COSTCO WHOLESALE CORPORATION (amounts in millions, except per share, share, and warehouse count data) FORWARD-LOOKING STATEMENTS Certain statements contained in this document constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For these purposes, forward-looking statements are statements that address activities, events, conditions or developments that the Company expects or anticipates may occur in the future and may relate to such matters as net sales growth, changes in comparable sales, cannibalization of existing locations by new openings, price or fee changes, earnings performance, earnings per share, stock-based compensation expense, warehouse openings and closures, capital spending, the effect of adopting certain accounting standards, future financial reporting, financing, margins, return on invested capital, strategic direction, expense controls, membership renewal rates, shopping frequency, litigation, and the demand for our products and services. In some cases, forward-looking statements can be identified because they contain words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "likely," "may," "might," "plan," "potential," "predict," "project," "seek," "should," "target," "will," "would," or similar expressions and the negatives of those terms. Such forward-looking statements involve risks and uncertainties that may cause actual events, results, or performance to differ materially from those indicated by such statements. These risks and uncertainties include, but are not limited to, domestic and international economic conditions, including exchange rates, inflation or deflation, the effects of competition and regulation, uncertainties in the financial markets, consumer and small-business spending patterns and debt levels, breaches of security or privacy of member or business information, conditions affecting the acquisition, development, ownership or use of real estate, capital spending, actions of vendors, rising costs associated with employees (generally including health-care costs), energy and certain commodities, geopolitical conditions (including tariffs), the ability to maintain effective internal control over financial reporting, regulatory and other impacts related to climate change, and COVID-19 related factors and challenges, including (among others) the duration of the pandemic, the unknown long-term economic impact, reduced member shopping due to illness, travel restrictions or financial hardship, shifts in demand for products, reduced workforces due to illness, quarantine, or government mandates, temporary store closures or operational limitations due to government mandates, or supply-chain disruptions, capacity constraints of third-party logistics suppliers, and other risks identified from time to time in the Company's public statements and reports filed with theSecurities and Exchange Commission (SEC). Forward-looking statements speak only as of the date they are made, and the Company does not undertake to update these statements, except as required by law. OVERVIEW The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to promote understanding of the results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q), as well as our consolidated financial statements, the accompanying Notes to Financial Statements, and the related Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2021 Form 10-K, which was filed with theUnited States Securities and Exchange Commission (SEC) onOctober 6, 2021 . We operate membership warehouses and e-commerce websites based on the concept that offering our members low prices on a limited selection of nationally-branded and private-label products in a wide range of categories will produce high sales volumes and rapid inventory turnover. When combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, these volumes and turnover enable us to operate profitably at significantly lower gross margins (net sales less merchandise costs) than most other retailers. We generally sell inventory before we are required to pay for it, even while taking advantage of early payment discounts. 17
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We believe that the most important driver of our profitability is increasing net sales, particularly comparable sales growth. Net sales includes our core merchandise categories (foods and sundries, non-foods, and fresh foods), warehouse ancillary (includes gasoline, pharmacy, optical, food court, hearing aids, and tire installation) and other businesses (includes e-commerce, business centers, travel and other). We define comparable sales as net sales from warehouses open for more than one year, including remodels, relocations and expansions, and sales related to e-commerce websites operating for more than one year. Comparable sales growth is achieved through increasing shopping frequency from new and existing members and the amount they spend on each visit (average ticket). Sales comparisons can also be particularly influenced by certain factors that are beyond our control: fluctuations in currency exchange rates (with respect to the consolidation of the results of our international operations); and changes in the cost of gasoline and associated competitive conditions. The higher our comparable sales exclusive of these items, the more we can leverage certain of our selling, general and administrative (SG&A) expenses, reducing them as a percentage of sales and enhancing profitability. Generating comparable sales growth is foremost a question of making available to our members the right merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long-term. Another substantial factor in net sales growth is the health of the economies in which we do business, including the effects of inflation or deflation, especiallythe United States . Net sales growth and gross margins are also impacted by our competition, which is vigorous and widespread, across a wide range of global, national and regional wholesalers and retailers, including those with e-commerce operations. While we cannot control or reliably predict general economic health or changes in competition, we believe that we have been successful historically in adapting our business to these changes, such as through adjustments to our pricing and merchandise mix, including increasing the penetration of our private-label items and through online offerings. Our philosophy is to provide our members with quality goods and services at competitive prices. We do not focus in the short-term on maximizing prices charged, but instead seek to maintain what we believe is a perception among our members of our "pricing authority" on quality goods - consistently providing the most competitive values. Our investments in merchandise pricing may include reducing prices on merchandise to drive sales or meet competition and holding prices steady despite cost increases instead of passing the increases on to our members, all negatively impacting gross margin as a percentage of net sales (gross margin percentage). We believe our gasoline business draws members, but it generally has a lower gross margin percentage relative to our non-gasoline business. It also has lower SG&A expenses as a percent of net sales compared to our non-gasoline business. A higher penetration of gasoline sales will generally lower our gross margin percentage. Rapidly changing gasoline prices may significantly impact our near-term net sales growth. Generally, rising gasoline prices benefit net sales growth which, given the higher sales base, negatively impacts our gross margin percentage but decreases our SG&A expenses as a percentage of net sales. A decline in gasoline prices has the inverse effect. Additionally, actions in various countries, particularlyChina ,the United States and theUnited Kingdom , have created uncertainty with respect to how tariffs will affect the costs of some of our merchandise. The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs. Merchandise costs were impacted by inflation higher than what we have experienced in recent years. The impact to our net sales and gross margin is influenced in part by our merchandising and pricing strategies in response to cost increases. While these potential impacts are uncertain, they could have an adverse impact on our results. We also achieve net sales growth by opening new warehouses. As our warehouse base grows, available and desirable sites become more difficult to secure, and square footage growth becomes a comparatively less substantial component of growth. The negative aspects of such growth, however, including lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouses when openings occur in existing markets, are continuing to decline in significance as they relate to the results of our total operations. Our rate of operating floor space square footage growth is generally higher in foreign markets, due to the smaller base in those markets, and we expect that to continue. Our e-commerce business growth, domestically and internationally, has also increased our sales but it generally has a lower gross margin percentage relative to our warehouse operations. 18
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The membership format is an integral part of our business and has a significant effect on our profitability. This format is designed to reinforce member loyalty and provide continuing fee revenue. The extent to which we achieve growth in our membership base, increase the penetration of our Executive members, and sustain high renewal rates materially influences our profitability. Our paid membership growth rate may be adversely impacted when warehouse openings occur in existing markets as compared to new markets. Our financial performance depends heavily on controlling costs. While we believe that we have achieved successes in this area, some significant costs are partially outside our control, particularly health care and utility expenses. With respect to the compensation of our employees, our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that achieving our longer-term objectives of reducing employee turnover and enhancing employee satisfaction requires maintaining compensation levels that are better than the industry average for much of our workforce. This may cause us, for example, to absorb costs that other employers might seek to pass through to their workforces. Because our business operates on very low margins, modest changes in various items in the consolidated statements of income, particularly merchandise costs and selling, general and administrative expenses, can have substantial impacts on net income. Our operating model is generally the same across ourU.S. , Canadian, and Other International operating segments (see Note 9 to the condensed consolidated financial statements included in Part I, Item 1, of this Report). Certain operations in the Other International segment have relatively higher rates of square footage growth, lower wage and benefit costs as a percentage of sales, less or no direct membership warehouse competition, or lack an e-commerce business. In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies relative to theU.S. dollar, which are references to the differences between the foreign-exchange rates we use to convert the financial results of our international operations from local currencies intoU.S. dollars for financial reporting purposes. This impact of foreign-exchange rate changes is calculated based on the difference between the current period's currency exchange rates and that of the comparable prior period. The impact of changes in gasoline prices on net sales is calculated based on the difference between the current period's average price per gallon sold and that of the comparable prior period. Our fiscal year ends on the Sunday closest toAugust 31 . References to the first quarter of 2022 and 2021 relate to the 12-week fiscal quarters endedNovember 21, 2021 , andNovember 22, 2020 . Certain percentages presented are calculated using actual results prior to rounding. Unless otherwise noted, references to net income relate to net income attributable toCostco . Highlights for the first quarter of 2022 as compared to the first quarter of 2021 include: •Net sales increased 17% to$49,417 , driven by an increase in comparable sales of 15% and sales at 20 net new warehouses opened since the end of the first quarter of 2021; •Membership fee revenue increased 10% to$946 , driven by new member sign-ups, upgrades to Executive Membership, and an increase in our renewal rate as more members have transitioned to auto renew; •Gross margin percentage decreased 49 basis points, driven primarily by our core merchandise categories; •SG&A expenses as a percentage of net sales decreased 65 basis points, primarily due to leveraging increased sales and ceasing of incremental wages related to COVID-19; •The provision for income taxes in the first quarter of 2022 was positively impacted by a benefit related to stock compensation of$91 ,$0.21 per diluted share, compared to$75 ,$0.17 per diluted share, in the first quarter of 2021. The first quarter of 2021 was also positively impacted by a benefit of$70 ,$0.16 per diluted share, in connection with the portion of the special dividend paid to 401(k) participants; 19
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•Net income was$1,324 ,$2.98 per diluted share, compared to$1,166 ,$2.62 per diluted share in 2021; and •A quarterly cash dividend of$0.79 per share was paid onNovember 12, 2021 . COVID-19 The COVID-19 pandemic continues. COVID-related and other supply and logistics constraints have continued to adversely affect some merchandise categories and are expected to do so for the foreseeable future. During the first quarter of fiscal 2021, we paid$212 incremental wages related to COVID-19, which ceased inFebruary 2021 . Certain risks and uncertainties related to the pandemic and vaccine mandates are included in Risk Factors (Part II, Item 1A) of this Form 10-Q and in Part 1, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedAugust 29, 2021 . RESULTS OF OPERATIONSNet Sales 12 Weeks Ended November 21, November 22, 2021 2020 Net Sales$ 49,417 $ 42,347 Changes in net sales: U.S 16 % 16 % Canada 19 % 18 % Other International 17 % 22 %Total Company 17 % 17 % Changes in comparable sales: U.S 15 % 15 % Canada 17 % 16 % Other International 13 % 19 %Total Company 15 % 15 % Changes in comparable sales excluding the impact of changes in foreign-currency and gasoline prices: U.S 10 % 17 % Canada 8 % 17 % Other International 11 % 18 %Total Company 10 % 17 % Net Sales Net sales increased$7,070 or 17% during the first quarter of 2022. This improvement was attributable to an increase in comparable sales of 15% and sales at the 20 net new warehouses opened since the end of the first quarter of 2021. While sales in all core merchandise categories increased, increases were strongest in non-foods, gasoline, and travel. Merchandise costs continued to be impacted by inflation, slightly higher than what we experienced in the fourth quarter of fiscal 2021. Higher gasoline prices positively impacted net sales by$1,843 , or 435 basis points, compared to 2021, with a 49% increase in the average price per gallon. The volume of gasoline sold increased approximately 26%, positively impacting net sales by$809 , or 191 basis points. Changes in foreign currencies relative to theU.S. dollar positively impacted net sales by approximately$380 , or 90 basis points, compared to the first quarter of 2021, primarily attributable to our Canadian operations. 20
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Comparable Sales
Comparable sales increased 15% in the first quarter of 2022, and were positively
impacted by increases in the average ticket and shopping frequency. There was an
increase of 14% in e-commerce comparable sales in the first quarter of 2022.
Membership Fees
12 Weeks Ended
November 21, November 22,
2021 2020
Membership fees $ 946 $ 861
Membership fees increase 10 % 7 %
Total paid members (000s) 62,500 59,100
Total cardholders (000s) 113,100 107,100
Membership fee revenues increased 10%, driven by sign-ups and upgrades to
Executive Membership. At the end of the first quarter of 2022, our member
renewal rates were 92% in the U.S. and Canada and 89% worldwide. Renewal rates
continue to benefit from more members auto renewing, as well as increased
penetration of executive members, who on average renew at a higher rate. Our
renewal rate, which excludes affiliates of Business members, is a trailing
calculation that captures renewals during the period seven to eighteen months
prior to the reporting date.
We account for membership fee revenue on a deferred basis, recognized ratably
over the one-year membership period. Our membership counts include active
memberships as well as memberships that have not renewed within the 12 months
prior to the reporting date.
Gross Margin
12 Weeks Ended
November 21, November 22,
2021 2020
Net sales $ 49,417 $ 42,347
Less merchandise costs 43,952 37,458
Gross margin $ 5,465 $ 4,889
Gross margin percentage 11.06 % 11.55 %
The gross margin of core merchandise categories, when expressed as a percentage
of core merchandise sales (rather than total net sales), decreased 18 basis
points. This measure eliminates the impact of changes in sales penetration and
gross margins from our warehouse ancillary and other businesses. The decrease
was primarily due to fresh foods and foods and sundries, partially offset by
non-foods.
Total gross margin percentage decreased 49 basis points compared to the first
quarter of 2021. Excluding the impact of gasoline price inflation on net sales,
gross margin percentage was 11.49%, a decrease of six basis points. This was
primarily due to a 26 basis-point decrease in core merchandise categories,
predominantly foods and sundries and fresh foods. Gross margin was also
negatively impacted by three basis points due to a LIFO charge for higher
merchandise costs and one basis-point due to increased 2% rewards. Gross margin
percentage was positively impacted by 12 basis points due to decreased
incremental wages related to COVID-19, which ended on February 28, 2021 .
Warehouse ancillary and other businesses increased 12 basis points, primarily
due to our gasoline business and certain other ancillary businesses.
Gross margin on a segment basis, when expressed as a percentage of the segment's
own sales and excluding the impact of changes in gasoline prices on net sales
(segment gross margin percentage), increased in our U.S. segment, due to
warehouse ancillary and other businesses, partially offset by core
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merchandise categories and the LIFO charge. Gross margin percentage decreased in
our Canadian segment, primarily due to decreases in core merchandise categories
and warehouse ancillary and other businesses. Gross margin percentage decreased
in our Other International segment due to decreases in core merchandise
categories and increased 2% rewards.
Selling, General and Administrative Expenses
12 Weeks Ended
November 21, November 22,
2021 2020
SG&A expenses $ 4,718 $ 4,320 SG&A expenses as a percentage of net sales 9.55 % 10.20 %
SG&A expenses as a percentage of net sales decreased 65 basis points. SG&A expenses as a percentage of net sales excluding the impact of gasoline price inflation was 9.92%, a decrease of 28 basis points. Warehouse operations and other businesses were lower by 11 basis points, largely attributable to payroll leveraging increased sales. Central operating costs were lower by six basis points. SG&A expenses were also lower by a net 13 basis points resulting from ceasing incremental COVID-19 wages, partially offset by a write-off of certain information technology assets. Stock compensation and pre-opening expenses were each higher by one basis-point. Changes in foreign currencies relative to theU.S. dollar positively impacted SG&A expenses by approximately$25 , compared to the first quarter of 2021, primarily attributable to our Canadian operations. The first quarter of fiscal 2022 includes the permanent$1 increase for hourly employees in our warehouses and distribution channels that began inMarch 2021 , and beginning inOctober 2021 , the additional starting wage increase from$16 and$16.50 to$17 and$18 . Interest Expense 12 Weeks Ended November 21, November 22, 2021 2020 Interest expense$ 39 $ 39
Interest expense is primarily related to Senior Notes. Interest Income and Other, Net
12 Weeks Ended
November 21, November 22,
2021 2020
Interest income $ 8 $ 10
Foreign-currency transaction gains, net 26 8
Other, net 8 11
Interest income and other, net $ 42 $ 29
Foreign-currency transaction gains, net include the revaluation or settlement of
monetary assets and liabilities by our Canadian and Other International
operations and mark-to-market adjustments for forward foreign-exchange
contracts. See Derivatives and Foreign Currency sections in Item 8, Note 1 of
our Annual Report on Form 10-K, for the fiscal year ended August 29, 2021 .
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Provision for Income Taxes
12 Weeks Ended
November 21, November 22,
2021 2020
Provision for income taxes $ 351 $ 239
Effective tax rate 20.7 % 16.8 %
The effective tax rate was favorably impacted by net discrete tax benefits of
$97 . This was primarily attributable to $91 of excess tax benefits related to
stock compensation. Excluding discrete net tax benefits, the tax rate was 26.4%.
The effective tax rate for the first quarter of 2021 was favorably impacted by
net discrete tax benefits of $135 . This was primarily attributable to $75 of
excess tax benefits related to stock compensation and $70 related to the special
cash dividend paid through the 401(k) plan. Excluding net discrete tax benefits,
the tax rate was 26.3% for the first quarter of 2021.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our significant sources and uses of cash and cash
equivalents:
12 Weeks Ended
November 21, November 22,
2021 2020
Net cash provided by operating activities
(912) (682)
Net cash used in financing activities (839)
(700)
Our primary sources of liquidity are cash flows generated from our operations, cash and cash equivalents, and short-term investments. Cash and cash equivalents and short-term investments were$13,476 and$12,175 atNovember 21, 2021 , andAugust 29, 2021 . Of these balances, unsettled credit and debit card receivables represented approximately$2,245 and$1,816 atNovember 21, 2021 , andAugust 29, 2021 . These receivables generally settle within four days. Material contractual obligations arising in the normal course of business primarily consist of purchase obligations, long-term debt and related interest payments, leases, and construction and land purchase obligations. Purchase obligations consist of contracts primarily related to merchandise, equipment, and third-party services, the majority of which are due in the next 12 months. Construction and land purchase obligations primarily relate to the development and opening of new and relocated warehouses, the majority of which (other than leases) are due in the next 12 months. Management believes that our cash and investment position and operating cash flows as well as capacity under existing and available credit agreements will be sufficient to meet our liquidity and capital requirements for the foreseeable future. Management also believes that ourU.S. current and projected asset position is sufficient to meetU.S. liquidity and capital requirements. Cash Flows from Operating Activities Net cash provided by operating activities totaled$3,258 in the first quarter of 2022, compared to$2,647 in the first quarter of 2021. Our cash flow provided by operations is primarily derived from net sales and membership fees. Cash flow used in operations generally consists of payments to merchandise suppliers, warehouse operating costs, including payroll and employee benefits, utilities, and credit and debit card processing fees. Cash used in operations also includes payments for income taxes. Changes in our net investment in merchandise inventories (the difference between merchandise inventories and accounts 23
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payable) is impacted by several factors, including how fast inventory is sold, the strategic forward deployment of inventory to accelerate delivery times to our members, payment terms with our suppliers, and the amount of payables paid early to obtain discounts from our suppliers. Cash Flows from Investing Activities Net cash used in investing activities totaled$912 in the first quarter of 2022, compared to$682 in the first quarter of 2021, and is primarily related to capital expenditures. Net cash from investing activities also includes purchases and maturities of short-term investments. Capital Expenditure Plans Our primary requirements for capital are acquiring land, buildings, and equipment for new and remodeled warehouses. Capital is also required for information systems, manufacturing and distribution facilities, initial warehouse operations, and working capital. In the first quarter of 2022, we spent$1,055 on capital expenditures, and it is our current intention to spend approximately$4,000 during fiscal year 2022. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents, and short-term investments. We opened nine new warehouses, including one relocation, in the first quarter of 2022 and plan to open 20 to 23 additional new warehouses, including up to four relocations, in the remainder of fiscal 2022. There can be no assurance that current expectations will be realized and plans are subject to change upon changes in capital expenditure needs or the economic environment. Cash Flows from Financing Activities Net cash used in financing activities totaled$839 in the first quarter of 2022, compared to$700 in the first quarter of 2021. Cash flow used in financing activities was primarily related to withholding taxes on stock-based awards, the payment of dividends, and repurchases of common stock. Subsequent to the end of the quarter, onDecember 1, 2021 , we repaid, prior to maturity, the 2.300% Senior Notes at a redemption price plus accrued interest as specified in the Notes' agreement. Dividends OnOctober 13, 2021 , our Board declared a quarterly cash dividend of$0.79 per share payable to shareholders of record onOctober 29, 2021 , which was paid onNovember 12, 2021 . Stock Repurchase Program During the first quarter of 2022 and 2021, we repurchased 77,000 and 213,000 shares of common stock, at an average price per share of$455.08 and$359.45 , totaling approximately$35 and$77 . These amounts may differ from the stock repurchase balances in the accompanying condensed consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of a quarter. Purchases are made from time to time, as conditions warrant, in the open market or in block purchases, pursuant to plans under SEC Rule 10b5-1. Repurchased shares are retired, in accordance with the Washington Business Corporation Act. Bank Credit Facilities and Commercial Paper Programs We maintain bank credit facilities for working capital and general corporate purposes. AtNovember 21, 2021 , we had borrowing capacity under these facilities of$1,046 . Our international operations maintain$561 of the total borrowing capacity under bank credit facilities, of which$198 is guaranteed by the Company. There were no outstanding short-term borrowings under the bank credit facilities at the end of the first quarter of 2022, and short-term borrowings were immaterial at the end of 2021. The Company has letter of credit facilities, for commercial and standby letters of credit, totaling$235 . The outstanding commitments under these facilities at the end of the first quarter of 2022 totaled$200 , most of which were standby letters of credit which do not expire or have expiration dates within one year. The bank credit facilities have various expiration dates, most of which are within one year, and we generally 24
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intend to renew these facilities. The amount of borrowings available at any time under our bank credit facilities is reduced by the amount of standby and commercial letters of credit outstanding. Critical Accounting Estimates The preparation of our consolidated financial statements in accordance withU.S. GAAP requires that we make estimates and judgments. We base these on historical experience and on assumptions that we believe to be reasonable. Our critical accounting policies are discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our Annual Report on Form 10-K, for the fiscal year endedAugust 29, 2021 . There have been no material changes to the critical accounting policies previously disclosed in that Report. Recent Accounting Pronouncements There have been no material changes in recently issued or adopted accounting standards from those disclosed in our Annual Report on Form 10-K, for the fiscal year endedAugust 29, 2021 . Item 3-Quantitative and Qualitative Disclosures about Market Risk Our direct exposure to financial market risk results from fluctuations in foreign-currency exchange rates and interest rates. There have been no material changes to our market risks as disclosed in our Annual Report on Form 10-K, for the fiscal year endedAugust 29, 2021 . Item 4-Controls and Procedures Evaluation of Disclosure Controls and Procedures Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of theSecurities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as ofNovember 21, 2021 and, based on their evaluation, have concluded the disclosure controls and procedures were effective as of such date. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the first quarter of fiscal 2022 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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