What changed in this filing

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Item 1A. Risk Factors

2023-10-11 compared with 2022-10-05 · 44 added, 43 removed, 195 unchanged (31% of the section changed)

8 unchanged sentences

Our financial and operational performance is highly dependent on our U.S.

and Canadian operations, which comprised 87% and 85% of net sales and operating income in 2022, respectively.

and Canadian operations, which comprised 87% and 84% of net sales and operating income in 2023.

Within the U.S., we are highly dependent on our California operations, which comprised 27% of U.S.

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We are undertaking large technology and IT transformation projects.

The failure of these

projects could adversely impact our business plans and potentially impair our day to day business operations.

The failure of these projects could adversely impact our business plans and potentially impair our day to day business operations.

Given the high volume of transactions we process, it is important that we build strong digital resiliency to prevent disruption from events such as power outages, computer and telecommunications failures, viruses, internal or external security breaches, errors by employees, and catastrophic events such as fires, earthquakes, tornadoes and hurricanes.

Any debilitating failure of our critical IT systems, data centers and backup systems would require significant investments in resources to restore IT services and may cause serious impairment in our business operations including loss of business services, increased cost of moving merchandise and failure to provide service to our members.

Any debilitating failure of our critical IT systems,

data centers and backup systems would require significant investments in resources to restore IT services and may cause serious impairment in our business operations including loss of business services, increased cost of moving merchandise and failure to provide service to our members.

We are currently making substantial investments in maintaining and enhancing our digital resiliency and failure or delay in these projects could be costly and harmful to our business.

Failure to deliver IT transformation efforts efficiently and effectively could result in the loss of our competitive position and adversely impact our financial condition and results of operations.

Insufficient IT capacity could also impact our capacity for timely, complete and accurate financial and non-financial reporting required by law.

We are required to maintain the privacy and security of personal and business information amidst multiplying threat landscapes and in compliance with privacy and data protection regulations globally.

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Increased security threats and more sophisticated cyber misconduct pose a risk to our systems, networks, products and services.

We rely upon IT systems and networks, some of which are managed by third parties, in connection with virtually all of our business activities.

Additionally, we collect, store and process sensitive information relating to our business, members, suppliers and employees.

We rely upon IT systems and networks, some of which are managed by or belong to third parties, including suppliers, partners, vendors, and service providers.

Additionally, we collect, store and process sensitive information relating to our business, members, employees, and other third parties.

Operating these IT systems and networks, and processing and maintaining this data, in a secure manner, is critical to our business operations and strategy.

Increased remote work has also increased the possible attack surfaces.

Threats designed to gain unauthorized access to systems, networks and data, both ours and third parties with whom we work, are increasing in frequency and sophistication.

Attempts to gain unauthorized access to systems, networks and data, both ours and third parties with whom we work, are increasing in frequency and sophistication, and in some cases, these attempts are successful.

Cybersecurity attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crimes and advanced persistent threats.

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These threats pose a risk to the security of our systems and networks and the confidentiality, integrity, and availability of our data.

It is possible that our IT systems and networks, or those managed by third parties such as cloud providers or suppliers that otherwise host confidential information, could have vulnerabilities, which could go unnoticed for a period of time.

Our IT systems and networks, or those managed by third parties such as cloud providers or suppliers that otherwise host or have access to confidential information, periodically have vulnerabilities, which may go unnoticed for a period of time.

Our logging capabilities, or the logging capabilities of third parties, are also not always complete or sufficiently detailed, affecting our ability to fully investigate and understand the scope of security events.

While our cybersecurity and compliance efforts seek to mitigate such risks, there can be no guarantee that the actions and controls we and our third-party service providers have implemented and are implementing, will be sufficient to protect our systems, information or other property.

The potential impacts of a material cybersecurity attack include reputational damage, litigation, government enforcement actions, penalties, disruption to systems, unauthorized release of confidential or otherwise protected information, corruption of data, diminution in the value of our investment in IT systems and increased cybersecurity protection and remediation costs.

The potential impacts of a cybersecurity attack include reputational damage, litigation, government enforcement actions, penalties, disruption to systems and operations, unauthorized release of confidential or otherwise protected information, corruption of data, diminution in the value of our investment in IT systems and increased cybersecurity protection and remediation costs.

This could adversely affect our competitiveness, results of operations and financial condition and, critically in light of our business model, loss of member confidence.

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We accept payments using a variety of methods, including select credit and debit cards, cash and checks, co-brand cardholder rebates, Executive member 2% reward certificates, and our shop card.

As we offer new payment options to our members, we may be subject to additional rules, regulations, compliance requirements, and higher fraud losses.

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 acceptance fees, along with additional transaction processing fees.

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If our internal systems are breached or compromised, we may be liable for card re-issuance costs, subject to fines and higher transaction fees and lose our ability to accept card payments from our members, and our business and operating results could be adversely affected.

Our failure to offer payment methods desired by our members could create a competitive disadvantage.

We might sell products that cause illness or injury to our members, harm to our reputation, and expose us to litigation.

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We must attract, train and retain a large and growing number of qualified employees, while controlling related labor costs and maintaining our core values.

Our ability to control labor and benefit costs is subject to numerous internal and external factors, including the continuing impacts of the pandemic, regulatory changes, prevailing wage rates, union relations and healthcare and other insurance costs.

Our ability to control labor and benefit costs is subject to

numerous internal and external factors, including regulatory changes, prevailing wage rates, union relations and healthcare and other insurance costs.

We compete with other retail and non-retail businesses for these employees and invest significant resources in training and motivating them.

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The retail business is highly competitive.

We compete for members, employees, sites, products and services and in other important respects with a wide range of local, regional and national wholesalers and retailers, both in the United States and in foreign countries, including other warehouse-club operators, supermarkets, supercenters, internet retailers, gasoline stations, hard discounters, department and specialty stores and operators selling a single category or narrow range of merchandise.

Such retailers and warehouse club operators compete in a variety of ways, including pricing, selection and availability, services, location, convenience, store hours, and the attractiveness and ease of use of websites and mobile applications.

We compete for members, employees, sites, products and services and in other important respects with a wide range of local, regional and national wholesalers and retailers, both in the United States and in foreign countries, including other warehouse-club operators, supermarkets, supercenters, online retailers, gasoline stations, hard discounters, department and specialty stores and operators selling a single category or narrow range of merchandise.

Such retailers and warehouse club operators compete vigorously and in a variety of ways, including pricing, selection and availability, services, location, convenience, store hours, and the attractiveness and ease of use of websites and mobile applications.

The evolution of retailing in online and mobile channels has improved the ability of customers to comparison shop, which has enhanced competition.

2 unchanged sentences

General economic factors, domestically and internationally, may adversely affect our business, financial condition, and results of operations.

and tax policies including changes in tax rates, duties, tariffs, or other restrictions, sovereign debt crises, pandemics and other health crises, and other economic factors could adversely affect demand for our products and services, require a change in product mix, or impact the cost of or ability to purchase inventory.

Additionally, actions in various countries, particularly China and the United States, have affected the costs of some of our merchandise.

Higher energy and gasoline costs, inflation, levels of unemployment, healthcare costs, consumer debt levels, foreign-currency exchange rates, unsettled financial markets, weaknesses in housing and real estate markets, reduced consumer confidence, changes and uncertainties related to government fiscal, monetary and tax policies including changes in interest rates, tax rates, duties, tariffs, or other restrictions, sovereign debt crises, pandemics and other health crises, and other economic factors could adversely affect demand for our products and services, require a change in product mix, or impact the cost of or ability to purchase inventory.

Additionally, trade-related actions in various countries, particularly China and the United States, have affected the costs of some of our merchandise.

The degree of our exposure is dependent on (among other things) the type of goods, rates imposed, and timing of the tariffs.

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Inflationary factors such as increases in merchandise costs may adversely affect our business, financial condition and results of operations.

If inflation on merchandise increases beyond our ability to control we may not be able to adjust prices to sufficiently offset the effect of the various cost increases without negatively impacting consumer demand.

Certain merchandise categories were impacted by inflation higher than what we have experienced in recent years due to, among other things, the continuing impacts of the pandemic and uncertain economic environment.

We may not be able to adjust prices to sufficiently offset the effect of cost increases without negatively impacting consumer demand.

Suppliers may be unable to timely supply us with quality merchandise at competitive prices or may fail to adhere to our high standards, resulting in adverse effects on our business, merchandise inventories, sales, and profit margins.

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Member demands may lead to out-of-stock positions causing a loss of sales and profits.

We buy from numerous domestic and foreign manufacturers and importers.

We buy from numerous domestic and foreign suppliers and importers.

Our inability to acquire suitable merchandise on acceptable terms or the loss of key suppliers could negatively affect us.

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Because of our efforts to adhere to high-quality standards for which available supply may be limited, particularly for certain food items, the large volumes we demand may not be consistently available.

Our suppliers (and those they depend upon for materials and services) are subject to risks, including labor disputes, union organizing activities, financial liquidity, natural disasters, extreme weather conditions, public health emergencies, supply constraints and general economic and political conditions that could limit their ability to timely provide us with acceptable merchandise.

Our efforts to secure supply could lead to commitments that prove to be unsuccessful in the short and long-term.

Our suppliers (and those they depend upon for materials and services) are subject to risks, including labor disputes, union organizing activities, financial liquidity, natural disasters, extreme weather conditions, public health emergencies, supply constraints and general economic and political conditions and other risks similar to those we face that could limit their ability to timely provide us with acceptable merchandise.

One or more of our suppliers might not adhere to our quality control, packaging, legal, regulatory, labor, environmental or animal welfare standards.

2 unchanged sentences

Fluctuations in foreign exchange rates may adversely affect our results of operations.

During 2022, our international operations, including Canada, generated 27% and 32% of our net sales and operating income, respectively.

During 2023, our international operations, including Canada, generated 27% and 34% of our net sales and operating income.

Our international operations have accounted for an increasing portion of our warehouses, and we plan to continue international growth.

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A portion of the products we purchase is paid for in a currency other than the local currency of the country in which the goods are sold.

Currency fluctuations may increase our merchandise costs and may not be passed on to members.

Consequently, fluctuations in currency exchange rates may adversely affect our results of operations.

Natural disasters, extreme weather conditions, public health emergencies or other catastrophic events could negatively affect our business, financial condition, and results of operations.

Currency fluctuations may increase our merchandise costs and may not be passed on to members and thus may adversely affect our results of operations.

Natural disasters, extreme weather conditions, or other catastrophic events could negatively affect our business, financial condition, and results of operations.

Natural disasters and extreme weather conditions, including those impacted by climate change, such as hurricanes, typhoons, floods, earthquakes, wildfires, droughts;

acts of terrorism or violence, including active shooter situations;

energy shortages;

public health issues, including pandemics and quarantines, particularly in California or Washington state, where our centralized operating systems and administrative personnel are located, could negatively affect our operations and financial performance.

and energy shortages;

particularly in California or Washington state, where our centralized operating systems and administrative personnel are located, could negatively affect our operations and financial performance.

Such events could result in physical damage to our properties, limitations on store operating hours, less frequent visits by members to physical locations, the temporary closure of warehouses, depots, manufacturing or home office facilities, the temporary lack of an adequate work force, disruptions to our IT systems, the temporary or long-term disruption in the supply of products from some local or overseas suppliers, the temporary disruption in the transport of goods to or from overseas, delays in the delivery of goods to our warehouses or depots, and the temporary reduction in the availability of products in our warehouses.

Public health issues, whether occurring in the U.S.

or abroad, could disrupt our operations, disrupt the operations of suppliers or members, or have an adverse impact on consumer spending and confidence levels.

These events could also reduce demand for our products or make it difficult or impossible to procure products.

We may be required to suspend operations in some or all of our locations, which could have a material adverse effect on our business, financial condition and results of operations.

The COVID-19 pandemic continues to affect our business, financial condition and results of operations in many respects.

The continuing impacts of the COVID-19 pandemic are highly unpredictable and volatile and are affecting certain business operations, demand for our products and services, in-stock positions, costs of doing business, availability of labor, access to inventory, supply chain operations, our ability to predict future performance, exposure to litigation, and our financial performance, among other things.

Pandemics and other health crises, including COVID-19, could affect our business, financial condition and results of operations in many respects.

The emergence, severity, magnitude and duration of global or regional health crises are uncertain and difficult to predict.

A pandemic, such as COVID-19, could affect certain business operations, demand for our products and services, in-stock positions, costs of doing business, availability of labor, access to inventory, supply chain operations, our ability to predict future performance, exposure to litigation, and our financial performance, among other things.

Other factors and uncertainties include, but are not limited to:

• The severity and duration of the pandemic, including future mutations or related variants of the virus in areas in which we operate;

• The severity and duration of pandemics;

• Evolving macroeconomic factors, including general economic uncertainty, unemployment rates, and recessionary pressures;

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• Unknown consequences on our business performance and initiatives stemming from the substantial investment of time and other resources to the pandemic response;

• The pace of recovery when the pandemic subsides;

• The pace of post-pandemic recovery;

• The long-term impact of the pandemic on our business, including consumer behaviors;

• Disruption and volatility within the financial and credit markets.

To the extent that COVID-19 continues to adversely affect the U.S.

and global economy, our business, results of operations, cash flows, or financial condition, it may also heighten other risks described in this section, including but not limited to those related to consumer behavior and expectations, competition, brand reputation, implementation of strategic initiatives, cybersecurity threats, payment-related risks, technology systems disruption, supply chain disruptions, labor availability and cost, litigation, operational risk as a result of remote work arrangements and regulatory requirements.

Factors associated with climate change could adversely affect our business.

We use natural gas, diesel fuel, gasoline, and electricity in our distribution and warehouse operations.

Government regulations limiting carbon dioxide and other greenhouse gas emissions may increase compliance and merchandise costs, and other regulation affecting energy inputs could materially affect our profitability.

Government regulations limiting carbon dioxide and other greenhouse gas emissions and other environmental restrictions may increase compliance and merchandise costs, and other regulation affecting energy inputs could materially affect our profitability.

As the economy transitions to lower carbon intensity we cannot guarantee that we will make adequate investments or successfully implement strategies that will effectively achieve our climate-related goals, which could lead to negative perceptions among members and other stakeholders and result in reputational harm.

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We also sell a substantial amount of gasoline, the demand for which could be impacted by concerns about climate change and increased regulations.

More stringent fuel economy standards and public policies aimed at increasing the adoption of zero-emission and alternative fuel vehicles and other regulations related to climate change will affect our future operations and may adversely impact our profitability, and require significant capital expenditures.

More stringent fuel economy standards, changing public policies aimed at increasing the adoption of zero-emission and alternative fuel vehicles and other regulations related to climate change, and evolving consumer preferences will affect our future operations and will adversely impact certain elements of our profitability and require significant capital expenditures.

Failure to meet financial market expectations could adversely affect the market price and volatility of our stock.

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We are subject to risks associated with the legislative, judicial, accounting, regulatory, political 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.

At the end of 2022, we operated 260 warehouses outside of the U.S., and we plan to continue expanding our international operations.

At the end of 2023, we operated 270 warehouses outside of the U.S.

(31% of all warehouse locations), and we plan to continue expanding our international operations.

Future operating results internationally could be negatively affected by a variety of factors, many similar to those we face in the U.S., certain of which are beyond our control.

These factors include political and economic conditions, regulatory constraints, currency regulations,

policy changes such as the withdrawal of the U.K.

from the European Union, and other matters in any of the countries or regions in which we operate, now or in the future.

These factors include political and economic conditions, regulatory constraints, currency regulations, policy changes, and other matters in any of the countries or regions in which we operate, now or in the future.

Other factors that may impact international operations include foreign trade (including tariffs and trade sanctions), monetary and fiscal policies and the laws and regulations of the U.S.

1 unchanged sentence

Risks inherent in international operations also include, among others, the costs and difficulties of managing international operations, adverse tax consequences, and difficulty in enforcing intellectual property rights.

New reporting obligations globally are increasing the cost and complexity of doing business.

Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial condition and results of operations.

1 unchanged sentence

Changes in rules or interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance and have a material impact on our consolidated financial statements.

We are exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act.

We are exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act and otherwise.

Section 404 of the Sarbanes-Oxley Act of 2002 requires management assessments of the effectiveness of internal control over financial reporting and disclosure controls and procedures.

If we are unable to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and report financial information accurately and to prepare financial statements within required time periods could be adversely affected, which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact our stock price.

Uncertainties around our developing systems concerning controls for non-financial reporting also create risks.

Changes in tax rates, new U.S.

2 unchanged sentences

and numerous foreign jurisdictions.

Additionally, at any point in time, we may be under examination for value added, sales-based, payroll, product, import or other non-income taxes.

Additionally, at any point in time, we may be under examination for value

added, sales-based, payroll, product, import or other non-income taxes.

We may recognize additional tax expense, be subject to additional tax liabilities, or incur losses and penalties, due to changes in laws, regulations, administrative practices, principles, assessments by authorities and interpretations related to tax, including tax rules in various jurisdictions.

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Additionally, changes in the enacted tax rates or adverse outcomes in tax audits, including transfer pricing disputes, could have a material adverse effect on our financial condition and results of operations.

Significant changes in or failure to comply with regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters could adversely impact our business, financial condition and results of operations.

Changes in or failure to comply with regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters (such as recycling and extended producer responsibility requirements) could adversely impact our business, financial condition and results of operations.

We are subject to a wide and increasingly broad array of federal, state, regional, local and international laws and regulations relating to the use, storage, discharge and disposal of hazardous materials, hazardous and non-hazardous wastes and other environmental matters.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors