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YEAR ENDED AUGUST 31, 2014
2014
Annual
Report
2014

Table of contents

  • Page 1
    Annual Report 2014 2014 YEAR ENDED AUGUST 31, 2014

  • Page 2
    ...Distribution Properties ...Market for Costco Common Stock, Dividend Policy and Stock Repurchase Program ...Five Year Operating and Financial Highlights ...Management's Discussion and Analysis of Financial Condition and Results of Operations ...Executive Officers and Corporate Governance...Management...

  • Page 3
    ... 2011 2012 2013 2014 2010* 2011 2012 Fiscal Year 2013 2014 2010 2011 2012 Fiscal Year 2013 2014 At Fiscal Year End *2010 excludes Mexico *2010 excludes Mexico *All Years Include Mexico Comparable Sales Growth Gold Star Members 14% 12% Membership Membership Business Members 7.0 31...

  • Page 4
    ...execution of our unique business model - continually providing goods and services at the lowest prices - drove the Company's strong financial and operating performance, and created additional opportunities for profitable future growth. Our members' loyalty - as measured by renewal rates and shopping...

  • Page 5
    ... another factor driving "in-store" shopping frequency. Our pharmacy, optical and hearing aid departments all recorded increases in sales and profits in 2014; and provided our members with great quality and savings on a variety of health and wellness products and services. Our pharmacies again...

  • Page 6
    ... square feet. International openings continued our global expansion with new warehouses in seven countries: Mexico (Monterrey III), Canada (St. Albert, Alberta; Central Mississauga, Ontario; and Guelph, Ontario); Australia (Ringwood, Crossroads, and North Lakes); Japan (Hitachinaka and Izumi); Korea...

  • Page 7
    ... package in the retail industry. And we never lose sight of our commitment to our stakeholders - providing our members with exceptional products and services, taking care of our employees, partnering with our suppliers, and rewarding our shareholders - not just for today, but for the long term...

  • Page 8
    ... 3 Wayne Wharton NEW MEXICO (3) Albuquerque N.W. Albuquerque S.E. Albuquerque NEW YORK (17) Brooklyn Commack Holbrook Lawrence Manhattan Melville Nanuet Nesconset New Rochelle Port Chester Queens Rego Park Riverhead Staten Island Syracuse Westbury Yonkers NORTH CAROLINA (7) Charlotte Durham...

  • Page 9
    ...(11) W. Bountiful S. Jordan Lehi Murray S. Ogden Orem St. George Salt Lake City Sandy Spanish Fork West Valley VERMONT (1) Colchester VIRGINIA (16) Chantilly Chesterfield Fairfax Fredericksburg Harrisonburg W. Henrico Leesburg Manassas SOUTH ZA ZAMA KOREA (11) Busan Cheonan Daegu Daejeon Euijeongbu...

  • Page 10
    ... warehouse openings and closures, the amount we expect to spend on our expansion plans, the effect of adopting certain accounting standards, future financial reporting, financing, margins, return on invested capital, strategic direction, expense controls, membership renewal rates, shopping frequency...

  • Page 11
    ... markets and direct mail to prospective new members. Ongoing promotional programs primarily relate to coupon mailers, The Costco Connection (a magazine we publish for our members), and e-mails to members promoting selected merchandise. Our warehouses generally operate on a seven-day, 69-hour week...

  • Page 12
    ... members to shop more frequently. The following table indicates the number of ancillary businesses in operation at fiscal year-end: 2014 2013 2012 Food Courts...Photo Processing Centers ...Optical Dispensing Centers ...Pharmacies ...Hearing-Aid Centers ...Gas Stations ...Number of warehouses...

  • Page 13
    ... to upgrade to an Executive membership in the U.S., Canada, Mexico, and U.K., for an annual fee of approximately $110. Our Executive members qualify for a 2% reward on qualified purchases (up to a maximum of approximately $750 per year), which can be redeemed only at Costco warehouses. This program...

  • Page 14
    ..., in new and replacement refrigeration and air conditioning systems. We have completed a greenhouse gas emissions inventory for our operations in the U.S., Puerto Rico, Canada, the United Kingdom and Australia that meets standards established by the GHG Protocol Corporate Accounting and Reporting...

  • Page 15
    ...negative trends in operating expenses, including increased labor, healthcare and energy costs; failing to meet targets for warehouse openings; cannibalizing existing locations with new warehouses; shifts in sales mix toward lower gross margin products; changes or uncertainties in economic conditions...

  • Page 16
    ... manage these and other similar factors effectively may affect our ability to timely build or lease new warehouses, which could have a material adverse effect on our future growth and profitability. We seek to expand our business in existing markets in order to attain a greater overall market share...

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

  • Page 18
    ... of credit and debit cards, and our proprietary cash card. As we offer new payment options to our members, we may be subject to additional rules, regulations, compliance requirements, and higher fraud losses. For certain payment methods, we pay interchange and other related card acceptance fees...

  • Page 19
    ... retailers 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 customers to comparison shop with...

  • Page 20
    ... of continued supply, pricing or access to new products, and any vendor could at any time change the terms upon which it sells to us or discontinue selling to us. Member demands may lead to out-of-stock positions of our merchandise leading to loss of sales and profits. We purchase our merchandise...

  • Page 21
    ... our comparable warehouse sales growth rates, margins, earnings and earnings per share or new warehouse openings could cause the market price of our stock to decline, as could changes in our dividend or stock repurchase policies. Legal and Regulatory Risks Our international operations subject us...

  • Page 22
    ... 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 and regulations relating to the use...

  • Page 23
    PROPERTIES Warehouse Properties At August 31, 2014 we operated 663 membership warehouses: NUMBER OF WAREHOUSES Lease Land and/or (1) Building Own Land and Building Total United States and Puerto Rico ...Canada ...Mexico ...United Kingdom...Japan ...Korea ...Taiwan ...Australia ...Spain ...Total ...

  • Page 24
    MARKET FOR COSTCO COMMON STOCK Market Information and Dividend Policy Our common stock is traded on the NASDAQ Global Select Market under the symbol "COST." On October 8, 2014, we had 8,315 stockholders of record. The following table shows the quarterly high and low closing sale prices as reported ...

  • Page 25
    ... the Company: Amazon.com, Inc.; The Home Depot, Inc.; Lowe's Companies; Best Buy Co., Inc.; Staples Inc.; Target Corporation; Kroger Company; and Wal-Mart Stores, Inc. The information provided is from August 30, 2009 through August 31, 2014. COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG COSTCO...

  • Page 26
    ... share, and warehouse count data) Aug. 31, 2014 As of and for the year ended (52 weeks) Sept. 1, 2013 (52 weeks) Sept. 2, 2012 (53 weeks) Aug. 28, Aug. 29, 2011 2010 (52 weeks) (52 weeks) RESULTS OF OPERATIONS Net sales ...$110,212 Merchandise costs ...98,458 11,754 Gross margin ...Membership fees...

  • Page 27
    ... comparable warehouse sales as sales from warehouses open for more than one year, including remodels, relocations and expansions, as well as online sales related to websites operating for more than one year. Comparable sales growth is achieved through increasing the shopping frequency from new and...

  • Page 28
    ...at warehouses opened in 2013 and 2014. Net and comparable sales were negatively impacted by changes in certain foreign currencies relative to the U.S. dollar; Membership fees increased 6% to $2,428, primarily due to membership sign-ups at existing and new warehouses and executive membership upgrades...

  • Page 29
    ... OF OPERATIONS Net Sales 2014 2013 2012 Net Sales ...$110,212 Increases in net sales: U.S...7% International ...8% Total Company ...Increases in comparable warehouse sales(1): U.S...International ...Total Company ...Increases in comparable warehouse sales excluding the impact of gasoline price and...

  • Page 30
    ... of net sales...2014 vs. 2013 $ 2,428 6% 2.20% $2,286 10 % 2.22 % $2,075 11% 2.13% Membership fees increased 6% in 2014. This increase was primarily due to membership sign-ups at existing and new warehouses and increased number of upgrades to our higher-fee Executive Membership program. The...

  • Page 31
    ... in fresh foods as a result of our continued investment in merchandise pricing. Warehouse ancillary and other businesses gross margin when expressed as a percentage of net sales increased by six basis points, predominately in our optical and hearing aid businesses. Additionally, gross margin was...

  • Page 32
    ... 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. During the fourth quarter we opened our first warehouse in Spain. Interest Expense 2014 2013 2012...

  • Page 33
    ...and short-term investments were $7,315 and $6,124 at the end of 2014 and 2013, respectively. Of these balances, approximately $1,383 and $1,254 at the end of 2014 and 2013, respectively, represented debit and credit card receivables, primarily related to sales in the last week of our fiscal year. In...

  • Page 34
    ...437 in 2013. Our cash flow provided by operations is primarily derived from net sales and membership fees. Our cash flow used in operations generally consists of payments to our merchandise vendors, warehouse operating costs including payroll and employee benefits, credit card processing fees, and...

  • Page 35
    ... were as follows: Payments Due by Fiscal Year Contractual obligations 2015 (1) 2016 to 2017 2018 to 2019 2020 and thereafter Total Purchase obligations (merchandise) ...Long-term debt(2) ...Operating leases (3) ...Purchase obligations (property, equipment, services and other)(4) ...Capital...

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

  • Page 37
    ..., a whollyowned 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
    ... market conditions, and other factors. As of the end of 2014, the majority of our long-term debt is fixed rate Senior Notes, carried at $4,596. Fluctuations in interest rates may affect the fair value of the fixed-rate debt. See Note 4 to the consolidated financial statements included in this Report...

  • Page 39
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The executive officers of Costco, their position, and ages are listed below. All executive officers have 25 or more years of service with the Company. Name Position Executive Officer Since Age W. Craig Jelinek ...President and Chief Executive Officer. Mr...

  • Page 40
    ... 31, 2014. 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, Chief Executive Officer and Director...

  • Page 41
    ... REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Costco Wholesale Corporation: We have audited the accompanying consolidated balance sheets of Costco Wholesale Corporation and subsidiaries as of August 31, 2014 and September 1, 2013, and the related consolidated statements...

  • Page 42
    ...have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of August 31, 2014 and September 1, 2013, and the related consolidated statements of income, comprehensive income, equity, and cash flows...

  • Page 43
    COSTCO WHOLESALE CORPORATION CONSOLIDATED BALANCE SHEETS (amounts in millions, except par value and share data) August 31, 2014 ASSETS CURRENT ASSETS Cash and cash equivalents ...$ 5,738 Short-term investments ...Receivables, net ...Merchandise inventories ...Deferred income taxes and other current ...

  • Page 44
    COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (amounts in millions, except per share data) 52 Weeks Ended August 31, 2014 REVENUE Net sales ...Membership fees ...Total revenue ...OPERATING...137 52 Weeks Ended September 1, 2013 53 Weeks Ended September 2, 2012 $ $ 4.69 4....

  • Page 45
    COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (amounts in millions) 52 Weeks Ended August 31, 2014 $ 2,088 49 2,137 33 $ 2,104 52 Weeks Ended September 1, 2013 $ 2,061 (278 ) 1,783 22 $ 1,761 53 Weeks Ended September 2, 2012 $ 1,767 (96 ) 1,671 24 $ 1,647 NET ...

  • Page 46
    COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF EQUITY (amounts in millions) Common Stock Shares (000's) BALANCE AT AUGUST 28, 2011 ...434,266 Net income ...Foreign-currency translation adjustment and other, net ...Stock-based compensation ...Stock options exercised, including tax effects ...

  • Page 47
    ... merchandise inventories ...Increase in accounts payable ...Other operating assets and liabilities, net ...Net cash provided by operating activities ...CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments ...Maturities and sales of short-term investments ...Additions to property...

  • Page 48
    ...(Costco or the Company), a Washington corporation, and its subsidiaries operate membership warehouses based on the concept that offering members low prices on a limited selection of nationally branded and select private-label products in a wide range of merchandise categories will produce high sales...

  • Page 49
    ... and debit card transactions with settlement terms of up to one week. Credit and debit card receivables were $1,383 and $1,254 at the end of 2014 and 2013, respectively. Short-Term Investments In general, short-term investments have a maturity at the date of purchase of three months to five years...

  • Page 50
    .... The Company's long-term financial liabilities consist of long-term debt, which is recorded on the balance sheet at issuance price and adjusted for any applicable unamortized discounts or premiums. Receivables, Net Receivables consist of the following at the end of 2014 and 2013: 2014 2013 Vendor...

  • Page 51
    ..., generally three to seven years. Other Assets Other assets consist of the following at the end of 2014 and 2013: 2014 2013 Prepaid rents, lease costs, and long-term deposits ...Receivables from governmental entities ...Cash surrender value of life insurance ...Other ...Other Assets ... $ 273...

  • Page 52
    ... 2014 2013 Insurance-related liabilities ...$ 371 Deferred sales ...250 Cash card liability ...173 Tax-related liabilities ...136 Returns reserve...122 Other ...169 Other current liabilities ...$ 1,221 Derivatives $ 346 204 159 77 95 208 $ 1,089 The Company is exposed to foreign-currency exchange...

  • Page 53
    ... of forward foreign-exchange contracts. Revenue Recognition The Company generally recognizes sales, which include shipping fees where applicable, net of returns, at the time the member takes possession of merchandise or receives services. When the Company collects payments from customers prior...

  • Page 54
    .... The net reduction in sales was $1,051, $970, and $900 in 2014, 2013, and 2012, respectively. Merchandise Costs Merchandise costs consist of the purchase price of inventory sold, inbound and outbound shipping charges and all costs related to the Company's depot operations, including freight from...

  • Page 55
    ... 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 expire...

  • Page 56
    ... share outstanding and is applied to the number of shares repurchased. Any remaining amount is allocated to retained earnings. See Note 6 for additional information. Recently Adopted Accounting Pronouncements In February 2013, the Financial Accounting Standards Board (FASB) issued guidance related...

  • Page 57
    ... the Company's consolidated financial statements or disclosures. Recent Accounting Pronouncements Not Yet Adopted In April 2014, the FASB issued guidance that changed the criteria for reporting discontinued operations, as well as requiring new disclosures about discontinued operations and disposals...

  • Page 58
    ... available-for-sale securities were not material in 2014, 2013, and 2012. At the end of 2014 and 2012, the Company's available-for-sale securities that were in a continuous unrealized-loss position were not material, and at the end of 2013, the Company had none. There were no gross unrealized gains...

  • Page 59
    ... Rate During the Fiscal Year Category of Aggregate Short-term Borrowings 2014: Bank borrowings: Japan ...Bank overdraft facility: United Kingdom...2013: Bank borrowings: Japan ...Bank overdraft facility: United Kingdom...Long-Term Debt In December 2012, the Company issued $3,500 in aggregate...

  • Page 60
    ...082 Maturities of long-term debt during the next five fiscal years and thereafter are as follows: 2015 ...$ 0 2016 ...1,296 2017 ...1,099 2018 ...1,191 2019 ...96 Thereafter...1,411 Total ...$ 5,093 Note 5-Leases Operating Leases The aggregate rental expense for 2014, 2013, and 2012 was $230, $225...

  • Page 61
    ... summarizes the Company's stock repurchase activity: Shares Repurchased (000's) Average Price per Share Total Cost 2014 ...2013 ...2012 ... 2,915 357 7,272 $114.45 96.41 84.75 $334 34 617 These amounts may differ from the stock repurchase balances in the accompanying consolidated statements of...

  • Page 62
    ... The Sixth Restated 2002 Stock Incentive Plan (Sixth Plan), amended in the second quarter of fiscal 2012, is the Company's only stock-based compensation plan with shares available for grant at the end of 2014. Each share issued in respect of stock awards is counted as 1.75 shares toward the limit of...

  • Page 63
    ...the exercise price and market value of common stock measured at each individual exercise date. Summary of Stock-Based Compensation The following table summarizes stock-based compensation expense and the related tax benefits under the Company's plans: 2014 2013 2012 Stock-based compensation expense...

  • Page 64
    ... and other employee stock programs were allocated to equity attributable to Costco in the amount of $84, $59, and $65, in 2014, 2013, and 2012, respectively. The reconciliation between the statutory tax rate and the effective rate for 2014, 2013, and 2012 is as follows: 2014 2013 2012 Federal taxes...

  • Page 65
    ... Retirement Plan owned 22,600,000 shares of Company stock through an ESOP. Dividends paid on these shares are deductible for U.S. income tax purposes. The components of the deferred tax assets (liabilities) are as follows: 2014 2013 Equity compensation ...$ 85 Deferred income/membership fees ...98...

  • Page 66
    ... used in computing net income per share and the effect on net income and the weighted average number of shares of potentially dilutive common shares outstanding (shares in 000's): 2014 2013 2012 Net income available to common stockholders after assumed conversions of dilutive securities ...$ 2,058...

  • Page 67
    ... in the United States denied promotion to warehouse general manager or assistant general manager since January 3, 2002. This class is less than 1,300 people. In February 2014 the court granted preliminary approval of a proposed settlement. Any payments to class members under the proposed settlement...

  • Page 68
    ... of Alabama, Arizona, California, Florida, Georgia, Kentucky, Nevada, New Mexico, North Carolina, South Carolina, Tennessee, Texas, Utah, and Virginia. Other than payments to class representatives, the settlement does not provide for cash payments to class members. On September 22, 2011, the court...

  • Page 69
    ... in the operation of membership warehouses in the U.S., Canada, Mexico, U.K., Japan, Australia, and Spain and through majority-owned subsidiaries in Taiwan and Korea. The Company's reportable segments are largely based on management's organization of the operating segments for operational decisions...

  • Page 70
    ... quarterly results of operations for 2014 and 2013. 52 Weeks Ended August 31, 2014 First Quarter (12 Weeks) Second Quarter (12 Weeks) Third Quarter (12 Weeks) Fourth Quarter (16 Weeks) Total (52 Weeks) REVENUE Net sales ...$ 24,468 $ 25,756 $ 25,233 $ 34,755 $110,212 Membership fees ...549 550 561...

  • Page 71
    ... (Unaudited) (Continued) 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 ...23,715 OPERATING EXPENSES Merchandise costs ...20...

  • Page 72
    ... Resources and Risk Management Roger A. Campbell Senior Vice President, International Operations Richard C. Chavez Senior Vice President, Costco Wholesale Industries & Business Development Victor A. Curtis Senior Vice President, Pharmacy Richard Delie Senior Vice President, Merchandising - Non-Foods...

  • Page 73
    ... Tim Murphy GMM - Foods - Bay Area Region Robert Murvin GMM - Foods - Texas Region Robert E. Nelson Financial Planning & Investor Relations Pietro Nenci GMM - Corporate Foods - Canadian Division Patrick J. Noone Country Manager - Australia Mario Omoss Operations - San Diego Region Frank Padilla GMM...

  • Page 74
    ...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 relations questions to [email protected]...

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