Costco 2013 Annual Report Download

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YEAR ENDED SEPTEMBER 1, 2013
Annual
Report
2013
2013

Table of contents

  • Page 1
    Annual Report 2013 2013 YEAR ENDED SEPTEMBER 1, 2013

  • Page 2
    ...Map of Warehouse Locations...Business Overview...Risk Factors...Properties: Warehouses, Administration and Merchandise Distribution Properties ...Market for Costco Common Stock, Dividend Policy and Stock Repurchase Program ...Five Year Operating and Financial Highlights...Management's Discussion and...

  • Page 3
    ... 2011* 2012* 2013* 2009 2010 2011* 2012* 2013* At Fiscal Year End *2011, 2012 and 2013 Include Mexico At Fiscal Year End *2011, 2012 and 2013 Include Mexico Average Sales Per Warehouse* (Sales In Millions) Year Opened 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 & Before Totals # of...

  • Page 4
    ... our annual membership fees in November 2011 for the first time in more than five years; strong new member sign-ups, particularly in a number of our international openings; increasing numbers of Executive Members; and continuing strong membership renewal rates (at 90 percent in the U.S. and Canada...

  • Page 5
    ... new locations generated large numbers of new member sign-ups and opening day sales in excess of $1 million. To support these high-volume warehouse operations, provide consistent in-stock positions and provide our members with the lowest possible prices, each of our international divisions operates...

  • Page 6
    ... quality and price of our designer frames and brand-name contact lenses, as well as the professionalism and expertise of our opticians and technicians. With 614 optical centers in operation worldwide, our growth rate in profits surpassed the rate of sales growth in 2013. Likewise, our Costco Hearing...

  • Page 7
    ... quality goods and services. With our global sourcing - now procuring products from more than 40 countries - we are able to provide our members with many items, such as fresh produce, throughout the year. Again in 2013 we expanded our private label, Kirkland Signatureâ„¢ items, providing our members...

  • Page 8
    ... Morrow - Bus. Ctr. Perimeter Town Center HAWAII (7) Hawaii Kai Honolulu Kailua-Kona Kapolei Kauai Maui Waipio IDAHO (5) Boise Coeur d'Alene Nampa Pocatello Twin Falls ILLINOIS (19) Bedford Park Bloomingdale Bolingbrook Chicago South Loop Glenview Lake in the Hills Lake Zurich Lincoln Park Melrose...

  • Page 9
    ...Salt Lake City Sandy Spanish Fork West Valley VERMONT (1) Colchester VIRGINIA (16) Chantilly Chesterfield Fairfax Fredericksburg Harrisonburg W. Henrico Leesburg Manassas Mount Vernon Newington Newport News Norfolk Pentagon City... D.C. PUERTO RICO (4) Bayamón E. Bayamón Caguas Carolina CANADA (87...

  • Page 10
    ...existing locations by new openings, price or fee changes, earnings performance, earnings per share, stock-based compensation expense, warehouse openings and closures, the amount we expect to spend on our expansion plans, the effect of adopting certain accounting standards, future financial reporting...

  • Page 11
    ... direct marketing programs (such as The Costco Connection, a magazine we publish for our members, coupon mailers, emails from costco.com, costco.ca, and costco.co.uk, and handouts) to existing members promoting selected merchandise. Our warehouses generally operate on a seven-day, 69-hour week, open...

  • Page 12
    ... services and encourage members to shop more frequently. The following table indicates the number of ancillary businesses in operation at fiscal year-end: 2013 2012 2011 Food Court ...One-Hour Photo Centers ...Optical Dispensing Centers ...Pharmacies ...Hearing-Aid Centers ...Gas Stations ...Number...

  • Page 13
    ... employee relations to be very good. Competition Our industry is highly competitive, based on factors such as price, merchandise quality and selection, warehouse location and member service. We compete with over 800 warehouse club locations across the U.S. and Canada (primarily Wal-Mart's Sam's Club...

  • Page 14
    ... warehouse energy management systems; refining our packaging design initiatives and the "cube efficiency" of our merchandise distribution systems; and further developing our recycling and waste stream management programs. Greenhouse Gas Reduction Program We have implemented a corporate energy policy...

  • Page 15
    ... fuel, maintenance and insurance provided by five transit agencies); and we have six van pools in the San Diego and Los Angeles regional offices. We offer employees subsidies to van pool, and we subsidize employees who purchase monthly bus passes. In addition, we encourage employees to ride bicycles...

  • Page 16
    ... locations with new warehouses; shifts in sales mix toward lower gross margin products; changes or uncertainties in economic conditions in our markets, including higher levels of unemployment and depressed home values; and failing to consistently provide high quality products and innovative new...

  • Page 17
    ... cloud service providers who perform these activities for us. Our online business, which operates websites in the U.S., Canada, and the U.K., depends upon the secure transmission of confidential information over public networks, including information permitting cashless payments. A compromise...

  • Page 18
    ...if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association rules and network operating rules, including data security rules, certification requirements and rules governing electronic funds transfers, which could change over time. If...

  • Page 19
    ... and warehouse club operators compete in a variety of ways, including merchandise pricing, selection and availability, services, location, convenience, and store hours. The evolution of retailing in online and mobile channels has improved the ability of members to comparison shop with digital...

  • Page 20
    ... business, merchandise inventories, sales and profit margins. We depend heavily on our ability to purchase merchandise in sufficient quantities at competitive prices. We have no assurances of continued supply, pricing or access to new products, and any vendor could at any time change the terms upon...

  • Page 21
    ... and economic factors specific to the countries or regions in which we operate which could adversely affect our business, financial condition and results of operations. During 2013, our international operations, including Canada, generated 28% of our consolidated net sales. We plan to continue...

  • Page 22
    ... transfer pricing disputes, or any change in the pronouncements relating to accounting for income taxes could have a material adverse effect on our financial condition and results of operations. Significant changes in, or failure to comply with, federal, state, regional, local and international laws...

  • Page 23
    ...) for the consolidation and distribution of most merchandise shipments to the warehouses, and various processing, packaging, and other facilities to support ancillary and other businesses. We operate 22 depots consisting of approximately 9.0 million square feet. Our executive offices are located in...

  • Page 24
    ... of Equity Securities There was no stock repurchase activity in the fourth quarter of fiscal 2013. Equity Compensation Plans Information related to our Equity Compensation Plans is incorporated herein by reference to Costco's Proxy Statement filed with the Securities and Exchange Commission. 22

  • Page 25
    ... of all dividends. Available Information Our internet website is www.costco.com. We make available through the Investor Relations section of that site, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and...

  • Page 26
    ...Financial Condition and Results of Operations, and our consolidated financial statements and notes thereto, included in this Report. SELECTED FINANCIAL DATA (dollars in millions, except per share and warehouse number data) Sept. 1, 2013 As of and for the year ended (52 weeks) Sept. 2, 2012 (53 weeks...

  • Page 27
    ... this Report). Certain countries in the Other International segment have relatively higher rates of square footage growth, lower wages and benefit costs as a percentage of country sales, and/or less direct membership warehouse competition. Additionally, we operate our lower-margin gasoline business...

  • Page 28
    ... of raising our annual membership fees and membership sign-ups at both existing and new warehouses. These increases were partially offset by the impact of one additional week of fees in 2012; Gross margin (net sales less merchandise costs) as a percentage of net sales increased seven basis points...

  • Page 29
    RESULTS OF OPERATIONS Net Sales 2013 2012 2011 Net Sales ...$102,870 Increases in net sales: U.S...5% International ...8% Total Company ...6% Increases in comparable warehouse sales(1): U.S...6% International ...6% Total Company ...6% Increases in comparable warehouse sales excluding the impact of ...

  • Page 30
    ... to new member sign-ups at warehouses open for more than one year, an extra week of membership fee revenue in fiscal 2012, the impact of raising our annual membership fees, increased penetration of our higher-fee Executive Membership program, and additional member sign-ups at new warehouses opened...

  • Page 31
    ... a result of not meeting certain internal performance targets. This was offset by higher central operating costs, predominately related to the continued investment in the modernization of our information systems in our U.S. operations. Warehouse operating costs as a percentage of net sales was flat...

  • Page 32
    ... expansion of ancillary operations at existing warehouses. Preopening expenses vary due to the number of warehouse openings, the timing of the opening relative to our year-end, whether the warehouse is owned or leased, and whether the opening is in an existing, new, or international market. Interest...

  • Page 33
    ... 2012. Our cash flow provided by operations is primarily derived from net sales and membership fees. Our cash flow used in operations generally consist of payments to our merchandise vendors, warehouse operating costs including payroll and employee benefits, utilities and credit card processing fees...

  • Page 34
    ... fund the special cash dividend. Additionally, cash used for repurchases of our common stock was minimal in 2013. In 2012, cash used also included the repayment of long-term debt and purchase of the non-controlling interest in Costco Mexico. The effect of changes in foreign-exchange rates decreased...

  • Page 35
    ... effect on our financial condition or consolidated financial statements. Stock Repurchase Programs In April 2011, our Board of Directors authorized a stock repurchase program in the amount of $4,000, expiring in April 2015, bringing total authorizations by our Board of Directors since inception of...

  • Page 36
    ...the consolidated financial statements included in this Report. Revenue Recognition We generally recognize sales, which include shipping fees where applicable, net of estimated returns, at the time the member takes possession of merchandise or receives services. When we collect payment from customers...

  • Page 37
    ... a wholly-owned captive insurance subsidiary and participation in a reinsurance pool, to provide for potential liabilities for workers' compensation, general liability, property damage, directors' and officers' liability, vehicle liability, and employee health care benefits. Liabilities associated...

  • Page 38
    ... in Note 1 to the consolidated financial statements included in this Report, as well as short-term investments in government and agency securities, and corporate notes and bonds with effective maturities of generally three months to five years at the date of purchase. The primary objective of our...

  • Page 39
    ... and Syria Human Rights Act of 2012 and Section 13(r) of the Securities Exchange Act of 1934, as amended. As reported in the Company's prior quarterly report filed on Form 10-Q for the quarter ended May 12, 2013, in the fourth quarter of 2013, the Company canceled a business membership at our...

  • Page 40
    ... CEO, chief financial officer or controller, we will disclose (on our website or in a Form 8-K report filed with the SEC) the nature of the amendment or waiver, its effective date, and to whom it applies. Executive Compensation Information related to Executive Compensation and Director Compensation...

  • Page 41
    ...in Rules 13a-15(e) or 15d-15(e) under the Securities and Exchange Act of 1934 (the Exchange Act)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures are...

  • Page 42
    ... 1, 2013. The attestation of KPMG LLP, our independent registered public accounting firm, on the effectiveness of our internal control over financial reporting is included with the consolidated financial statements in this Report. W. Craig Jelinek President and Chief Executive Officer Richard...

  • Page 43
    ... of the Public Company Accounting Oversight Board (United States), Costco Wholesale Corporation's internal control over financial reporting as of September 1, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations...

  • Page 44
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Costco Wholesale Corporation: We have audited Costco Wholesale Corporation's internal control over financial reporting as of September 1, 2013 based on criteria established in Internal Control - ...

  • Page 45
    COSTCO WHOLESALE CORPORATION CONSOLIDATED BALANCE SHEETS (amounts in millions, except par value and share date) September 1, 2013 ASSETS CURRENT ASSETS Cash and cash equivalents ...Short-term investments ...Receivables, net ...Merchandise inventories ...Deferred income taxes and other current assets...

  • Page 46
    COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (amounts in millions, except per share data) 52 Weeks Ended September 1, 2013 REVENUE Net sales ...Membership fees ...Total revenue ...OPERATING EXPENSES Merchandise...867 88,915 53 Weeks Ended September 2, 2012 52 Weeks Ended August 28, ...

  • Page 47
    ... ...COMPREHENSIVE INCOME ATTRIBUTABLE TO COSTCO ...$ 2,061 (278) 1,783 22 $ 1,761 53 Weeks Ended September 2, 2012 $ 1,767 (96) 1,671 24 $ 1,647 52 Weeks Ended August 28, 2011 $ 1,542 275 1,817 104 $ 1,713 The accompanying notes are an integral part of these consolidated financial statements. 45

  • Page 48
    .... . Repurchases of common stock . . Cash dividends declared ...Distribution to noncontrolling interest ...Purchase of noncontrolling interest in Costco Mexico...BALANCE AT SEPTEMBER 2, 2012 ...Net income...Foreign-currency translation adjustment and other, net ...Stock-based compensation ...Stock...

  • Page 49
    ... ...Excess tax benefits on stock-based awards...Repurchases of common stock ...Cash dividend payments ...Purchase of noncontrolling interest in Costco Mexico ...Other financing activities, net ...Net cash provided by (used in) financing activities ...EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH...

  • Page 50
    ... share data and warehouse number data) Note 1-Summary of Significant Accounting Policies Description of Business Costco Wholesale Corporation (Costco or the Company), a Washington corporation, and its subsidiaries operate membership warehouses based on the concept that offering members low prices...

  • Page 51
    ... terms of up to one week. Credit and debit card receivables were $1,254 and $1,161 at the end of 2013 and 2012, respectively. Short-Term Investments In general, short-term investments have a maturity at the date of purchase of three months to five years. Investments with maturities beyond five years...

  • Page 52
    ... consist of tax-related items. Third-party pharmacy receivables generally relate to amounts due from members' insurance companies for the amount above their co-pay, which is collected at the pointof-sale. Receivables are recorded net of an allowance for doubtful accounts. Management determines the...

  • Page 53
    ... or other valuation techniques. Impairment charges, included in selling, general and administrative expenses on the consolidated statements of income, in 2013, 2012, and 2011 were immaterial. The Company capitalizes certain computer software and software development costs incurred in connection with...

  • Page 54
    ... incurred to date. Accounts Payable The Company's banking system provides for the daily replenishment of major bank accounts as checks are presented. Included in accounts payable at the end of 2013 and 2012 are $493 and $565, respectively, representing the excess of outstanding checks over cash on...

  • Page 55
    ... accompanying consolidated statements of income relating to the net changes in the fair value of unsettled forward foreign-exchange contracts were immaterial in 2013, 2012, and 2011. The Company is exposed to fluctuations in prices for the energy it consumes, particularly electricity and natural gas...

  • Page 56
    ...forward foreign-exchange contracts. Revenue Recognition The Company generally recognizes sales, which include shipping fees where applicable, net of estimated returns, at the time the member takes possession of merchandise or receives services. When the Company collects payments from customers prior...

  • Page 57
    ... on the consolidated statements of income. See Note 7 for additional information on the Company's stock-based compensation plans. Leases The Company leases land and/or buildings at warehouses and certain other office and distribution facilities, primarily under operating leases. Operating leases...

  • Page 58
    ... for the convertible note securities. Stock Repurchase Programs Repurchased shares of common stock are retired, in accordance with the Washington Business Corporation Act. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted...

  • Page 59
    ... impact on the Company's consolidated financial statements or disclosures. Note 2-Investments The Company's investments at the end of 2013 and 2012, were as follows: Cost Basis Unrealized Gains, Net Recorded Basis 2013: Available-for-sale: Government and agency securities(1) ...Corporate notes and...

  • Page 60
    ...277 $ 2012: Level 1 Level 2 Money market mutual funds(1) ...Investment in U.S. government and agency securities(2) ...Investment in corporate notes and bonds ...Investment in FDIC-insured corporate bonds ...Investment in asset and mortgage-backed securities ...Forward foreign-exchange contracts...

  • Page 61
    ... during 2013 and 2012 were immaterial. Note 4-Debt Short-Term Borrowings The Company enters into various short-term bank credit facilities, totaling $700 and $438 in 2013 and 2012, respectively. At the end of 2013, $36 was outstanding under these credit facilities, with interest rates ranging...

  • Page 62
    ...In June 2008, the Company's Japanese subsidiary entered into a ten-year term loan with a variable rate of interest of Yen TIBOR (6-month) plus a 0.35% margin (0.68% and 0.78% at the end of 2013 and 2012, respectively) on the outstanding balance. Interest is payable semi-annually and principal is due...

  • Page 63
    ... primarily on reported market values, recently completed market transactions, and estimates based upon interest rates, maturities, and credit. Substantially all of the Company's long-term debt is classified as Level 2. Maturities of long-term debt during the next five fiscal years and thereafter...

  • Page 64
    ...authorization by the Board of Directors approved in April 2011, which expires in April 2015. As of the end of 2013, the total amount repurchased under this plan was $945. The following table summarizes the Company's stock repurchase activity: Shares Repurchased (000's) Average Price per Share Total...

  • Page 65
    ... options was increased. The number of outstanding stock options and RSUs was increased by multiplying the number of outstanding shares by a factor of 1.0763, representing the ratio of the NASDAQ closing price of $105.95 on December 5, 2012, which was the last trading day immediately prior to the ex...

  • Page 66
    ...the Company provides for accelerated vesting for employees and non-employee directors who have attained 25 or more years and five or more years of service with the Company, respectively. Recipients are not entitled to vote or receive dividends on non-vested and undelivered shares. At the end of 2013...

  • Page 67
    ... benefit ...(94) (79) (67) Stock-based compensation expense, net of income taxes ...$ 191 $ 162 $ 140 Note 8-Retirement Plans The Company has a 401(k) Retirement Plan available to all U.S. employees who have completed 90 days of employment. For all U.S. employees, with the exception of California...

  • Page 68
    ... for income taxes for 2013 was favorably impacted by a $62 nonrecurring tax benefit in connection with the special cash dividend of $7.00 per share paid by the Company to employees, who through the Company's 401(k) Retirement Plan owned 22,600,000 shares of Company stock through an ESOP. Dividends...

  • Page 69
    ... timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of these tax positions would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. The total...

  • Page 70
    ...number of shares of potentially dilutive common shares outstanding (shares in 000's): 2013 2012 2011 Net income available to common stockholders after assumed conversions of dilutive securities ...$ Weighted average number of common shares used in basic net income per common share ...RSUs and stock...

  • Page 71
    ... seeking records relating to the Company's receipt and handling of hazardous merchandise returned by Costco members and other records. The Company has entered into a tolling agreement with the United States Attorney's Office. The Environmental Protection Agency (EPA) issued an Information Request to...

  • Page 72
    ...-up materials at its gasoline stations. In July 2013, the matter was settled with, among other things, payment of an immaterial sum to the County of San Diego as partial reimbursement for costs incurred in the matter. The Company has received notices from most states stating that they have appointed...

  • Page 73
    ... subsidiaries in Taiwan and Korea. The Company's reportable segments are largely based on management's organization of the operating segments for operational decisions and assessments of financial performance, which considers geographic locations. The material accounting policies of the segments are...

  • Page 74
    ...results of operations for 2013 and 2012. 52 Weeks Ended September 1, 2013 First Quarter (12 Weeks) Second Quarter (12 Weeks) Third Quarter (12 Weeks) Fourth Quarter (16 Weeks) Total (52 Weeks) REVENUE Net sales ...$ 23,204 Membership fees ...511 Total revenue ...OPERATING EXPENSES Merchandise costs...

  • Page 75
    ... Financial Data (Unaudited) (Continued) 53 Weeks Ended September 2, 2012 First Quarter (12 Weeks) Second Quarter (12 Weeks) Third Quarter (12 Weeks) Fourth Quarter (17 Weeks) Total (53 Weeks) REVENUE Net sales ...$ 21,181 Membership fees ...447 Total revenue ...OPERATING EXPENSES Merchandise...

  • Page 76
    ..., Costco Wholesale Industries & Business Development Victor A. Curtis Senior Vice President, Pharmacy Richard Delie Senior Vice President, Merchandising - Non-Foods John B. Gaherty Senior Vice President, General Manager - Midwest Region Richard A. Galanti Executive Vice President, Chief Financial...

  • Page 77
    ... Canada Region James Stafford GMM - Foods - Northeast Region Richard Stephens Operations - Pharmacy Kimberley L. Suchomel GMM - International John Sullivan Associate General Counsel & Chief Compliance Officer Gary Swindells Country Manager - France Mauricio Talayero Chief Financial Officer - Mexico...

  • Page 78
    ... to Investor Relations, Costco Wholesale Corporation, 999 Lake Drive, Issaquah, Washington 98027. Internet users can access recent sales and earnings releases, the annual report and SEC filings, as well as our Costco Online web site, at http://www.costco.com. E-mail users may direct their investor...

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