have affected and could continue to negatively affect the flow or availability of certain products.

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

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

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

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

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 operations.

Any material interruption in these systems could have a material adverse effect on our business and results of operations.

We are currently making and will continue to 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 could be harmful.

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

Excessive technological change could impact the effectiveness of adoption, and could make it more

difficult for us to realize benefits.

The potential problems and interruptions associated with implementing technology initiatives could disrupt or reduce the efficiency of our operations.

These initiatives might not provide the anticipated benefits or may provide them on a delayed schedule or at a higher cost.

We previously identified a material weakness in our internal control related to ineffective information technology general controls and if 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.

Internal controls related to the operation of technology systems are critical to maintaining adequate internal control over financial reporting.

We reported in our Annual Report on Form 10-K as of September 2, 2018, 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 systems that support the Company’s financial reporting processes.

During 2019, we completed the remediation measures related to the material weakness and concluded that our internal control over financial reporting was effective as of September 1, 2019.

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

We receive, retain, and transmit personal information about our members and employees and entrust that information to third-party business associates, including cloud service-providers that perform activities for us.

Our warehouse and online businesses depend upon the secure transmission of 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 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 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 highly regulated in all of our operating countries.

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

If we or those with whom we share information fail to comply with laws and regulations, such as the General Data Protection Regulation (GDPR) and California Consumer Privacy Act (CCPA), our reputation could be damaged, possibly resulting in lost business, and we could be subjected to additional legal risk or financial losses as a result of non-compliance.

We have security measures and controls to protect personal and business information and continue to make investments to secure access to our information technology network.

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

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

preventative measures.

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

economic factors could adversely affect demand for our products and services, require a change in product mix, or impact the cost of or ability to purchase inventory.

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

[removed: Interest] [added: *Interest] Rate [removed: Risk][added: Risk*]

Our exposure to market risk for changes in interest rates relates primarily to our investment holdings that are diversified among various instruments considered to be cash equivalents, as defined in [Note [removed: 1](#s4AEC290A0D185EC486E86148CF4931E4)] [added: 1](#id2c7a27cc45a4341a7bdf88b9739d38b_106)] 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.

A 100 [removed: basis-point] [added: basis point] change in interest rates as of the end of [removed: 2019] [added: 2020] would have had an immaterial incremental change in fair market value.

As of the end of [removed: 2019,] [added: 2020,] long-term debt with fixed interest rates was [removed: $6,852.][added: $7,657.]

See [Note [removed: 4](#sF2875645BF505273AC15EE9E32FEF9EA)] [added: 5](#id2c7a27cc45a4341a7bdf88b9739d38b_121)] to the consolidated financial statements included in Item 8 of this Report for more information on our long-term debt.

[removed: Foreign] [added: *Foreign] Currency [removed: Risk][added: Risk*]

For additional information related to the Company's forward foreign-exchange contracts, see [Notes [removed: 1](#s4AEC290A0D185EC486E86148CF4931E4)] [added: 1](#id2c7a27cc45a4341a7bdf88b9739d38b_106)] and [removed: [3](#s76E8B80B941D593CBB830B765AAF636B)] [added: [4](#id2c7a27cc45a4341a7bdf88b9739d38b_118)] 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 [removed: September 1, 2019,] [added: August 30, 2020,] would have decreased the fair value of the contracts by [removed: $79] [added: $111] and resulted in an unrealized loss in the consolidated statements of income for the same amount.

[removed: Commodity] [added: *Commodity] Price [removed: Risk][added: Risk*]

We also enter into variable-priced contracts for some purchases of electricity and natural gas, in addition to [added: some of the] fuel for our gas stations, on an index basis.

Costco operated [added: 795,] 782, [removed: 762,] and [removed: 741] [added: 762] warehouses worldwide at [added: August 30, 2020,] September 1, 2019, [added: and] September 2, 2018, [removed: and September 3, 2017,] respectively.

References to [removed: 2019] [added: 2020, 2019,] and 2018 relate to the 52-week fiscal years ended [added: August 30, 2020,] September 1, 2019, and September 2, 2018, respectively.

[removed: General][added: General]

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

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

In general, with variations by country, our warehouses accept certain credit cards, including Costco co-branded cards, debit cards, [removed: cash,] [added: cash and] checks, [added: co-brand cardholder rebates, executive member 2% reward certificates] and our proprietary stored-value card (shop card).

We seek to limit [added: most] items to fast-selling models, sizes, and colors.

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

[removed: | • | Hardlines] [added: - Hardlines] (including major appliances, electronics, health and beauty aids, hardware, and garden and patio) [removed: |]

[removed: | • | Fresh Foods] [added: - Fresh Foods] (including meat, produce, deli, and bakery) [removed: |]

[removed: | • | Softlines] [added: - Softlines] (including apparel and small appliances) [removed: |]

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

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

We operated [removed: 593] [added: 615] gas stations at the end of [removed: 2019.][added: 2020.]

Net sales for our gasoline business represented approximately [removed: 11%] [added: 9%] of total net sales in [removed: 2019.][added: 2020.]

[removed: At the end of 2019, we operated] [added: The Company operates] e-commerce websites in the U.S., Canada, Mexico, U.K., Korea, [added: Taiwan, Japan,] and [removed: Taiwan.][added: Australia.]

Net sales for e-commerce represented approximately [removed: 4%] [added: 6%] of total net sales in [removed: 2019.][added: 2020.]

[removed: Additionally,] [added: This figure does not consider other services] we offer [added: online in certain countries such as] business delivery, [removed: travel] [added: travel, same-day grocery,] and various other [removed: services online in certain countries.][added: services.]

Certain financial information for our segments and geographic areas is included in [Note [removed: 11](#s594B4BAC1AAB5FFFBBE3D38A2CEE3A51)] [added: 12](#id2c7a27cc45a4341a7bdf88b9739d38b_151)] to the consolidated financial statements included in Item 8 of this Report.

[removed: Membership][added: Membership]

Our member renewal rate was 91% in the U.S. and Canada and 88% on a worldwide basis at the end of [removed: 2019.][added: 2020.]

| | [removed: 2019] | | [added: 2020] | [removed: 2018] | | | [removed: 2017] | | [added: 2019 | | | | | | 2018 | | |]

| Gold Star | [added: | | 46,800 | | | | | |] 42,900 | | | [removed: 40,700] | | | [removed: 38,600] [added: 40,700] | | [added: |]

| Business, including affiliates | [added: | | 11,300 | | | | | |] 11,000 | | | [removed: 10,900] | | | [removed: 10,800] [added: 10,900] | | [added: |]

| Total paid members | [added: | | 58,100 | | | | | |] 53,900 | | | [removed: 51,600] | | | [removed: 49,400] [added: 51,600] | | [added: |]

| Household cards | [added: | | 47,400 | | | | | |] 44,600 | | | [removed: 42,700] | | | [removed: 40,900] [added: 42,700] | | [added: |]

| Total cardholders | [added: | | 105,500 | | | | | |] 98,500 | | | [removed: 94,300] | | | [removed: 90,300] [added: 94,300] | | [added: |]

Executive memberships are also available in Mexico, the U.K., [removed: and] [added: Japan,] Korea, [added: and Taiwan,] for which the additional annual fee varies.

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

This program also offers (except in [removed: Mexico] [added: Mexico, Japan,] 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 printing.

Executive members, who [added: totaled 22.6 million and] represented 39% of paid members at the end of [removed: 2019,] [added: 2020,] generally shop more frequently and spend more than other members.

[removed: Labor][added: Labor]

| | [removed: 2019] | | [added: 2020] | [removed: 2018] | | | [removed: 2017] | | [added: 2019 | | | | | | 2018 | | |]

| Full-time employees | [added: | | 156,000 | | | | | |] 149,000 | | | [removed: 143,000] | | | [removed: 133,000] [added: 143,000] | | [added: |]

| Part-time employees | [added: | | 117,000 | | | | | |] 105,000 | | | [removed: 102,000] | | | [removed: 98,000] [added: 102,000] | | [added: |]

| Total employees | [added: | | 273,000 | | | | | |] 254,000 | | | [removed: 245,000] | | | [removed: 231,000] [added: 245,000] | | [added: |]

Approximately [removed: 16,000] [added: 17,100] employees are union employees.

[removed: Competition][added: Competition]

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

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

We average anywhere from 8,000 to 10,000 SKUs online, some of which are also available in our warehouses.

The COVID-19 pandemic created unprecedented supply constraints including disruptions and delays that have impacted and could continue to impact the flow and availability of certain products.

When sources of supply become unavailable, we seek alternative sources.

Our membership counts include active memberships as well as memberships that have not renewed within the 12 months prior to the reporting date.

At the end of 2020, we standardized our membership count methodology globally to be consistent with the U.S. and Canada, which resulted in the addition to the count of approximately 2.0 million total cardholders for 2020, of which 1.3 million were paid members.

The change did not impact 2019 or 2018.

Membership fee income and the renewal rate calculations were not affected.

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

and the control of inventory.

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

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See discussion of Legal Proceedings in [Note [removed: 10](#s1C749172260D544993F92E848552A8DB)] [added: 11](#id2c7a27cc45a4341a7bdf88b9739d38b_148)] to the consolidated financial statements included in Item 8 of this Report.

[removed: UNITED STATES][added: UNITED STATES]

[removed: SECURITIES] [added: SECURITIES] AND EXCHANGE [removed: COMMISSION][added: COMMISSION]

[removed: Washington,] [added: Washington,] D.C. [removed: 20549][added: 20549]

[removed: FORM 10-K][added: FORM 10-K]

| ☒ | [removed: ANNUAL] [added: | | ANNUAL] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF [removed: 1934] [added: 1934] | [added: | |]

[removed: For] [added: For] the fiscal year ended [removed: September 1, 2019][added: August 30, 2020]

| ☐ | [removed: TRANSITION] [added: | | TRANSITION] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF [removed: 1934] [added: 1934] | [added: | |]

[removed: Costco] [added: Costco] Wholesale [removed: Corporation][added: Corporation]

| [removed: Washington] [added: Washington] | | [removed: 91-1223280] | [added: | | | 91-1223280 | | |]

| (State or other jurisdiction of incorporation or organization) | | [added: | | | |] (I.R.S. Employer Identification No.) | [added: | |]

[removed: 999] [added: 999] Lake Drive, Issaquah, WA [removed: 98027][added: 98027]

Registrant’s telephone number, including area code: [removed: (425) 313-8100][added: (425) 313-8100]

[removed: Securities] [added: Securities] registered pursuant to Section 12(b) of the [removed: Act:][added: Act:]

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

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

[removed: Securities] [added: Securities] registered pursuant to Section 12(g) of the Act: [removed: None][added: None]

| Large accelerated filer [added: | | |] ☒ | | [added: |] Accelerated filer [added: | | |] ☐ | [added: | |]

| Non-accelerated filer [added: | | |] ☐ | | [added: |] Smaller reporting company [added: | | |] ☐ | [added: | |]

| [added: | | | | | |] Emerging growth company [added: | | |] ☐ | | |

The aggregate market value of the voting stock held by non-affiliates of the registrant as of February [removed: 17, 2019] [added: 16, 2020] was [removed: 95,005,703,244.][added: $140,245,657,604.]

The number of shares outstanding of the registrant’s common stock as of [removed: October 3, 2019] [added: September 29, 2020] was [removed: 439,656,950.][added: 441,228,027.]

[removed: DOCUMENTS] [added: DOCUMENTS] INCORPORATED BY [removed: REFERENCE][added: REFERENCE]

Portions of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on January [removed: 22, 2020,] [added: 21, 2021,] are incorporated by reference into [Part [removed: III](#sED6D321C20A75064A90E6CDF30DC7A96)] [added: III](#id2c7a27cc45a4341a7bdf88b9739d38b_166)] of this Form 10-K.

[removed: COSTCO] [added: COSTCO] WHOLESALE [removed: CORPORATION][added: CORPORATION]

[removed: ANNUAL] [added: ANNUAL] REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED [removed: SEPTEMBER 1, 2019][added: AUGUST 30, 2020]

[removed: TABLE] [added: TABLE] OF [removed: CONTENTS][added: CONTENTS]

| | | [removed: Page] | [added: | | | Page | | |]

[removed: | [PART I](#s1DF8033513FE59559ECE38F30EEE5548) | | |][added: PART I]

| Item 1. | [removed: [Business](#s7CDC93349AB05CEF950F7715B432771E)] | [removed: [3](#s7CDC93349AB05CEF950F7715B432771E)] | [added: [Business](#id2c7a27cc45a4341a7bdf88b9739d38b_16) | | | [3](#id2c7a27cc45a4341a7bdf88b9739d38b_16) | | |]

| Item 1A. | [added: | |] [Risk [removed: Factors](#s203E8DC8D22C53C798341F0E88A79196)] [added: Factors](#id2c7a27cc45a4341a7bdf88b9739d38b_19)] | [removed: [8](#s203E8DC8D22C53C798341F0E88A79196)] | [added: | [8](#id2c7a27cc45a4341a7bdf88b9739d38b_19) | | |]

| Item 1B. | [added: | |] [Unresolved Staff [removed: Comments](#s37939109C3FA5167A07D988AD4E7CFFC)] [added: Comments](#id2c7a27cc45a4341a7bdf88b9739d38b_22)] | [removed: [16](#s37939109C3FA5167A07D988AD4E7CFFC)] | [added: | [17](#id2c7a27cc45a4341a7bdf88b9739d38b_22) | | |]

| Item 2. | [removed: [Properties](#s9FFEFC5161625FA3A90CF4664383F963)] | [removed: [16](#s9FFEFC5161625FA3A90CF4664383F963)] | [added: [Properties](#id2c7a27cc45a4341a7bdf88b9739d38b_25) | | | [17](#id2c7a27cc45a4341a7bdf88b9739d38b_25) | | |]

| Item 3. | [added: | |] [Legal [removed: Proceedings](#s80339AF8EB8950799243E887771CB747)] [added: Proceedings](#id2c7a27cc45a4341a7bdf88b9739d38b_28)] | [removed: [17](#s80339AF8EB8950799243E887771CB747)] | [added: | [18](#id2c7a27cc45a4341a7bdf88b9739d38b_28) | | |]

| Item 4. | [added: | |] [Mine Safety [removed: Disclosures](#sE6A75D0F08C15686B008ACAFDB50AD7F)] [added: Disclosures](#id2c7a27cc45a4341a7bdf88b9739d38b_31)] | [removed: [17](#sE6A75D0F08C15686B008ACAFDB50AD7F)] | [added: | [18](#id2c7a27cc45a4341a7bdf88b9739d38b_31) | | |]

| Item 5. | [added: | |] [Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity [removed: Securities](#s1A12124EB0795E74B8359C31F14778A1)] [added: Securities](#id2c7a27cc45a4341a7bdf88b9739d38b_37)] | [removed: [17](#s1A12124EB0795E74B8359C31F14778A1)] | [added: | [18](#id2c7a27cc45a4341a7bdf88b9739d38b_37) | | |]

| Item 6. | [added: | |] [Selected Financial [removed: Data](#sBD0E0737722751F492C994EC65AA54AB)] [added: Data](#id2c7a27cc45a4341a7bdf88b9739d38b_43)] | [removed: [19](#sBD0E0737722751F492C994EC65AA54AB)] | [added: | [19](#id2c7a27cc45a4341a7bdf88b9739d38b_43) | | |]

| Item 7. | [added: | |] [Management’s Discussion and Analysis of Financial Condition and Results of [removed: Operations](#s00B188113CCE50CBAB7104E57E24687D)] [added: Operations](#id2c7a27cc45a4341a7bdf88b9739d38b_46)] | [removed: [20](#s00B188113CCE50CBAB7104E57E24687D)] | [added: | [21](#id2c7a27cc45a4341a7bdf88b9739d38b_46) | | |]

| Item 7A. | [added: | |] [Quantitative and Qualitative Disclosures About Market [removed: Risk](#s7AB7666F814A5DE38E64036FB34A7C95)] [added: Risk](#id2c7a27cc45a4341a7bdf88b9739d38b_70)] | [removed: [28](#s7AB7666F814A5DE38E64036FB34A7C95)] | [added: | [30](#id2c7a27cc45a4341a7bdf88b9739d38b_70) | | |]

| Item 8. | [added: | |] [Financial Statements and Supplementary [removed: Data](#sB10969D315195D4EA69BEEE9342E1495)] [added: Data](#id2c7a27cc45a4341a7bdf88b9739d38b_73)] | [removed: [30](#sB10969D315195D4EA69BEEE9342E1495)] | [added: | [32](#id2c7a27cc45a4341a7bdf88b9739d38b_73) | | |]

| Item 9. | [added: | |] [Changes in and Disagreements with Accountants on Accounting and Financial [removed: Disclosure](#s480EBBD3A2B651BBB257EDD76B93ED43)] [added: Disclosure](#id2c7a27cc45a4341a7bdf88b9739d38b_157)] | [removed: [62](#s480EBBD3A2B651BBB257EDD76B93ED43)] | [added: | [66](#id2c7a27cc45a4341a7bdf88b9739d38b_157) | | |]

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or

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Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

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| [PART II](#id2c7a27cc45a4341a7bdf88b9739d38b_34) | | | | | | | | |

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| [PART IV](#id2c7a27cc45a4341a7bdf88b9739d38b_184) | | | | | | | | |

| | | | [Signatures](#id2c7a27cc45a4341a7bdf88b9739d38b_193) | | | [71](#id2c7a27cc45a4341a7bdf88b9739d38b_193) | | |

10-K 1 cost10k9119.htm 10-K

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

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

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

[removed: Warehouse Properties][added: Warehouse Properties]

| | [removed: Own] [added: | | Own] Land and [removed: Building] [added: Building] | | | [removed: Lease Land and/or Building(1)] | | | [removed: Total] [added: Lease Land and/or Building(1)] | | [added: | | | | Total | | |]

| United States and Puerto Rico | [removed: 437] | | [added: 443] | [removed: 106] | | | [removed: 543] | | [added: 109 | | | | | | 552 | | |]

[removed: | (1) | 114] [added: (1)119] of the [removed: 162] [added: 166] leases are land-only leases, where Costco owns the building. [removed: |]

At the end of [removed: 2019,] [added: 2020,] our warehouses contained approximately [removed: 113.9] [added: 116.1] million square feet of operating floor space: [removed: 79.9] [added: 81.4] million in the U.S.; [removed: 14.0] [added: 14.3] million in Canada; and [removed: 20.0] [added: 20.4] million in Other International.

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

At August 30, 2020, we operated 795 membership warehouses:

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

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

| Canada | | | 87 | | | | | | 14 | | | | | | 101 | | |

| Other International | | | 99 | | | | | | 43 | | | | | | 142 | | |

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| Total | | | 629 | | | | | | 166 | | | | | | 795 | | |

Total square feet associated with distribution and logistics facilities were approximately 28.0 million.

At September 1, 2019, we operated 782 membership warehouses:

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

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| Canada | 86 | | | 14 | | | 100 | |

| Mexico | 38 | | | 1 | | | 39 | |

| United Kingdom | 23 | | | 6 | | | 29 | |

| Japan | 13 | | | 13 | | | 26 | |

| Korea | 12 | | | 4 | | | 16 | |

| Taiwan | — | | | 13 | | | 13 | |

| Australia | 8 | | | 3 | | | 11 | |

| Spain | 2 | | | — | | | 2 | |

| Iceland | — | | | 1 | | | 1 | |

| France | 1 | | | — | | | 1 | |

| China | — | | | 1 | | | 1 | |

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

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The following schedule shows warehouse openings, net of closings and relocations, and expected openings through December 31, 2019:

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| | United States | | | Canada | | | Other International | | | Total | | | Total Warehouses in Operation | |

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

| 2016 | 21 | | | 2 | | | 6 | | | 29 | | | 715 | |

| 2017 | 13 | | | 6 | | | 7 | | | 26 | | | 741 | |

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

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

| 2020 (expected through 12/31/2019) | 3 | | | — | | | — | | | 3 | | | 785 | |

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

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

Our executive offices are located in Issaquah, Washington, and we maintain 19 regional offices in the U.S., Canada and Other International locations.

[removed: PART II][added: PART II]

[removed: Market] [added: Market] Information and Dividend [removed: Policy][added: Policy]

Our common stock is traded on the NASDAQ Global Select Market under the symbol “COST.” On [removed: October 3, 2019,] [added: September 29, 2020,] we had [removed: 9,115] [added: 9,690] stockholders of record.

[removed: Issuer] [added: Issuer] Purchases of Equity [removed: Securities][added: Securities]

The following table sets forth information on our common stock repurchase activity for the fourth quarter of [removed: 2019] [added: 2020] (dollars in millions, except per share data):

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

| Total fourth quarter | | | [removed: 194,000] | | | [added: | | | | | | 275,000 | | | | | |] $ | [removed: 268.08] [added: 321.73] | | | [removed: 194,000] | | [added: 275,000] | | | | [added: | | | | |]

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

[removed: Performance Graph][added: Performance Graph]

The following graph compares the cumulative total shareholder return (stock price appreciation and the reinvestment of dividends) on an investment of $100 in Costco common stock, S&P 500 Index, and the S&P 500 Retail Index over the five years from August [removed: 31, 2014,] [added: 30, 2015,] through [removed: September 1, 2019.][added: August 30, 2020.]

[removed: ][added: ]

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| May 11—June 7, 2020 | | | | | | | | | | | | — | | | | | | $ | — | | | | | — | | | | | | $ | 3,833 | |

| June 8—July 5, 2020 | | | | | | | | | | | | 94,000 | | | | | | 301.79 | | | | | | 94,000 | | | | | | 3,805 | | |

| July 6—August 2, 2020 | | | | | | | | | | | | 93,000 | | | | | | 324.51 | | | | | | 93,000 | | | | | | 3,775 | | |

| August 3—August 30, 2020 | | | | | | | | | | | | 88,000 | | | | | | 340.17 | | | | | | 88,000 | | | | | | 3,745 | | |

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| 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 | | |

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| --- | --- |

This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in [Item [removed: 7](#s00B188113CCE50CBAB7104E57E24687D)] [added: 7](#id2c7a27cc45a4341a7bdf88b9739d38b_46)] of this Report, and our consolidated financial statements and notes thereto, included in [Item [removed: 8](#sB10969D315195D4EA69BEEE9342E1495)] [added: 8](#id2c7a27cc45a4341a7bdf88b9739d38b_73)] of this Report.

[removed: SELECTED] [added: SELECTED] FINANCIAL [removed: DATA][added: DATA]

[removed: (dollars] [added: (dollars] in millions, except per share [removed: data)][added: data)]

| | [removed: Sept.] [added: | | Aug. 30, 2020 | | | | | | Sept.] 1, [removed: 2019] [added: 2019] | | | | [removed: Sept.] [added: | | Sept.] 2, [removed: 2018] [added: 2018] | | | | [removed: Sept. 3, 2017] | | [added: Sept. 3, 2017] | | [removed: Aug. 28, 2016] | | | | [removed: Aug. 30, 2015] [added: Aug. 28, 2016] | | |

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

| RESULTS OF OPERATIONS | | | | | | | | | | | | | | | | | | | | [added: | | | | | | | | | |]

| Net sales | [added: | |] $ | [removed: 149,351] [added: 163,220] | | | [added: | |] $ | [removed: 138,434] [added: 149,351] | | | [added: | |] $ | [removed: 126,172] [added: 138,434] | | | [added: | |] $ | [removed: 116,073] [added: 126,172] | | | [added: | |] $ | [removed: 113,666] [added: 116,073] | |

| Membership fees | [added: | | 3,541 | | | | | |] 3,352 | | | | [added: | |] 3,142 | | | | [removed: 2,853] | | [added: 2,853] | | [removed: 2,646] | | | | [removed: 2,533] [added: 2,646] | | |

| Gross margin(1) as a percentage of net sales | [removed: 11.02] | | [added: 11.20 | |] % | | [removed: 11.04] | | [added: 11.02 | |] % | | [removed: 11.33] | | [added: 11.04 | |] % | | [removed: 11.35] | | [added: 11.33 | |] % | | [removed: 11.09] | | [added: 11.35 | |] % |

| Selling, general and administrative expenses as a percentage of net sales | [removed: 10.04] | | [added: 10.01 | |] % | | [removed: 10.02] | | [added: 10.04 | |] % | | [removed: 10.26] | | [added: 10.02 | |] % | | [removed: 10.40] | | [added: 10.26 | |] % | | [removed: 10.07] | | [added: 10.40 | |] % |

| Operating income | [added: | |] $ | [removed: 4,737] [added: 5,435] | | | [added: | |] $ | [removed: 4,480] [added: 4,737] | | | [added: | |] $ | [removed: 4,111] [added: 4,480] | | | [added: | |] $ | [removed: 3,672] [added: 4,111] | | | [added: | |] $ | [removed: 3,624] [added: 3,672] | |

| Net income attributable to Costco | [added: | | 4,002 | | | | | |] 3,659 | | | | [added: | |] 3,134 | | | | [removed: 2,679] | | [added: 2,679] | | [removed: 2,350] | | | | [removed: 2,377] [added: 2,350] | | |

| Net income per diluted common share attributable to Costco | [added: | | 9.02 | | | | | |] 8.26 | | | | [added: | |] 7.09 | | | | [removed: 6.08] | | [added: 6.08] | | [removed: 5.33] | | | | [removed: 5.37] [added: 5.33] | | |

| Cash dividends declared per common share | [added: | | 2.70 | | | | | |] 2.44 | | | | [added: | |] 2.14 | | | | [removed: 8.90] | | [added: 8.90] | | [removed: 1.70] | | | | [removed: 6.51] [added: 1.70] | | |

| Changes in comparable sales(2) | | | | | | | | | | | | | | | | | | | | [added: | | | | | | | | | |]

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

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

| Other International | [added: | | 9 | | % | | | |] 2 | | % | | [added: | |] 11 | | % | | [removed: 2] | | [removed: %] [added: 2] | | [removed: (3] [added: %] | | [removed: )%] | | [removed: (3] [added: (3)] | | [removed: )%] [added: %] |

| Total Company | [removed: 6] | | [added: 8 | |] % | | [removed: 9] | | [added: 6 | |] % | | [removed: 4] | | [added: 9 | |] % | | [removed: 0] | | [added: 4 | |] % | | [removed: 1] | | [added: 0 | |] % |

| Changes in Total Company comparable sales excluding the impact of changes in foreign currency and gasoline prices (3) | [removed: 6] | | [added: 9 | |] % | | [removed: 7] | | [added: 6 | |] % | | [removed: 4] | | [added: 7 | |] % | | [added: | |] 4 | | % | | [removed: 7] | | [added: 4 | |] % |

| BALANCE SHEET DATA | | | | | | | | | | | | | | | | | | | | [added: | | | | | | | | | |]

| Net property and equipment | [added: | |] $ | [removed: 20,890] [added: 21,807] | | | [added: | |] $ | [removed: 19,681] [added: 20,890] | | | [added: | |] $ | [removed: 18,161] [added: 19,681] | | | [added: | |] $ | [removed: 17,043] [added: 18,161] | | | [added: | |] $ | [removed: 15,401] [added: 17,043] | |

| Total assets | [added: | | 55,556 | | | | | |] 45,400 | | | | [added: | |] 40,830 | | | | [removed: 36,347] | | [added: 36,347] | | [removed: 33,163] | | | | [removed: 33,017] [added: 33,163] | | |

| Long-term debt, excluding current portion | [added: | | 7,514 | | | | | |] 5,124 | | | | [added: | |] 6,487 | | | | [removed: 6,573] | | [added: 6,573] | | [removed: 4,061] | | | | [removed: 4,852] [added: 4,061] | | |

| Costco stockholders’ equity | [added: | | 18,284 | | | | | |] 15,243 | | | | [added: | |] 12,799 | | | | [removed: 10,778] | | [added: 10,778] | | [removed: 12,079] | | | | [removed: 10,617] [added: 12,079] | | |

| WAREHOUSE INFORMATION | | | | | | | | | | | | | | | | | | | | [added: | | | | | | | | | |]

| Warehouses in Operation | | | | | | | | | | | | | | | | | | | | [added: | | | | | | | | | |]

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

| Opened | [added: | | 16 | | | | | |] 25 | | | | [added: | |] 25 | | | | [removed: 28] | | [added: 28] | | [removed: 33] | | | | [removed: 26] [added: 33] | | |

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

| End of year | [added: | | 795 | | | | | |] 782 | | | | [added: | |] 762 | | | | [removed: 741] | | [added: 741] | | [removed: 715] | | | | [removed: 686] [added: 715] | | |

| MEMBERSHIP INFORMATION | | | | | | | | | | | | | | | | | | | | [added: | | | | | | | | | |]

| Total paid members (000's) [added: (4)] | [added: | | 58,100 | | | | | |] 53,900 | | | | [added: | |] 51,600 | | | | [removed: 49,400] | | [added: 49,400] | | [removed: 47,600] | | | | [removed: 44,600] [added: 47,600] | | |

[removed: | (1) | Net] [added: (1)Net] sales less merchandise costs. [removed: |]

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

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

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

[removed: Overview][added: Overview]

We believe that the most important driver of our profitability is [removed: sales growth,] [added: increasing net sales,] particularly comparable sales growth.

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

The following graph provides information concerning average sales per warehouse over a 10 year period.

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

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

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

| | | | | | | Average Sales Per Warehouse* | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| | | | | | | (Sales In Millions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| Year Opened | | | # of Whses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| 2020 | | | 13 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 132 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| 2019 | | | 20 | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 129 | | $ | 138 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| 2018 | | | 21 | | | | | | | | | | | | | | | | | | | | | | | | $ | 116 | | $ | 119 | | $ | 141 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| 2017 | | | 26 | | | | | | | | | | | | | | | | | | | | | $ | 121 | | $ | 142 | | $ | 158 | | $ | 176 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| 2016 | | | 29 | | | | | | | | | | | | | | | | | | $ | 87 | | $ | 97 | | $ | 118 | | $ | 131 | | $ | 145 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| 2015 | | | 23 | | | | | | | | | | | | | | | $ | 83 | | $ | 85 | | $ | 94 | | $ | 112 | | $ | 122 | | $ | 136 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| 2014 | | | 30 | | | | | | | | | | | | $ | 108 | | $ | 109 | | $ | 115 | | $ | 125 | | $ | 140 | | $ | 144 | | $ | 155 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| 2013 | | | 26 | | | | | | | | | $ | 99 | | $ | 109 | | $ | 113 | | $ | 116 | | $ | 124 | | $ | 137 | | $ | 144 | | $ | 158 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| 2012 | | | 15 | | | | | | $ | 105 | | $ | 115 | | $ | 124 | | $ | 128 | | $ | 130 | | $ | 139 | | $ | 152 | | $ | 158 | | $ | 173 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| 2011 & Before | | | 592 | | | $ | 146 | | $ | 156 | | $ | 164 | | $ | 171 | | $ | 171 | | $ | 170 | | $ | 176 | | $ | 189 | | $ | 196 | | $ | 206 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| Totals | | | 795 | | | $ | 146 | | $ | 155 | | $ | 160 | | $ | 164 | | $ | 162 | | $ | 159 | | $ | 163 | | $ | 176 | | $ | 182 | | $ | 192 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| | | | | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| | | | | | | Fiscal Year | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| *First year sales annualized. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| 2012 and 2017 were 53-week fiscal years | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

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

| Total executive members (000's) (5) | | | 22,600 | | | | | | 20,800 | | | | | | 19,300 | | | | | | 18,500 | | | | | | 17,400 | | |

For 2017, the prior year includes the comparable 53 weeks.

(4)2020 includes an additional 1.3 million due to standardizing our membership count methodology globally to be consistent with the U.S. and Canada.

See [Item 1](#id2c7a27cc45a4341a7bdf88b9739d38b_16).

(5)Counts are included in total paid members

Net sales includes our core merchandise categories (food and sundries, hardlines, softlines, and fresh foods), warehouse ancillary and other businesses.

It also has lower SG&A expenses as a percent of net sales compared to our non-gasoline business.

continue.

For discussion related to the results of operations and changes in financial condition for 2019 compared to 2018 refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2019 Form 10-K, which was filed with the United States Securities and Exchange Commission on October 11, 2019.

- Gross margin percentage increased 18 basis points, driven primarily by certain core merchandise categories, partially offset by certain ancillary and other businesses, which were negatively impacted by COVID-19 related closures or restrictions;

- SG&A expenses as a percentage of net sales decreased three basis points primarily due to leveraging increased sales and partial reversal of a previous year tax assessment.

These benefits were partially offset by incremental wage and sanitation costs as a result of COVID-19;

- The effective tax rate in 2020 was 24.4% compared to 22.3% in 2019;

- In February 2020, we acquired a 35% interest in Navitus Health Solutions, a pharmacy benefit manager.

In March 2020, we acquired Innovel Solutions, a company that provides final-mile delivery, installation and white-glove capabilities for big and bulky products across the United States and Puerto Rico;

- In April 2020, we issued $4,000 in aggregate principal amount of Senior Notes, some proceeds of which were used to repay $1,500 of Senior Notes; and

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| --- | --- |

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| --- | --- |

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| --- | --- |

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

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| --- | --- |

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| --- | --- |

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| --- | --- |

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| --- | --- |

| • | 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; |

| | |

| --- | --- |

| • | The effective tax rate in 2019 was 22.3% compared to 28.4% in 2018. Both years were favorably impacted by the Tax Cuts and Jobs Act (2017 Tax Act) and other net tax benefits; |

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| --- | --- |

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.

Comparable sales were negatively impacted by cannibalization (established warehouses losing sales to our newly opened locations).

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

[removed: REPORT] [added: REPORT] OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING [removed: FIRM][added: FIRM]

[removed: Opinion] [added: *Opinion] on the Consolidated Financial [removed: Statements][added: Statements*]

We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation and subsidiaries (the Company) as of [removed: September 1, 2019] [added: August 30, 2020] and September [removed: 2, 2018,] [added: 1, 2019,] the related consolidated statements of income, comprehensive income, equity, and cash flows for the 52-week [removed: period] [added: periods] ended [added: August 30, 2020,] September 1, [removed: 2019, the 52-week period ended September 2, 2018] [added: 2019] and [removed: the 53-week period ended] September [removed: 3, 2017,] [added: 2, 2018,] 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 [removed: September 1, 2019] [added: August 30, 2020] and September [removed: 2, 2018,] [added: 1, 2019,] and the results of its operations and its cash flows for the 52-week [removed: period] [added: periods] ended [added: August 30, 2020,] September 1, [removed: 2019, the 52-week period ended September 2, 2018] [added: 2019] and [removed: the 53-week period ended] September [removed: 3, 2017,] [added: 2, 2018,] 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 [removed: September 1, 2019,] [added: August 30, 2020,] based on criteria established in [removed: Internal] [added: *Internal] Control [removed: -] [added: –] Integrated Framework [removed: (2013)] [added: (2013)*] issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated October [removed: 10, 2019] [added: 6, 2020] expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

[removed: Basis] [added: *Basis] for [removed: Opinion][added: Opinion*]

[removed: Critical] [added: *Critical] Audit [removed: Matters][added: Matter*]

The critical audit [removed: matters] [added: matter] communicated below [removed: are matters] [added: is a matter] arising from the current period audit of the consolidated financial statements that [removed: were] [added: was] communicated or required to be communicated to the audit committee and that: (1) [removed: relate] [added: relates] 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 [added: a] critical audit [removed: matters] [added: matter] 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 [removed: matters] [added: matter] below, providing [added: a] separate [removed: opinions] [added: opinion] on the critical audit [removed: matters] [added: matter] or on the accounts or disclosures to which [removed: they relate.][added: it relates.]

[removed: Evaluation] [added: *Evaluation] of self-insurance [removed: liabilities][added: liabilities*]

As discussed in [Note [removed: 1](#s4AEC290A0D185EC486E86148CF4931E4)] [added: 1](#id2c7a27cc45a4341a7bdf88b9739d38b_106)] 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.

We identified the evaluation of the Company’s [added: workers’ compensation and general liability] self-insurance liabilities [added: for the United States and Canadian operations] as a critical audit matter because of the [added: extent of] specialized [removed: skills necessary] [added: skill and knowledge needed] to evaluate the Company’s actuarial models and the judgments required to assess the underlying assumptions made by the Company.

[removed: Key] [added: Specifically, subjective auditor judgment was required to evaluate certain] assumptions underlying the Company’s actuarial [removed: estimates include:] [added: estimates, including] 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 [added: following are the] primary procedures we performed to address this critical audit [removed: matter included the following.][added: matter.]

We [added: evaluated the design and] tested [added: operating effectiveness of] certain internal controls over the Company’s self-insurance process.

[removed: | • |] [added: -] Assessing the actuarial models used by the Company for consistency with generally [removed: accepted actuarial standards; |]

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

[removed: | • | 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 [removed: Company; and |][added: Company]

[removed: REPORT] [added: REPORT] OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING [removed: FIRM][added: FIRM]

[removed: Opinion] [added: *Opinion] on Internal Control Over Financial [removed: Reporting][added: Reporting*]

We have audited Costco Wholesale Corporation and [removed: subsidiaries’] [added: subsidiaries*’*] (the Company) internal control over financial reporting as of [removed: September 1, 2019,] [added: August 30, 2020,] based on criteria established in [removed: Internal] [added: *Internal] Control [removed: -] [added: –] Integrated Framework [removed: (2013)] [added: (2013)*] issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of [removed: September 1, 2019,] [added: August 30, 2020,] based on criteria established in [removed: Internal] [added: *Internal] Control [removed: -] [added: –] Integrated Framework [removed: (2013)] [added: (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 [removed: September 1, 2019] [added: August 30, 2020] and September [removed: 2, 2018,] [added: 1, 2019,] the related consolidated statements of income, comprehensive income, equity, and cash flows for the 52-week [removed: period] [added: periods] ended [added: August 30, 2020,] September 1, [removed: 2019, the 52-week period ended September 2, 2018] [added: 2019] and [removed: the 53-week period ended] September [removed: 3, 2017,] [added: 2, 2018,] and the related notes (collectively, the consolidated financial statements), and our report dated October [removed: 10, 2019] [added: 6, 2020] expressed an unqualified opinion on those consolidated financial statements.

[removed: Basis] [added: *Basis] for [removed: Opinion][added: Opinion*]

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial [removed: Reporting ([Item 9A](#s066E7EA18CCE561895BBFD3FCA80809C)).][added: Reporting.]

[removed: Definition] [added: *Definition] and Limitations of Internal Control Over Financial [removed: Reporting][added: Reporting*]

[removed: COSTCO] [added: COSTCO] WHOLESALE [removed: CORPORATION][added: CORPORATION]

[removed: CONSOLIDATED] [added: CONSOLIDATED] BALANCE [removed: SHEETS][added: SHEETS]

[removed: (amounts] [added: (amounts] in millions, except par value and share [removed: data)][added: data)]

| | [removed: September] [added: | | August 30, 2020 | | | | | | September] 1, [removed: 2019] [added: 2019] | | | | [removed: September] [added: | | September] 2, [removed: 2018] [added: 2018] | | |

| [removed: ASSETS] [added: ASSETS] | | | | | | | | [added: | | | |]

| [removed: CURRENT ASSETS] [added: CURRENT ASSETS] | | | | | | | | [added: | | | |]

| Cash and cash equivalents | [added: | |] $ | [removed: 8,384] [added: 12,277] | | | [added: | |] $ | [removed: 6,055] [added: 8,384] | |

| Short-term investments | [removed: 1,060] | | [added: 1,028] | | [removed: 1,204] | | | [added: | 1,060 | | |]

| Receivables, net | [removed: 1,535] | | [added: 1,550] | | [removed: 1,669] | | | [added: | 1,535 | | |]

| Merchandise inventories | [removed: 11,395] | | [added: 12,242] | | [removed: 11,040] | | | [added: | 11,395 | | |]

| Other current assets | [removed: 1,111] | | [added: 1,023] | | [removed: 321] | | | [added: | 1,111 | | |]

| Total current assets | [removed: 23,485] | | [added: 28,120] | | [removed: 20,289] | | | [added: | 23,485 | | |]

[removed: | PROPERTY AND EQUIPMENT | | | | | | | |][added: *Property and Equipment, Net*]

| Land | [removed: 6,417] | | [added: N/A] | | [removed: 6,193] | | | [added: | $ | 6,696 | | | | | $ | 6,417 | |]

*Change in Accounting Principle*

As discussed in [Note 1](#id2c7a27cc45a4341a7bdf88b9739d38b_106) to the consolidated financial statements, the Company has changed its method of accounting for leases as of September 2, 2019 due to the adoption of Accounting Standards Update 2016-02 – Leases (ASC 842).

The estimated insurance/self-insurance liabilities as of August 30, 2020 were $1,188 million, a portion of which related to workers’ compensation and general liability self-insurance liabilities for the United States and Canadian operations.

This included controls related to the development and selection of the assumptions listed above used in the actuarial calculation and review of the actuarial report.

accepted actuarial standards

historical estimate with actual incurred losses and paid losses

- Evaluating the above listed assumptions underlying the Company’s actuarial estimates by

October 6, 2020

October 6, 2020

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

| | | | August 30, 2020 | | | | | | September 1, 2019 | | |

| Operating lease right-of-use assets | | | 2,788 | | | | | | — | | |

| Other long-term assets | | | 2,841 | | | | | | 1,025 | | |

| Long-term operating lease liabilities | | | 2,558 | | | | | | — | | |

| Other long-term liabilities | | | 1,935 | | | | | | 1,455 | | |

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

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| Net income | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 4,002 | | | | | | 4,002 | | | | | | 57 | | | | | | 4,059 | | | | | | | | |

| Repurchases of common stock | | | (643) | | | | | | — | | | | | | (10) | | | | | | — | | | | | | (188) | | | | | | (198) | | | | | | — | | | | | | (198) | | | | | | | | |

| BALANCE AT AUGUST 30, 2020 | | | 441,255 | | | | | | $ | 4 | | | | | $ | 6,698 | | | | | $ | (1,297) | | | | | $ | 12,879 | | | | | $ | 18,284 | | | | | $ | 421 | | | | | $ | 18,705 | | | | | | | |

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| Non-cash lease expense | | | 194 | | | | | | — | | | | | | — | | |

| Acquisitions | | | (1,163) | | | | | | — | | | | | | — | | |

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In February 2020, the Company acquired a 35% interest in Navitus Health Solutions, a pharmacy benefit manager.

This investment is included in other long-term assets and is accounted for using the equity-method with earnings/losses recorded in other income in the consolidated statement of income.

These estimates and assumptions take into account historical and forward looking factors that the Company believes are reasonable, including but not limited to the potential impacts arising from the novel coronavirus (COVID-19) and related public and private sector policies and initiatives.

data.

The following table summarizes the Company's property and equipment balances at the end of 2020 and 2019:

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

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.

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| • | 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

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.

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

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:

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| • | 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 |

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| • | 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

October 10, 2019

[removed: Evaluation] [added: Evaluation] of Disclosure Controls and [removed: Procedures][added: Procedures]

Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the [removed: Securities and Exchange Commission] [added: SEC] and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure.

The Chief Executive Officer [removed: (CEO)] and the Chief Financial [removed: Officer (CFO),] [added: Officer,] with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of [removed: September 1, 2019] [added: August 30, 2020] and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.

[removed: Management's] [added: Management's] Annual Report on Internal Control Over Financial [removed: Reporting][added: Reporting]

Under the supervision of and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of [removed: September 1, 2019,] [added: August 30, 2020,] using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission [removed: (COSO)] in Internal [removed: Control—Integrated] [added: Control—Integrated] Framework (2013).

[removed: Changes] [added: Changes] in Internal Control Over Financial [removed: Reporting][added: Reporting]

[removed: Except for the changes in connection with our implementation of the remediation plan discussed above, there] [added: There] have been no [removed: 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: 2019] [added: 2020] that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

| /s/ W. CRAIG JELINEK | | [added: | | | |]

| W. Craig Jelinek | | [added: | | | |]

| [removed: President,] [added: *President,] Chief Executive Officer and [removed: Director] [added: Director*] | | [added: | | | |]

| /s/ RICHARD A. GALANTI | | [added: | | | |]

| Richard A. Galanti | | [added: | | | |]

| [removed: Executive] [added: *Executive] Vice President, Chief Financial Officer and [removed: Director] [added: Director*] | | [added: | | | |]

Based on its assessment, management has concluded that our internal control over financial reporting was effective as of August 30, 2020.

The attestation of KPMG LLP, our independent registered public accounting firm, on the effectiveness of our internal control over financial reporting is included with the consolidated financial statements in Item 8 of this Report.

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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.

During 2019, management implemented our previously disclosed remediation 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

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.

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[removed: PART III][added: PART III]

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, [Item [removed: 1](#s7CDC93349AB05CEF950F7715B432771E)] [added: 1](#id2c7a27cc45a4341a7bdf88b9739d38b_16)] 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,” [removed: “Directors,”] [added: “Directors” and] “Committees of the Board” [removed: and “Section 16(a) Beneficial Ownership Reporting Compliance”] in Costco’s Proxy Statement for its [removed: 2020] [added: 2021] annual meeting of [removed: stockholders,] [added: shareholders,] which will be filed with the SEC within 120 days of the end of our fiscal year (“Proxy Statement”).

[removed: PART IV][added: PART IV]

[removed: | (a) | Documents] [added: (a)Documents] filed as part of this report are as follows: [removed: |]

[removed: | (b) | Exhibits:] [added: (b)Exhibits:] The required exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference. [removed: |]

| | | | | | | [removed: Incorporated] [added: | | | | | | | | | | | | Incorporated] by [removed: Reference] [added: Reference] | | | | | [added: | | | | | | | | | | | | | | | | | | | | | |]

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

| [removed: [3.1](http://www.sec.gov/Archives/edgar/data/909832/000090983215000003/costex3110q21515.htm)] [added: 3.1] | | [added: | | | |] [Articles of Incorporation as amended of Costco Wholesale [removed: Corporation](http://www.sec.gov/Archives/edgar/data/909832/000090983215000003/costex3110q21515.htm)] [added: Corporation](https://www.sec.gov/Archives/edgar/data/909832/000090983220000004/costex3110q21620.htm)] | | | | [added: | | | | | | | |] 10-Q | | [removed: 2/17/2019] | | [removed: 3/13/2019] | [added: | 2/16/2020 | | | | | | 3/12/2020 | | | | | | | | | | | | | | |]

| [removed: [3.2](http://www.sec.gov/Archives/edgar/data/909832/000119312517330827/d482406dex32.htm)] [added: 3.2] | | [removed: [Bylaws as amended of] [added: | | | | [Bylaws](https://www.sec.gov/Archives/edgar/data/909832/000119312520018115/d880773dex32.htm) [as amended](https://www.sec.gov/Archives/edgar/data/909832/000119312520018115/d880773dex32.htm) [of] Costco Wholesale [removed: Corporation](http://www.sec.gov/Archives/edgar/data/909832/000119312517330827/d482406dex32.htm)] [added: Corporation](https://www.sec.gov/Archives/edgar/data/909832/000119312520018115/d880773dex32.htm)] | | | | [added: | | | | | | | |] 8-K | | | | [removed: 4/30/2019] | [added: | | | | | | | 1/29/2020 | | | | | | | | | | | | | | |]

| [removed: [4.1](http://www.sec.gov/Archives/edgar/data/909832/000119312517172294/d398248dex41.htm)] [added: 4.5] | | [added: | | | |] [Form of [removed: 2.150%] [added: 2.300%] Senior Notes due May 18, [removed: 2021](http://www.sec.gov/Archives/edgar/data/909832/000119312517172294/d398248dex41.htm)] [added: 2022](https://www.sec.gov/Archives/edgar/data/909832/000119312517172294/d398248dex42.htm)] | | | | [added: | | | | | | | |] 8-K | | | | [added: | | | | | | | |] 5/16/2017 | [added: | | | | | | | | | | | | | |]

| [removed: [4.2](http://www.sec.gov/Archives/edgar/data/909832/000119312517172294/d398248dex42.htm)] [added: 4.6] | | [added: | | | |] [Form of [removed: 2.300%] [added: 2.750%] Senior Notes due May 18, [removed: 2022](http://www.sec.gov/Archives/edgar/data/909832/000119312517172294/d398248dex42.htm)] [added: 2024](https://www.sec.gov/Archives/edgar/data/909832/000119312517172294/d398248dex43.htm)] | | | | [added: | | | | | | | |] 8-K | | | | [added: | | | | | | | |] 5/16/2017 | [added: | | | | | | | | | | | | | |]

| [removed: [4.3](http://www.sec.gov/Archives/edgar/data/909832/000119312517172294/d398248dex43.htm)] [added: 4.7] | | [added: | | | |] [Form of [removed: 2.750%] [added: 3.000%] Senior Notes due May 18, [removed: 2024](http://www.sec.gov/Archives/edgar/data/909832/000119312517172294/d398248dex43.htm)] [added: 2027](https://www.sec.gov/Archives/edgar/data/909832/000119312517172294/d398248dex44.htm)] | | | | [added: | | | | | | | |] 8-K | | | | [added: | | | | | | | |] 5/16/2017 | [added: | | | | | | | | | | | | | |]

| [removed: [4.4](http://www.sec.gov/Archives/edgar/data/909832/000119312517172294/d398248dex44.htm)] [added: 4.4] | | [added: | | | |] [Form of [removed: 3.000%] [added: 1.750%] Senior Notes due [removed: May 18, 2027](http://www.sec.gov/Archives/edgar/data/909832/000119312517172294/d398248dex44.htm)] [added: April 20, 2032](https://www.sec.gov/Archives/edgar/data/909832/000119312520110803/d903866dex43.htm)] | | | | [added: | | | | | | | |] 8-K | | | | [removed: 5/16/2017] | [added: | | | | | | | 4/17/2020 | | | | | | | | | | | | | | |]

| [removed: [10.1*](http://www.sec.gov/Archives/edgar/data/909832/000119312512428890/d388097dex101.htm)] [added: 10.1*] | | [added: | | | |] [Costco Wholesale Executive Health Plan](http://www.sec.gov/Archives/edgar/data/909832/000119312512428890/d388097dex101.htm) | | | | [added: | | | | | | | |] 10-K | | [added: | | | |] 9/2/2012 | | [added: | | | |] 10/19/2012 | [added: | | | | | | | | | | | | | |]

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