COSTCO WHOLESALE CORPORATION 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 consolidated financial statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K). This section generally discusses the results of operations for 2022 compared to 2021. For discussion related to the results of operations and changes in financial condition for 2021 compared to 2020 refer to Part II, Item 7, 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 .
Overview
We believe that the most important driver of our profitability is increasing net sales, particularly comparable sales. Net sales includes our core merchandise categories (foods and sundries, non-foods, and fresh foods), warehouse ancillary (gasoline, pharmacy, optical, food court, hearing aids, and tire installation) and other businesses (e-commerce, business centers, travel and other). 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 our international operations); inflation and changes in the cost of gasoline and associated competitive conditions. The higher our comparable sales exclusive of these items, the more we can leverage our SG&A expenses, reducing them as a percentage of sales and enhancing profitability. Generating comparable sales growth is foremost a question of making available to our members the right merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long-term. Another substantial factor in net sales growth is the health of the economies in which we do business, including the effects of inflation or deflation, 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" - consistently providing the most competitive values. Merchandise costs in 2022 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. Those strategies can include, but are not limited to, working with our suppliers to share in absorbing cost increases, earlier-than-usual purchasing and in greater volumes, offering seasonal merchandise outside its season, as well as passing cost increases on to our members. Our investments in merchandise pricing may include reducing prices on merchandise to drive sales or meet competition and holding prices steady despite cost increases instead of passing the increases on to our members, all negatively impacting gross margin and gross margin as a percentage of net sales (gross margin percentage). We believe our gasoline business enhances traffic in our warehouses, but it generally has a lower gross margin percentage 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- 22
--------------------------------------------------------------------------------
Table of Contents
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 andthe United States , have affected the costs of some of our merchandise. The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs. Higher tariffs could adversely impact our results. We also achieve net sales growth by opening new warehouses. As our warehouse base grows, available and desirable sites become more difficult to secure, and square footage growth becomes a comparatively less substantial component of growth. The negative aspects of such growth, however, including lower initial operating profitability relative to existing warehouses and cannibalization of sales at existing warehouses when openings occur in existing markets, are continuing to decline in significance as they relate to the results of our total operations. Our rate of square footage growth is generally higher in foreign markets, due to the smaller base in those markets, and we expect that to continue. Our e-commerce business growth, domestically and internationally, has also increased our sales but it generally has a lower gross margin percentage relative to our warehouse operations. E-commerce sales growth slowed in 2022 compared to 2021 and 2020. 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 SG&A 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 11 to the consolidated financial statements included in Item 8 of this Report). Certain operations in the Other International segment have relatively higher rates of square footage growth, lower wage and benefit costs as a percentage of sales, less or no direct membership warehouse competition, or lack e-commerce or business delivery. In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies relative to theU.S. dollar, which are the differences between the foreign-exchange rates we use to convert the financial results of our international operations from local currencies intoU.S. dollars. 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 2022, 2021, and 2020 relate to the 52-week fiscal years endedAugust 28, 2022 ,August 29, 2021 , andAugust 30, 2020 , respectively. Certain percentages presented are calculated using actual results prior to rounding. Unless otherwise noted, references to net income relate to net income attributable toCostco . 23
--------------------------------------------------------------------------------
Table of Contents
Highlights for 2022 versus 2021 include:
•We opened 26 new warehouses, including 3 relocations: 14 net new in theU.S. , 2 net new in our Canadian segment, and 7 new in our Other International segment, compared to 22 new warehouses, including 2 relocations in 2021;
•Net sales increased 16% to
•Membership fee revenue increased 9% to
•Gross margin percentage decreased 65 basis points, driven primarily by our core merchandise categories and a LIFO charge for higher merchandise costs;
•SG&A expenses as a percentage of net sales decreased 77 basis points, primarily due to leveraging increased sales and ceasing of incremental wages related to COVID-19, despite additional wage and benefits increases;
•We incurred a one-time
•The effective tax rate in 2022 was 24.6% compared to 24.0% in 2021;
•Net income increased 17% to
•In
•In
COVID-19
The COVID-19 pandemic continued to impact our business during 2022, albeit to a lesser extent. 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 2021, we paid$515 in incremental wages related to COVID-19, which ceased inFebruary 2021 . 24
--------------------------------------------------------------------------------
Table of Contents RESULTS OF OPERATIONSNet Sales 2022 2021 2020 Net Sales$ 222,730 $ 192,052 $ 163,220 Increases in net sales: U.S. 17 % 16 % 9 % Canada 16 % 22 % 5 % Other International 10 % 23 % 13 %Total Company 16 % 18 % 9 % Increases in comparable sales: U.S. 16 % 15 % 8 % Canada 15 % 20 % 5 % Other International 7 % 19 % 9 %Total Company 14 % 16 % 8 % Increases in comparable sales excluding the impact of changes in foreign currency and gasoline prices: U.S. 10 % 14 % 9 % Canada 12 % 12 % 7 % Other International 10 % 13 % 11 %Total Company 11 % 13 % 9 % Net Sales Net sales increased$30,678 or 16% during 2022. The improvement was attributable to an increase in comparable sales of 14%, and sales at new warehouses opened in 2021 and 2022. Sales increased$15,830 in core merchandise categories and$14,848 in warehouse ancillary and other businesses. The rate of increase was strongest in our gasoline, business centers, and travel businesses. Sales continued to be impacted by inflation, higher than what we experienced in previous fiscal years. During 2022, higher gasoline prices positively impacted net sales by$9,230 , 481 basis points, compared to 2021, with a 42% increase in the average price per gallon. The volume of gasoline sold increased approximately 22%, positively impacting net sales by$3,847 , 200 basis points. Changes in foreign currencies relative to theU.S. dollar negatively impacted net sales by approximately$1,762 , 92 basis points, compared to 2021, attributable primarily to our Other International operations. Comparable Sales
Comparable sales increased 14% during 2022 and were positively impacted by increases in shopping frequency and average ticket, which includes the effects of inflation and changes in foreign currency. E-commerce comparable sales increased 10% during 2022, including inflation.
25--------------------------------------------------------------------------------
Table of Contents
Membership Fees
2022 2021 2020
Membership fees $ 4,224 $ 3,877 $ 3,541
Membership fees increase 9 % 9 % 6 %
Membership fee revenue increased 9% in 2022, driven by new member sign-ups and
upgrades to Executive membership. Changes in foreign currencies relative to the
U.S. dollar negatively impacted membership fees by $42 , compared to 2021. At the
end of 2022, our member renewal rates were 93% in the U.S. and Canada and 90%
worldwide. Renewal rates continue to benefit from more members auto renewing and
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.
Gross Margin
2022 2021 2020
Net sales $ 222,730 $ 192,052 $ 163,220
Less merchandise costs 199,382 170,684 144,939
Gross margin $ 23,348 $ 21,368 $ 18,281
Gross margin percentage 10.48 % 11.13 % 11.20 %
Total gross margin percentage decreased 65 basis points compared to 2021.
Excluding the impact of gasoline price inflation on net sales, gross margin was
10.94%, a decrease of 19 basis points. This was primarily due to a 33
basis-point decrease in core merchandise categories, predominantly driven by
decreases in fresh foods and foods and sundries, and 19 basis points due to a
LIFO charge for higher merchandise costs. Gross margin was also negatively
impacted by one basis point due to increased 2% rewards. Warehouse ancillary and
other businesses positively impacted gross margin by 29 basis points,
predominantly gasoline, partially offset by e-commerce. Gross margin was
positively impacted by five basis points due to the net impact of ceasing
incremental wages related to COVID-19 and the negative impact of a one-time
charge related to granting our employees one additional day of paid time off.
Changes in foreign currencies relative to the U.S. dollar negatively impacted
gross margin by approximately $176 , compared to 2021, primarily attributable to
our Other International Operations.
The gross margin in core merchandise categories, when expressed as a percentage
of core merchandise sales (rather than total net sales), decreased 27 basis
points. The decrease was across all categories, most significantly in fresh
foods. This measure eliminates the impact of changes in sales penetration and
gross margins from our warehouse ancillary and other businesses.
Gross margin on a segment basis, when expressed as a percentage of the segment's
own sales and excluding the impact of changes in gasoline prices on net sales
(segment gross margin percentage), decreased across all segments. All segments
were negatively impacted due to decreases in core merchandise categories,
partially offset by increases in warehouse ancillary and other businesses. Gross
margin in our U.S. segment was also negatively impacted by the LIFO charge. Our
Other International segment was negatively impacted by increased 2% rewards. All
segments benefited from the ceasing of incremental wages related to COVID-19.
26--------------------------------------------------------------------------------
Table of Contents
Selling, General and Administrative Expenses
2022 2021 2020
SG&A expenses$ 19,779 $ 18,537 $
16,387
SG&A expenses as a percentage of net sales 8.88 % 9.65 % 10.04 %
SG&A expenses as a percentage of net sales decreased 77 basis points compared to 2021. SG&A expenses as a percentage of net sales excluding the impact of gasoline price inflation was 9.26%, a decrease of 39 basis points. Warehouse operations and other businesses were lower by 17 basis points, largely attributable to leveraging increased sales. This includes the impact of the starting wage increase we instituted inOctober 2021 , as well the increased wages and benefits that were effective onMarch 14, 2022 , andJuly 4, 2022 . SG&A expenses was benefited by a net of 16 basis points due to the positive impact of ceasing incremental wages related to COVID-19, partially offset by higher write-offs of certain information technology assets, and expenses related to granting our employees one additional day of paid time off. Central operating costs were lower by five basis points, and stock compensation expense was lower by one basis point. Changes in foreign currencies relative to theU.S. dollar decreased SG&A expenses by approximately$148 , compared to 2021, primarily attributable to our Other International operations. Interest Expense 2022 2021 2020 Interest expense$ 158 $ 171 $ 160 Interest expense primarily relates to Senior Notes and financing leases. Interest expense decreased in 2022 due to repayment of the 2.300% Senior Notes onDecember 1, 2021 . For more information on our debt arrangements, refer to the consolidated financial statements included in Item 8 of this Report.
Interest Income and Other, Net
2022 2021 2020
Interest income $ 61 $ 41 $ 89 Foreign-currency transaction gains, net 106 56 7 Other, net
38 46 (4)
Interest income and other, net $ 205 $ 143 $ 92 The increase in interest income in 2022 was primarily due to higher global
interest rates. Foreign-currency transaction gains, net, include revaluation or
settlement of monetary assets and liabilities by our
Note 1 to the consolidated financial statements included in Item 8 of this
Report.
27--------------------------------------------------------------------------------
Table of Contents
Provision for Income Taxes
2022 2021 2020
Provision for income taxes $ 1,925 $ 1,601 $ 1,308
Effective tax rate 24.6 % 24.0 % 24.4 %
The effective tax rate for 2022 was impacted by net discrete tax benefits of
$130 . This included $94 of excess tax benefits related to stock compensation.
Excluding discrete net tax benefits, the tax rate was 26.2% for 2022.
The effective tax rate for 2021 was impacted by net discrete tax benefits of
$163 . This included $75 of excess tax benefits related to stock compensation,
$70 related to the special cash dividend paid through our 401(k) plan, and $19
related to a reduction in the valuation allowance against certain deferred tax
assets. Excluding net discrete tax benefits, the tax rate was 26.4% for 2021.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our significant sources and uses of cash and cash
equivalents:
2022 2021 2020
Net cash provided by operating activities $ 7,392 $ 8,958 $ 8,861
Net cash used in investing activities (3,915) (3,535) (3,891)
Net cash used in financing activities (4,283) (6,488) (1,147)
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 $11,049 and $12,175 at the end of 2022 and 2021,
respectively. Of these balances, unsettled credit and debit card receivables
represented approximately $2,010 and $1,816 at the end of 2022 and 2021. These
receivables generally settle within four days. Changes in foreign exchange rates
impacted cash and cash equivalents negatively by $249 in 2022, and positively by
$46 and $70 in 2021 and 2020.
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. See Notes
4 and 5 to the consolidated financial statements included in Item 8 of
this Report for amounts outstanding on August 28, 2022 , related to debt and
leases.
Purchase obligations consist of contracts primarily related to merchandise,
equipment, and third-party services, the majority of which are due in the next
12 months. Construction and land purchase obligations consist of contracts
primarily related to the development and opening of new and relocated
warehouses, the majority of which (other than leases) are due in the next 12
months.
Management believes that our cash and investment position and operating cash
flows with capacity under existing and available credit agreements will be
sufficient to meet our liquidity and capital requirements for the foreseeable
future. We believe that our U.S. current and projected asset position is
sufficient to meet our U.S. liquidity requirements.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled$7,392 in 2022, compared to$8,958 in 2021. Our cash flow provided by operations is primarily from net sales and membership fees. Cash flow used in operations generally consists of payments to merchandise suppliers, warehouse operating costs, including payroll and employee benefits, utilities, and credit and debit card processing fees. Cash used in operations also includes payments for income taxes. Changes in our net investment in merchandise inventories (the difference between merchandise inventories and accounts payable) is impacted by 28
--------------------------------------------------------------------------------
Table of Contents
several factors, including how fast inventory is sold, the forward deployment of inventory to accelerate delivery times, payment terms with our suppliers, and early payments to obtain discounts from suppliers.
Cash Flows from Investing Activities
Net cash used in investing activities totaled$3,915 in 2022, compared to$3,535 in 2021, and is primarily related to capital expenditures. Net cash flows from investing activities also includes purchases and maturities of short-term investments.
Capital Expenditures
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 2022, we spent$3,891 on capital expenditures, and it is our current intention to spend approximately$3,800 to$4,000 during fiscal 2023. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents, and short-term investments. We opened 26 new warehouses, including three relocations, in 2022, and plan to open approximately up to 29 additional new warehouses, including four relocations, in 2023. There can be no assurance that current expectations will be realized, and plans are subject to change upon further review of our capital expenditure needs or based on the economic environment.
Cash Flows from Financing Activities
Net cash used in financing activities totaled$4,283 in 2022, compared to$6,488 in 2021. Cash flows used in financing activities primarily related to the payment of dividends, payments to our former joint-venture partner for a dividend and the purchase of their equity interest inTaiwan , totaling$1,050 in the aggregate, repayments of our 2.300% Senior Notes, repurchases of common stock, and withholding taxes on stock awards.
Stock Repurchase Programs
During 2022 and 2021, we repurchased 863,000 and 1,358,000 shares of common stock, at average prices of$511.46 and$364.39 , respectively, totaling approximately$442 and$495 , respectively. These amounts may differ from the stock repurchase balances in the accompanying consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of each fiscal year. Purchases are made from time-to-time, as conditions warrant, in the open market or in block purchases and pursuant to plans under SEC Rule 10b5-1. Repurchased shares are retired, in accordance with the Washington Business Corporation Act. The remaining amount available to be purchased under our approved plan was$2,808 at the end of 2022.
Dividends
Cash dividends declared in 2022 totaled$3.38 per share, as compared to$12.98 per share in 2021. Dividends in 2021 included a special dividend of$10.00 per share, aggregating approximately$4,430 . InApril 2022 , the Board of Directors increased our quarterly cash dividend from$0.79 to$0.90 per share.
Bank Credit Facilities and Commercial Paper Programs
We maintain bank credit facilities for working capital and general corporate purposes. AtAugust 28, 2022 , we had borrowing capacity under these facilities of$1,257 . Our international operations maintain$773 of this capacity under bank credit facilities, of which$176 is guaranteed by the Company. Short-term borrowings outstanding under the bank credit facilities were$88 and$41 at the end of 2022 and 2021. The Company has letter of credit facilities, for commercial and standby letters of credit, totaling$224 . The outstanding commitments under these facilities at the end of 2022 totaled$184 , most of which were standby letters of credit that do not expire or have expiration dates within one year. The bank credit facilities have various expiration dates, most within one year, and we generally intend to renew these 29
--------------------------------------------------------------------------------
Table of Contents
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.
Off-Balance Sheet Arrangements
In the opinion of management, we have no off-balance sheet arrangements that have had or are reasonably likely to have a material current or future effect on our financial condition or financial statements.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance withU.S. generally accepted accounting principles (U.S. GAAP) requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on assumptions that we believe to be reasonable, and we continue to review and evaluate these estimates. For further information on significant accounting policies, see discussion in Note 1 to the consolidated financial statements included in Item 8 of this Report.
Insurance/Self-insurance Liabilities
Claims for employee health-care benefits, workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, inventory loss, and other exposures are funded predominantly through self-insurance. Insurance coverage is maintained for certain risks to seek to limit exposures arising from very large losses. We use different risk management mechanisms, including a wholly-owned captive insurance subsidiary, and participate in a reinsurance program. Liabilities associated with the risks that we retain are not discounted and are estimated by using historical claims experience, demographic factors, severity factors, and other actuarial assumptions. The costs of claims are highly unpredictable and can fluctuate as a result of inflation rates, regulatory or legal changes, and unforeseen developments in claims. While we believe our estimates are reasonable and provide for a certain degree of coverage to account for these variables, actual claims and costs could differ significantly from recorded liabilities. Historically, adjustments to our estimates have not been material.
Recent Accounting Pronouncements
We do not expect that any recently issued accounting pronouncements will have a material effect on our financial statements.
© Edgar Online, source
