Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations
(amounts in millions, except per share, share, and warehouse count data)
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. They include statements that address activities, events, conditions or developments that we expect or anticipate may occur in the future and may relate to such matters as sales growth, changes in comparable sales, cannibalization of existing locations by new openings, price or fee changes, earnings performance, earnings per share, stock-based compensation expense, warehouse openings and closures, capital spending, the effect of adopting certain accounting standards, future financial reporting, financing, margins, return on invested capital, strategic direction, expense controls, membership renewal rates, shopping frequency, litigation, and the demand for our products and services. Forward-looking statements may also be identified by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “likely,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. Such forward-looking statements involve risks and uncertainties that may cause actual events, results, or performance to differ materially from those indicated by such statements. These risks and uncertainties include, but are not limited to, domestic and international economic conditions, including exchange rates, the effects of competition and regulation, uncertainties in the financial markets, consumer and small business spending patterns and debt levels, breaches of security or privacy of member or business information, conditions affecting the acquisition, development, ownership or use of real estate, capital spending, actions of vendors, rising costs associated with employees (generally including health care costs), energy and certain commodities, geopolitical conditions (including tariffs), the ability to remediate material weaknesses in internal control, and other risks identified from time to time in our public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and we do not undertake to update these statements, except as required by law.
This management discussion should be read in conjunction with the management discussion included in our fiscal 2018 Annual Report on Form 10-K, previously filed with the SEC.
OVERVIEW
We operate membership warehouses and e-commerce websites based on the concept that offering our members low prices on a limited selection of nationally-branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. When combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, these volumes and turnover enable us to operate profitably at significantly lower gross margins (net sales less merchandise costs) than most other retailers.
We believe that the most important driver of our profitability is sales growth, particularly comparable sales growth. We define comparable sales as sales from warehouses open for more than one year, including remodels, relocations and expansions, as well as online 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); changes in the cost of gasoline and associated competitive conditions; and changes from the revenue recognition standard. The higher our comparable sales exclusive of these items, the more we can leverage certain of our selling, general and administrative expenses, reducing them as a percentage of sales and enhancing profitability. Generating comparable sales growth is foremost a question of making available the right merchandise at the right prices, a skill that we believe we have repeatedly demonstrated over the long term. Another substantial factor in sales growth is the health of the economies in which we do business, including the effects of inflation or deflation, especially the United States. 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 to our merchandise mix, including increasing the penetration of our private label items and through our 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 can, from time to time, 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, negatively impacting near-term gross margin as a percentage of net sales (gross margin percentage). We believe that our gasoline business draws members, but it generally has a significantly lower gross margin percentage relative to our non-gasoline businesses. A higher penetration of gasoline sales will generally lower our gross margin percentage. 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 selling, general and administrative (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 potential cost increases. While these potential impacts are uncertain, they could have an adverse impact on our results.
We also achieve sales growth by opening new warehouses. As our warehouse base grows, available and desirable potential 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.
Our 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 our ability to control costs. While we believe that we have achieved successes in this area, some significant costs are partially outside our control, most particularly health care and utility expenses. With respect to compensation of our employees, our philosophy is not to seek to minimize their wages and benefits. Rather, we believe that 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 is operated on very low margins, modest changes in various items in the income statement, 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 10
included in Part I, Item 1, of this Report). Certain countries in the Other International segment have relatively higher rates of square footage growth, lower wages and benefits costs as a percentage of country sales, and/or less or no direct membership warehouse competition.
In discussions of our consolidated operating results, we refer to the impact of changes in foreign currencies relative to the U.S. dollar, which relates 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 the
third
quarters of
2019
and
2018
relate to the 12 week fiscal quarters ended
May 12, 2019
, and
May 13, 2018
, respectively. References to the
first thirty-six weeks
of
2019
and
2018
relate to the 36 weeks ended
May 12, 2019
, and
May 13, 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.
Key items for the
third
quarter of
2019
as compared to the
third
quarter of
2018
include:
|
|
|
|
•
|
Net sales increased
7%
to
$33,964
, driven by an increase in comparable sales of
6%
and sales at
23
net new warehouses opened since the end of the
third
quarter of
2018
;
|
|
|
|
|
•
|
Membership fee revenue increased
5%
to
$776
, primarily due to sign-ups at existing and new warehouses and the annual fee increase in the U.S. and Canada in June 2017;
|
|
|
|
|
•
|
Gross margin percentage decreased
six
basis points primarily due to the impact of the new revenue recognition standard on net sales;
|
|
|
|
|
•
|
SG&A expenses as a percentage of net sales decreased
six
basis points primarily due to the impact of the new revenue recognition standard on net sales;
|
|
|
|
|
•
|
The provision for income taxes in the third quarter of 2019 was positively impacted by a non-recurring tax benefit of
$73
, or $0.16 per diluted share;
|
|
|
|
|
•
|
Net income increased
21%
to
$906
, or
$2.05
per diluted share, compared to
$750
, or
$1.70
per diluted share in
2018
;
|
|
|
|
|
•
|
On April 26, 2019, our Board of Directors declared a quarterly cash-dividend of $0.65 per share, an increase from $0.57, which was paid on May 24, 2019; and
|
|
|
|
|
•
|
On
April 26, 2019
, the Board of Directors authorized a new share repurchase program in the amount of
$4,000
.
|
RESULTS OF OPERATIONS
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
36 Weeks Ended
|
|
|
May 12,
2019
|
|
May 13,
2018
|
|
May 12,
2019
|
|
May 13,
2018
|
|
Net Sales
|
$
|
33,964
|
|
|
$
|
31,624
|
|
|
$
|
102,903
|
|
|
$
|
95,020
|
|
|
Changes in net sales
|
|
|
|
|
|
|
|
|
U.S
|
9
|
%
|
|
11
|
%
|
|
10
|
%
|
|
11
|
%
|
|
Canada
|
3
|
%
|
|
14
|
%
|
|
3
|
%
|
|
14
|
%
|
|
Other international
|
4
|
%
|
|
17
|
%
|
|
5
|
%
|
|
18
|
%
|
|
Total Company
|
7
|
%
|
|
12
|
%
|
|
8
|
%
|
|
12
|
%
|
|
Changes in comparable sales:
|
|
|
|
|
|
|
|
|
U.S
|
7
|
%
|
|
10
|
%
|
|
9
|
%
|
|
9
|
%
|
|
Canada
|
1
|
%
|
|
11
|
%
|
|
1
|
%
|
|
10
|
%
|
|
Other international
|
2
|
%
|
|
12
|
%
|
|
2
|
%
|
|
13
|
%
|
|
Total Company
|
6
|
%
|
|
10
|
%
|
|
7
|
%
|
|
10
|
%
|
|
Changes in comparable sales excluding the impact of changes in foreign currency and gasoline prices
(1)
:
|
|
|
|
|
|
|
|
|
U.S
|
6
|
%
|
|
8
|
%
|
|
7
|
%
|
|
7
|
%
|
|
Canada
|
5
|
%
|
|
5
|
%
|
|
6
|
%
|
|
4
|
%
|
|
Other international
|
7
|
%
|
|
6
|
%
|
|
6
|
%
|
|
7
|
%
|
|
Total Company
|
6
|
%
|
|
7
|
%
|
|
7
|
%
|
|
7
|
%
|
_______________
|
|
|
|
(1)
|
Excludes the impact of the revenue recognition standard for the periods ended
May 12, 2019
. See Item 1
Note 1
.
|
Net Sales
Net sales increased
$2,340
or
7%
, and
$7,883
or
8%
during the
third
quarter and
first thirty-six weeks
of
2019
, respectively, compared to the
third
quarter and
first thirty-six weeks
of
2018
. These increases were attributable to an increase in comparable sales of
6%
and
7%
in the
third
quarter and
first thirty-six weeks
of
2019
, respectively, and sales at the
23
net new warehouses opened since the end of the
third
quarter of
2018
.
During the third quarter of 2019, changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately
$427
, or
135
basis points, compared to the
third
quarter of
2018
, attributable to our Other International and Canadian operations. The new revenue recognition standard positively impacted net sales by $
346
, or
110
basis points. Gasoline prices had a slight positive impact on net sales.
During the first thirty-six weeks of 2019, changes in foreign currencies relative to the U.S. dollar negatively impacted net sales by approximately
$1,199
, or
126
basis points, compared to the first thirty-six weeks of
2018
, attributable to our Canadian and Other International operations. The new revenue recognition standard positively impacted net sales by $
865
, or
91
basis points. Changes in gasoline prices also positively impacted net sales by approximately
$240
, or
25
basis points, due to a
2%
increase in the average price per gallon.
Comparable Sales
Comparable sales increased
6%
and
7%
in the
third
quarter and
first thirty-six weeks
of
2019
, respectively, and were positively impacted by increases in shopping frequency and average ticket. Comparable sales for the third quarter and first thirty-six weeks of 2019 were negatively impacted by cannibalization (established warehouses losing sales to our newly opened locations).
Membership Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
36 Weeks Ended
|
|
|
May 12,
2019
|
|
May 13,
2018
|
|
May 12,
2019
|
|
May 13,
2018
|
|
Membership fees
|
$
|
776
|
|
|
$
|
737
|
|
|
$
|
2,302
|
|
|
$
|
2,145
|
|
|
Membership fees as a percentage of net sales
|
2.29
|
%
|
|
2.33
|
%
|
|
2.24
|
%
|
|
2.26
|
%
|
|
Total paid members as of quarter end (000's)
|
53,100
|
|
|
50,900
|
|
|
—
|
|
|
—
|
|
|
Total cardholders as of quarter end (000's)
|
97,200
|
|
|
93,000
|
|
|
—
|
|
|
—
|
|
Membership fees increased
5%
and
7%
in the
third
quarter and
first thirty-six weeks
of
2019
, respectively. This was primarily due to sign-ups at existing and new warehouses and the fee increase (discussed below). Renewal rates are
91%
in the U.S. and Canada and
88%
worldwide.
As previously reported, in fiscal 2017 we increased our membership fees in the U.S. and Canada. We account for membership fee revenue on a deferred basis, recognized ratably over the one-year membership period. These fee increases had a positive impact on revenues during the
third
quarter and
first thirty-six weeks
of
2019
of approximately $
11
and $
72
, respectively.
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
36 Weeks Ended
|
|
|
May 12,
2019
|
|
May 13,
2018
|
|
May 12,
2019
|
|
May 13,
2018
|
|
Net sales
|
$
|
33,964
|
|
|
$
|
31,624
|
|
|
$
|
102,903
|
|
|
$
|
95,020
|
|
|
Less merchandise costs
|
30,233
|
|
|
28,131
|
|
|
91,576
|
|
|
84,481
|
|
|
Gross margin
|
$
|
3,731
|
|
|
$
|
3,493
|
|
|
$
|
11,327
|
|
|
$
|
10,539
|
|
|
Gross margin percentage
|
10.99
|
%
|
|
11.05
|
%
|
|
11.01
|
%
|
|
11.09
|
%
|
Quarterly Results
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 21 basis points, with increases in all core merchandise categories. This measure eliminates the impact of changes in sales penetration and gross margins from our warehouse ancillary and other businesses.
Total gross margin percentage decreased six basis points compared to the
third
quarter of
2018
. Excluding the impacts of the new revenue recognition standard and gasoline price inflation on net sales, gross margin as a percentage of adjusted net sales was 11.10%, an increase of five basis points. This was primarily due to a nine basis point increase across most core merchandise categories, partially offset by the Executive Membership 2% reward program, which negatively impacted gross margin by three basis points, due to increased spending by Executive Members. Warehouse ancillary and other businesses decreased by one basis point.
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 in our
U.S. operations, primarily due to warehouse ancillary and other businesses, partially offset by increases in our core merchandise categories. The segment gross margin percentage in our Canadian operations decreased, primarily due to our core merchandise categories. The segment gross margin percentage in our Other International operations decreased, primarily due to the Executive Membership 2% reward program which was recently introduced in Korea, and our core merchandise categories.
Year-to-date Results
The gross margin of core merchandise categories, when expressed as a percentage of core merchandise sales, increased eight basis points. This was attributable to increases in food and sundries and hardlines partially offset by decreases in softlines.
Total gross margin percentage decreased eight basis points compared to the
first thirty-six weeks
of
2018
. Excluding the impacts of gasoline price inflation and the new revenue recognition standard on net sales, gross margin as a percentage of adjusted net sales was 11.13%, an increase of four basis points from the
first thirty-six weeks
of
2018
. This was primarily due to a 15 basis point increase in our warehouse ancillary and other businesses, predominantly our gasoline business. This increase was partially offset by decreases of four basis points in our core merchandise categories and four basis points due to an adjustment to our estimate of breakage on rewards earned under our co-branded credit card program. Executive Membership 2% reward program negatively impacted gross margin by three basis points, due to increased spending by Executive Members.
The segment gross margin percentage increased in our U.S. operations, primarily due to our warehouse ancillary and other businesses, predominantly our gasoline business, partially offset by our core merchandise categories. The segment gross margin percentage in our Canadian operations decreased due to decreases across all core merchandise categories, except fresh foods, and warehouse ancillary and other businesses. The segment gross margin percentage in our Other International operations decreased, primarily in our core merchandise categories.
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
36 Weeks Ended
|
|
|
May 12,
2019
|
|
May 13,
2018
|
|
May 12,
2019
|
|
May 13,
2018
|
|
SG&A expenses
|
$
|
3,371
|
|
|
$
|
3,155
|
|
|
$
|
10,310
|
|
|
$
|
9,613
|
|
|
SG&A expenses as a percentage of net sales
|
9.92
|
%
|
|
9.98
|
%
|
|
10.02
|
%
|
|
10.12
|
%
|
Quarterly Results
SG&A expenses as a percentage of net sales decreased
six
basis points compared to the
third
quarter of
2018
. Excluding the impacts of the new revenue recognition standard and gasoline price inflation on net sales, SG&A expenses as a percentage of adjusted net sales was 10.03%, an increase of five basis points compared to the prior year. Operating costs related to warehouse, ancillary and other businesses, which includes e-commerce and travel, increased two basis points, primarily due to the wage increases of our U.S. hourly employees that went into effect in June 2018. Central operating costs were higher by two basis points and stock compensation expense was higher by one basis point.
Year-to-date Results
SG&A expenses as a percentage of net sales decreased
10
basis points compared to the
first thirty-six weeks
of
2018
. Excluding the impacts of gasoline price inflation and the new revenue recognition standard on net sales, SG&A expenses as a percentage of adjusted net sales was 10.13%, an increase of one basis point. Stock compensation expense was higher by two basis points and operating costs related to warehouse, ancillary and other businesses, which includes e-commerce and travel, were lower by one basis point.
Preopening Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
36 Weeks Ended
|
|
|
May 12,
2019
|
|
May 13,
2018
|
|
May 12,
2019
|
|
May 13,
2018
|
|
Preopening expenses
|
$
|
14
|
|
|
$
|
8
|
|
|
$
|
45
|
|
|
$
|
37
|
|
|
Warehouse openings, including relocations
|
|
|
|
|
|
|
|
|
United States
|
1
|
|
|
0
|
|
|
9
|
|
|
7
|
|
|
Canada
|
0
|
|
|
0
|
|
|
2
|
|
|
1
|
|
|
Other International
|
2
|
|
|
2
|
|
|
2
|
|
|
2
|
|
|
Total warehouse openings, including relocations
|
3
|
|
|
2
|
|
|
13
|
|
|
10
|
|
Preopening expenses include startup costs 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 openings, the timing of the openings relative to our quarter-end, whether the warehouse is owned or leased, and whether the opening is in an existing, new or international market. For the remainder of fiscal
2019
, we expect to open
13
warehouses, including
two
relocations.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
36 Weeks Ended
|
|
|
May 12,
2019
|
|
May 13,
2018
|
|
May 12,
2019
|
|
May 13,
2018
|
|
Interest expense
|
$
|
35
|
|
|
$
|
37
|
|
|
$
|
105
|
|
|
$
|
111
|
|
Interest expense is primarily related to Senior Notes. In October 2018 we repaid a Guaranteed Senior Note issued by our Japanese subsidiary.
Interest Income and Other, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
36 Weeks Ended
|
|
|
May 12,
2019
|
|
May 13,
2018
|
|
May 12,
2019
|
|
May 13,
2018
|
|
Interest income
|
$
|
27
|
|
|
$
|
16
|
|
|
$
|
81
|
|
|
$
|
45
|
|
|
Foreign-currency transaction gains, net
|
3
|
|
|
20
|
|
|
6
|
|
|
10
|
|
|
Other, net
|
6
|
|
|
5
|
|
|
17
|
|
|
15
|
|
|
Interest income and other, net
|
$
|
36
|
|
|
$
|
41
|
|
|
$
|
104
|
|
|
$
|
70
|
|
Interest income increased for the
third
quarter and
first thirty-six weeks
of
2019
, due to higher interest rates and higher average cash and investment balances. Foreign-currency transaction gains, net, include the revaluation or settlement of monetary assets and liabilities by our Canadian and Other International operations and mark-to-market adjustments for forward foreign-exchange contracts. See Derivatives and Foreign Currency sections in Item 8, Note 1 of our Annual Report on Form 10-K, for the fiscal year ended
September 2, 2018
.
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
36 Weeks Ended
|
|
|
May 12,
2019
|
|
May 13,
2018
|
|
May 12,
2019
|
|
May 13,
2018
|
|
Provision for income taxes
|
$
|
207
|
|
|
$
|
309
|
|
|
$
|
679
|
|
|
$
|
867
|
|
|
Effective tax rate
|
18.5
|
%
|
|
28.8
|
%
|
|
20.7
|
%
|
|
29.0
|
%
|
The effective tax rate for the
third
quarter and
first thirty-six weeks
of
2019
was favorably impacted by the reduction in the U.S. federal corporate tax rate from 35% to 21%, which was in effect for the entire
third
quarter and
first thirty-six weeks
of 2019, as compared to a higher blended rate effective for the
third
quarter and
first thirty-six weeks
of 2018. The effective tax rate for the
first thirty-six weeks
of
2019
included discrete net tax benefits of $165. During the third quarter of 2019, we recognized a net benefit of
$73
related to U.S. taxation of deemed foreign dividends, net of losses of current year foreign tax credits, which impacted the effective tax rate. The tax rate for the first thirty-six weeks of 2019 was
26.8%
, excluding the discrete benefits, but including the impact of the lost foreign tax credits.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our significant sources and uses of cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
36 Weeks Ended
|
|
|
May 12,
2019
|
|
May 13,
2018
|
|
Net cash provided by operating activities
|
$
|
4,063
|
|
|
$
|
4,220
|
|
|
Net cash used in investing activities
|
(1,945
|
)
|
|
(1,852
|
)
|
|
Net cash used in financing activities
|
(1,146
|
)
|
|
(1,014
|
)
|
Our primary sources of liquidity are cash flows from warehouse operations, cash and cash equivalents, and short-term investment balances. Cash and cash equivalents and short-term investments were
$8,167
and
$7,259
at
May 12, 2019
, and
September 2, 2018
, respectively. Of these balances, approximately
$1,460
and
$1,348
represented unsettled credit and debit card receivables, respectively. These receivables generally settle within four days.
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 and, beginning in the second quarter of fiscal 2018, we no longer consider earnings after fiscal 2017 of our non-U.S. consolidated subsidiaries to be indefinitely reinvested.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled
$4,063
in the
first thirty-six weeks
of
2019
, compared to
$4,220
in the
first thirty-six weeks
of
2018
. Cash provided by operations is primarily derived from net sales and membership fees. Cash used in operations generally consists of payments to merchandise vendors, and warehouse operating costs, including payroll and employee benefits, utilities, and debit and credit 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 our inventory is sold, the payment terms with our vendors, and the amount of payables we pay early to obtain favorable discounts from our vendors.
Cash Flows from Investing Activities
Net cash used in investing activities totaled
$1,945
in the
first thirty-six weeks
of
2019
compared to
$1,852
in the
first thirty-six weeks
of
2018
, and primarily related to capital expenditures. Net cash from investing activities also includes purchases and maturities of short-term investments.
Capital Expenditure Plans
Our primary requirements for capital are acquiring land, buildings, and equipment for new and remodeled warehouses. Capital is also required for information systems, manufacturing and distribution facilities, initial warehouse operations and working capital. In the
first thirty-six weeks
of
2019
, we spent
$1,989
on capital expenditures, and it is our current intention to spend approximately $2,800 to $3,100 during fiscal
2019
. We opened
13
new warehouses, including
three
relocations, in the
first thirty-six weeks
of
2019
and plan to open
13
additional new warehouses, including
two
relocations, in the remainder of fiscal
2019
. 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.
Cash Flows from Financing Activities
Net cash used in financing activities totaled
$1,146
in the
first thirty-six weeks
of
2019
compared to
$1,014
in the
first thirty-six weeks
of
2018
. Cash flow used in financing activities primarily related to the payment of dividends, withholding taxes on stock-based awards, and repurchases of common stock. Dividends totaling $752 were paid during the first thirty-six weeks of 2019, of which $250 related to the dividend declared in August 2018.
Stock Repurchase Programs
On
April 26, 2019
, the Board of Directors authorized a new share repurchase program in the amount of
$4,000
, which expires in
April 2023
. During the
first thirty-six weeks
of
2019
and
2018
, we repurchased
903,000
and
1,337,000
shares of common stock, at an average price per share of
$215.94
and
$174.30
, respectively, totaling approximately
$195
and
$233
, respectively. These amounts may differ from the stock repurchase balances in the accompanying condensed consolidated statements of cash flows due to changes in unsettled stock repurchases at the end of a quarter. Purchases are made from time-to-time, as conditions warrant, in the open market or in block purchases and pursuant to plans under SEC Rule 10b5-1. Repurchased shares are retired, in accordance with the Washington Business Corporation Act.
Dividends
On
April 26, 2019
, our Board of Directors declared a quarterly dividend of
$0.65
per share payable to shareholders of record on
May 10, 2019
. The dividend was paid on
May 24, 2019
.
Bank Credit Facilities and Commercial Paper Programs
We maintain bank credit facilities for working capital and general corporate purposes. At
May 12, 2019
, we had borrowing capacity under these facilities of $880, including a $400 revolving line of credit, which expires in June 2019. The Company currently has no plans to draw upon this facility but intends to renew it. Our international operations maintain $353 of the borrowing capacity under bank credit facilities, of which $146 is guaranteed by the Company. There were no outstanding short-term borrowings under the bank credit facilities at the end of the
third
quarter of
2019
or at the end of fiscal
2018
.
The Company has letter of credit facilities, for commercial and standby letters of credit, totaling $234. The outstanding commitments under these facilities at the end of the
third
quarter of
2019
totaled $162, most of which were standby letters of credit with 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
As of the date of this Report, there were no material changes to our contractual obligations outside the ordinary course of business since the end of our last fiscal year.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with U.S. GAAP requires that we make estimates and judgments. We base these on historical experience and on assumptions that we believe to be reasonable. Our critical accounting policies are discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K, for the fiscal year ended
September 2, 2018
. There have been no material changes to the critical accounting policies previously disclosed in that Report.
Recent Accounting Pronouncements
See discussion of Recent Accounting Pronouncements in
Note 1
to the condensed consolidated financial statements included in
Part I, Item 1
of this Report.
Item 3—Quantitative and Qualitative Disclosures About Market Risk
Our direct exposure to financial market risk results from fluctuations in foreign currency exchange rates and interest rates. There have been no material changes to our market risks as disclosed in our Annual Report on Form 10-K, for the fiscal year ended
September 2, 2018
.
Item 4—Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of
May 12, 2019
and, based on their evaluation, have concluded the disclosure controls and procedures were not effective as of that date due to a material weakness in internal control over financial reporting that was disclosed in our Annual Report on Form 10-K for the fiscal year ended September 2, 2018.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the
third
quarter of fiscal 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting except as described below.
Remediation
As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended September 2, 2018, we began implementing a remediation plan to address the material weakness mentioned above. The weakness will not be considered remediated, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal 2019.