warehouse count data)
Overview
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 (food and sundries, hardlines, softlines, and fresh
foods), warehouse ancillary and other businesses. 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 (primarily impacting our U.S. and Canadian operations).
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, especially the 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, particularly China and the United
States, have created uncertainty with respect to how tariffs will affect the
costs of some of our merchandise. The degree of our exposure is dependent on
(among other things) the type of goods, rates imposed, and timing of the
tariffs. The impact to our net sales and gross margin will be influenced in part
by our merchandising and pricing strategies in response to cost increases. While
these potential impacts are uncertain, they could have an adverse impact on our
results.
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
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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 business.
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 our U.S., Canada, and Other
International operating segments (see   Note 12   to the consolidated financial
statements included in Item 8 of this Report). Certain countries in the Other
International segment have relatively higher rates of square footage growth,
lower wage and benefit costs as a percentage of country sales, less or no direct
membership warehouse competition, and may lack an e-commerce business.
In discussions of our consolidated operating results, we refer to the impact of
changes in foreign currencies relative to the U.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 into
U.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 to August 31. References to 2020,
2019, and 2018 relate to the 52-week fiscal years ended August 30, 2020,
September 1, 2019, and September 2, 2018, respectively. Certain percentages
presented are calculated using actual results prior to rounding. Unless
otherwise noted, references to net income relate to net income attributable to
Costco.
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.
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Highlights for 2020 included:
•We opened 16 new warehouses, including 3 relocations: 9 new in the U.S., 3 new
in our Other International segment, and 1 net new location in our Canadian
segment, compared to 25 new warehouses, including 5 relocations in 2019;
•Net sales increased 9% to $163,220 driven by a 8% increase in comparable sales
and sales at new warehouses opened in 2019 and 2020;
•Membership fee revenue increased 6% to $3,541, primarily due to membership
sign-ups at existing and new warehouses;
•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;
•Net income increased 9% to $4,002, or $9.02 per diluted share compared to
$3,659, or $8.26 per diluted share 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
•In April 2020, the Board of Directors approved an increase in the quarterly
cash dividend from $0.65 to $0.70 per share.

COVID-19


On March 11, 2020, the World Health Organization announced that COVID-19
infections had become a pandemic, and shortly afterward the U.S. declared a
National Emergency. The outbreak has led to widespread and continuing impacts on
the global economy and is affecting many aspects of our business and the
operations of others with which we do business. In our response to the pandemic
and in an effort to protect our members and employees, we have taken several
measures, as described in Item 1A Risk Factors, and their implications on our
results of operations have impacted us across all our reportable segments to
varying degrees. Throughout the pandemic our warehouses have largely remained
open as a result of being deemed an "essential business" in most markets and
resulted in strong sales increases in our food and sundries and fresh foods
merchandise categories compared to pre-pandemic time periods. This growth in
certain of our core business categories has led to improved gross margin and
SG&A percentages as we leveraged these sales to achieve greater efficiency. Our
e-commerce business has also benefited, as more members have shopped online
during the pandemic. Conversely, we have experienced decreases in both the sales
and profitability of many of our ancillary and other businesses due to temporary
closures or limited demand. Additionally, we paid $564 in incremental wage and
sanitation costs during 2020 related to COVID-19.

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RESULTS OF OPERATIONS
Net Sales
                                                              2020               2019               2018
Net Sales                                                 $ 163,220          $ 149,351          $ 138,434
Changes in net sales:
U.S.                                                              9  %               9  %               9  %
Canada                                                            5  %               3  %              10  %
Other International                                              13  %               5  %              14  %
Total Company                                                     9  %               8  %              10  %
Changes in comparable sales:
U.S.                                                              8  %               8  %               9  %
Canada                                                            5  %               2  %               9  %
Other International                                               9  %               2  %              11  %
Total Company                                                     8  %               6  %               9  %
Increases in comparable sales excluding the impact of
changes in foreign currency and gasoline prices(1):
U.S.                                                              9  %               6  %               7  %
Canada                                                            7  %               5  %               4  %
Other International                                              11  %               6  %               7  %
Total Company                                                     9  %               6  %               7  %


_______________
(1)Excluding the impact of the revenue recognition standard for the year ended
September 1, 2019.
Net Sales
Net sales increased $13,869 or 9% during 2020, primarily due to an 8% increase
in comparable sales and sales at new warehouses opened in 2019 and 2020. During
the second half of 2020, we experienced a significant sales shift from certain
of our ancillary and other businesses to our core merchandise categories,
primarily food and sundries and fresh foods, as a result of COVID-19. This shift
was largely driven by price deflation and lower volume in our gasoline business;
temporary closures of most of our optical, hearing aid and photo departments;
limited service in our food courts; and minimal demand in our travel business.
Changes in gasoline prices negatively impacted net sales by $1,504, or 101 basis
points, compared to 2019, due to a 10% decrease in the average price per gallon.
The volume of gasoline sold decreased approximately 4%, negatively impacting net
sales by $699, or 47 basis points. Changes in foreign currencies relative to the
U.S. dollar negatively impacted net sales by approximately $663, or 44 basis
points, compared to 2019, attributable to our Canadian and Other International
Operations.
Comparable Sales
Comparable sales increased 8% during 2020 and were positively impacted by
increases in average ticket. While traffic increased slightly in 2020, it
decreased in the second half of the year due to capacity restrictions and
regulations related to COVID-19. There was an increase of 50% in e-commerce
comparable sales in 2020, with an increase of 80% in the second half of the
year.
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Membership Fees
                                                   2020          2019          2018
Membership fees                                 $ 3,541       $ 3,352       $ 3,142
Membership fees increase                              6  %          7  %         10  %
Membership fees as a percentage of net sales       2.17  %       2.24  %

2.27 %




The increase in membership fees was primarily due to membership sign-ups at
existing and new warehouses. At the end of 2020, our member renewal rates were
91% in the U.S. and Canada and 88% worldwide. Our renewal rate 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
                               2020            2019            2018
Net sales                  $ 163,220       $ 149,351       $ 138,434
Less merchandise costs       144,939         132,886         123,152
Gross margin               $  18,281       $  16,465       $  15,282
Gross margin percentage        11.20  %        11.02  %        11.04  %


The gross margin of our core merchandise categories (food and sundries,
hardlines, softlines and fresh foods), when expressed as a percentage of core
merchandise sales (rather than total net sales), increased 16 basis points,
primarily due to increases in fresh foods and softlines, partially offset by a
decrease in hardlines. This measure eliminates the impact of changes in sales
penetration and gross margins from our warehouse ancillary and other businesses.
Fresh foods gross margin increased as a result of efficiencies from increased
sales, partially offset by operating losses from our poultry complex.
Total gross margin percentage increased 18 basis points compared to 2019.
Excluding the impact of gasoline price deflation on net sales, gross margin
percentage was 11.10%, an increase of eight basis points. This increase was
primarily due to a 32 basis point increase in our core merchandise categories,
predominantly fresh foods and food and sundries, partially offset by a decrease
in softlines and hardlines. This increase was also positively impacted by our
co-branded credit card program, which included an adjustment in 2019 to our
estimate of breakage on rewards earned. These increases were partially offset by
a decrease of 14 basis points in our warehouse ancillary and other businesses,
predominantly certain ancillary businesses that were negatively impacted by
COVID-19 related closures or restrictions. However, certain of our ancillary and
other businesses, such as tire shop, gasoline and e-commerce businesses, did
improve. Gross margin was also negatively impacted by incremental wage and
sanitation costs related to COVID-19 of six basis points, a reserve for certain
inventory of three basis points, and increased spending by members under the
Executive Membership 2% reward program of one basis point. Changes in foreign
currencies relative to the U.S. dollar negatively impacted gross margin by
approximately $68 in 2020.
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), was impacted by increases in fresh foods and
food and sundries and decreases in softlines and hardlines in each of our U.S.,
Canadian, and Other International segments. Each of our segments were also
negatively impacted by the incremental wage and sanitation costs as a result of
COVID-19. The segment gross margin percentage increased in our U.S. operations,
predominantly in our core merchandise categories which includes the impact from
our co-branded credit card program, as discussed above,
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partially offset by certain ancillary businesses that were negatively impacted
by COVID-19 related closures or restrictions. Our Canadian segment gross margin
percentage decreased primarily due to certain of our warehouse ancillary and
other businesses that were negatively impacted by COVID-19 related closures or
restrictions. The segment gross margin percentage increased in our Other
International operations primarily due to core merchandise categories, as
discussed above, and was also positively impacted by certain warehouse ancillary
and other businesses, predominantly e-commerce. These increases were partially
offset by increased spending by members under the Executive Membership 2% reward
program.
Selling, General and Administrative Expenses
                                                2020           2019

2018


SG&A expenses                                $ 16,332       $ 14,994       $ 13,876
SG&A expenses as a percentage of net sales      10.01  %       10.04  %

10.02 %




SG&A expenses as a percentage of net sales decreased three basis points compared
to 2019. SG&A expenses as a percentage of net sales, excluding the impact of
gasoline price deflation, was 9.91%, a decrease of 13 basis points. SG&A
expenses were negatively impacted by approximately $456, or 28 basis points, due
to incremental wage and sanitation costs as a result of COVID-19, and
approximately $24 or one basis point due to costs associated with the
acquisition of Innovel (see   Note 2   to the consolidated financial
statements). Operating costs related to warehouse operations and other
businesses, which include e-commerce and travel, were lower by 26 basis points,
primarily due to leveraging increased sales. SG&A expenses were also benefited
by 13 basis points related to a product tax assessment charge in 2019 which was
partially reversed in 2020. Stock compensation was lower by two basis points,
and central operating costs were lower by one basis point. Our Canadian segment
SG&A percentage was higher compared to 2019 due primarily to the incremental
wage and sanitation costs related to COVID as outlined above. Changes in foreign
currencies relative to the U.S. dollar positively impacted SG&A expenses by
approximately $58.
Preopening
                                                    2020      2019      2018
Preopening expenses                                $ 55      $ 86      $ 68
Warehouse openings, including relocations
United States                                         9        18        17
Canada                                                4         3         3
Other International                                   3         4         5

Total warehouse openings, including relocations 16 25 25




Preopening expenses include costs for startup operations related to new
warehouses and relocations, developments in new international markets, new
manufacturing and distribution facilities, and expansions at existing
warehouses. Preopening expenses vary due to the number of warehouse and facility
openings, the timing of the opening relative to our year-end, whether a
warehouse is owned or leased, and whether openings are in an existing, new, or
international market. In 2020, operations commenced at our new poultry
processing plant, and in 2019, we opened our first warehouse in China.
Interest Expense
                      2020       2019       2018
Interest expense     $ 160      $ 150      $ 159

Interest expense primarily relates to Senior Notes. In December 2019 and February 2020, we repaid $1,200 and $500 in total outstanding principal of the 1.700% and 1.750% Senior Notes, respectively. In


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April 2020, we issued $4,000 in aggregate principal amount of long-term debt
consisting of $1,250 of 1.375% Senior Notes due June 2027; $1,750 of 1.600%
Senior Notes due April 2030; and $1,000 of 1.750% Senior Notes due April 2032. A
portion of the proceeds was used to repay, prior to maturity, $1,000 and $500 of
the 2.150% and 2.250% Senior Notes. For more information on our debt
arrangements refer to   Note 5   to the consolidated financial statements.
Interest Income and Other, Net
                                           2020      2019       2018
Interest income                           $ 89      $ 126      $  75

Foreign-currency transaction gains, net 7 27 23 Other, net

                                  (4)        25         23
Interest income and other, net            $ 92      $ 178      $ 121


The decrease in interest income in 2020 was primarily due to lower interest
rates in the U.S. and Canada, partially offset by higher average cash and
investment balances. Foreign-currency transaction gains, net include the
revaluation and settlement of monetary assets and liabilities and mark-to-market
adjustments for forward foreign-exchange contracts by our Canadian and Other
International operations. See Derivatives and Foreign Currency sections in
  Note 1   to the consolidated financial statements. Other, net was impacted by
a $36 charge related to the repayment of certain Senior Notes, as discussed
above and in   Note 5  .
Provision for Income Taxes
                                 2020          2019          2018
Provision for income taxes    $ 1,308       $ 1,061       $ 1,263
Effective tax rate               24.4  %       22.3  %       28.4  %


The effective tax rate for 2020 included discrete net tax benefits of $81,
including a benefit of $77 due to excess tax benefits from stock compensation.
Excluding these benefits, the tax rate was 25.9% for 2020.
The effective tax rate for 2019 included discrete net tax benefits of $221,
including a benefit of $59 due to excess tax benefits from stock compensation.
This also included a tax benefit of $105 related to U.S. taxation of deemed
foreign dividends, offset by losses of foreign tax credits, which impacted the
effective tax rate. Excluding these benefits, the tax rate was 26.9% for 2019.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our significant sources and uses of cash and cash
equivalents:
                                               2020         2019

2018


Net cash provided by operating activities    $ 8,861      $ 6,356      $ 5,774
Net cash used in investing activities         (3,891)      (2,865)      (2,947)
Net cash used in financing activities         (1,147)      (1,147)      (1,281)


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 $13,305 and $9,444 at the end of 2020 and 2019,
respectively. Of these balances, unsettled credit and debit card receivables
represented approximately $1,636 and $1,434 at the end of 2020 and 2019,
respectively. These receivables generally settle within four days. Cash and cash
equivalents were positively impacted by a change in exchange rates of $70 in
2020, and negatively impacted by $15 and $37 in 2019 and 2018, respectively.
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Management believes that our cash position and operating cash flows 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. We no longer consider
earnings after 2017 of our non-U.S. consolidated subsidiaries to be indefinitely
reinvested.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $8,861 in 2020, compared to
$6,356 in 2019. 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 our 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 several factors,
including how fast inventory is sold, payment terms with our suppliers, and the
amount of payables paid early to obtain discounts from our suppliers.
Cash Flows from Investing Activities
Net cash used in investing activities totaled $3,891 in 2020, compared to $2,865
in 2019, and primarily related to capital expenditures. In 2020, we acquired
Innovel and a minority interest in Navitus. For more information see   Notes 1
and   2   to the consolidated financial statements. Net cash flows from
investing activities also includes maturities and purchases of short-term
investments.
Capital Expenditures
Our primary requirement for capital is 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 2020, we spent $2,810 on capital
expenditures, and it is our current intention to spend approximately $3,000 to
$3,200 during fiscal 2021. These expenditures are expected to be financed with
cash from operations, existing cash and cash equivalents, and short-term
investments. We opened 16 new warehouses, including three relocations, in 2020,
and plan to open approximately 23 additional new warehouses, including three
relocations, in 2021. We have experienced delays in real estate and construction
activities due to COVID-19. 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 current economic environment.
Cash Flows from Financing Activities
Net cash used in financing activities totaled $1,147 in both 2020 and 2019. In
April 2020, we issued $4,000 in aggregate principal amount of Senior Notes as
follows: $1,250 of 1.375% due June 2027; $1,750 of 1.600% due April 2030; and
$1,000 of 1.750% due April 2032. A portion of the proceeds was used to repay,
prior to maturity, the outstanding $1,000 and $500 principal balances on the
2.150% and 2.250% Senior Notes, respectively, at a redemption price plus accrued
interest as specified in the Notes' agreements. The remaining funds are intended
for general corporate purposes.
Financing activities also included $1,200 and $500 repayment of our 1.700% and
1.750% Senior Notes, respectively, payment of dividends, withholding taxes on
stock-based awards, and repurchases of common stock.
Stock Repurchase Programs
During 2020 and 2019, we repurchased 643,000 and 1,097,000 shares of common
stock, at average prices of $308.45 and $225.16, respectively, totaling
approximately $198 and $247, 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
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Business Corporation Act. The remaining amount available to be purchased under
our approved plan was $3,745 at the end of 2020.
Dividends
Cash dividends declared in 2020 totaled $2.70 per share, as compared to $2.44
per share in 2019. Dividends totaling $1,479 were paid during 2020, of which
$286 related to the dividend declared in August 2019. In April 2020, the Board
of Directors increased our quarterly cash dividend from $0.65 to $0.70 per
share. In July 2020, the Board of Directors declared a quarterly cash dividend
in the amount of $0.70 per share, which was paid on August 14, 2020.
Bank Credit Facilities and Commercial Paper Programs
We maintain bank credit facilities for working capital and general corporate
purposes. At August 30, 2020, we had borrowing capacity under these facilities
of $967. Our international operations maintain $500 of the total borrowing
capacity under bank credit facilities, of which $204 is guaranteed by the
Company. There were no outstanding short-term borrowings under the bank credit
facilities at the end of 2020 and 2019.
The Company has letter of credit facilities, for commercial and standby letters
of credit, totaling $183. The outstanding commitments under these facilities at
the end of 2020 totaled $166, 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 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.
Contractual Obligations
At August 30, 2020, our commitments to make future payments under contractual
obligations were as follows:
                                                                              Payments Due by Fiscal Year
                                                                                                              2026 and
Contractual obligations                       2021             2022 to 2023           2024 to 2025           thereafter             Total
Purchase obligations(1)                    $ 12,575          $           9          $           -          $          -          $ 12,584
Long-term debt(2)                               241                  1,163                  1,475                 5,776             8,655
Operating leases (3) (4)                        273                    499                    388                 2,410             3,570
Construction and land obligations               979                     35                      -                     -             1,014
Finance lease obligations(4)                     61                    128                    197                   742             1,128
Purchase obligations (equipment, services
and other)(5)                                   674                    205                     72                   187             1,138
Other(6)                                         60                     36                     28                   108               232
Total                                      $ 14,863          $       2,075          $       2,160          $      9,223          $ 28,321


_______________
(1)Includes open purchase orders primarily related to merchandise and supplies.
(2)Includes contractual interest payments and excludes deferred issuance costs.
(3)Operating lease payments have not been reduced by future sublease income of
$101.
(4)Includes amounts representing interest.
(5)Excludes certain services negotiated at the individual warehouse or regional
level that are not significant and generally contain clauses allowing for
cancellation without significant penalty.
(6)Includes asset retirement obligations and deferred compensation obligations.
The amount excludes $25 of non-current unrecognized tax contingencies and $48 of
other obligations due to uncertainty regarding the timing of future cash
payments.
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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 with U.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 in certain instances 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 over time. 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
See   Note 1   to the consolidated financial statements included in Item 8 of
this Report for a detailed description of recent accounting pronouncements.
Item 7A-Quantitative and Qualitative Disclosures About Market Risk (amounts in
millions)
Our exposure to financial market risk results from fluctuations in interest
rates and foreign currency exchange rates. We do not engage in speculative or
leveraged transactions or hold or issue financial instruments for trading
purposes.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to
our investment holdings that are diversified among various instruments
considered to be cash equivalents, as defined in   Note 1   to the consolidated
financial statements included in Item 8 of this Report, as well as short-term
investments in government and agency securities with effective maturities of
generally three months to five years at the date of purchase. The primary
objective of our investment activities is to preserve principal and secondarily
to generate yields. The majority of our short-term investments are in fixed
interest-rate securities. These securities are subject to changes in fair value
due to interest rate fluctuations.
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Our policy limits investments in the U.S. to direct U.S. government and
government agency obligations, repurchase agreements collateralized by U.S.
government and government agency obligations, U.S. government and government
agency money market funds, and insured bank balances. Our wholly-owned captive
insurance subsidiary invests in U.S. government and government agency
obligations and U.S. government and government agency money market funds. Our
Canadian and Other International subsidiaries' investments are primarily in
money market funds, bankers' acceptances, and bank certificates of deposit,
generally denominated in local currencies.
A 100 basis point change in interest rates as of the end of 2020 would have had
an immaterial incremental change in fair market value. For those investments
that are classified as available-for-sale, the unrealized gains or losses
related to fluctuations in market volatility and interest rates are reflected
within stockholders' equity in accumulated other comprehensive income in the
consolidated balance sheets.
The nature and amount of our long-term debt may vary as a result of business
requirements, market conditions, and other factors. As of the end of 2020,
long-term debt with fixed interest rates was $7,657. Fluctuations in interest
rates may affect the fair value of the fixed-rate debt. See   Note 5   to the
consolidated financial statements included in Item 8 of this Report for more
information on our long-term debt.
Foreign Currency Risk
Our foreign subsidiaries conduct certain transactions in non-functional
currencies, which exposes us to fluctuations in exchange rates. We manage these
fluctuations, in part, through the use of forward foreign-exchange contracts,
seeking to economically hedge the impact of these fluctuations on known future
expenditures denominated in a non-functional foreign-currency. The contracts are
intended primarily to economically hedge exposure to U.S. dollar merchandise
inventory expenditures made by our international subsidiaries whose functional
currency is other than the U.S. dollar. We seek to mitigate risk with the use of
these contracts and do not intend to engage in speculative transactions. For
additional information related to the Company's forward foreign-exchange
contracts, see   Notes 1   and   4   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
August 30, 2020, would have decreased the fair value of the contracts by $111
and resulted in an unrealized loss in the consolidated statements of income for
the same amount.
Commodity Price Risk
We are exposed to fluctuations in prices for energy, particularly electricity
and natural gas, and other commodities used in retail and manufacturing
operations, which we seek to partially mitigate through fixed-price contracts
for certain of our warehouses and other facilities, predominantly in the U.S.
and Canada. We also enter into variable-priced contracts for some purchases of
electricity and natural gas, in addition to some of the fuel for our gas
stations, on an index basis. These contracts meet the characteristics of
derivative instruments, but generally qualify for the "normal purchases and
normal sales" exception under authoritative guidance and require no
mark-to-market adjustment.
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