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Costco identifies 'material weakness' in internal financial systems

Costco Wholesale Corp. will discuss a problem with its internal financial record-keeping systems in an upcoming annual filing with the SEC, the retailer said Oct. 4.

The company is investigating the weakness, which relates "to the extent of privileges afforded users authorized to access company systems," including those that it uses for filings with the SEC, the company said in a statement summarizing its fiscal fourth-quarter and full-year 2018 results.

Executive Vice President, CFO and Director Richard Galanti confirmed the problem to analysts during a call Oct. 4 to discuss the company's financial results.

The issue has to do with a member of Costco's information technology team "who had access to something they shouldn't have," Galanti said. "The controls weren't in place. We should have done a better job."

Shares of Costco were 2.3% lower at $226.37 in after-hours trading Oct. 4. The Issaquah, Wash.-based retailer reported GAAP EPS that missed analyst expectations, though same-store sales beat estimates.

The company said it still expects to submit its annual Form 10-K to the SEC on time, and it has not made any misstatements on earlier filings. A fix to the weakness will be completed before the end of Costco's 2019 fiscal year, according to the company.

Costco is also coping with shifts in costs as a result of the trade war between the U.S. and China. The company has canceled some international shipments, accelerated others to beat tariff implementations and worked with suppliers to minimize costs, Galanti said.

At the same time, the company has lowered prices on some U.S.-produced items, such as pork and nuts, as tariffs implemented by China reduced their prices.

"It's a small net negative," Galanti told analysts.

The company expects total openings in fiscal 2019 to number in the "low 20s," Galanti told analysts. That estimate falls below annual store opening targets in the low 30s that the company has discussed in recent quarters.

"We've got more on our plate" with other initiatives, Galanti told analysts, adding that the company expects to ramp up store openings again in 2020 and 2021, especially outside of the U.S.

Costco expects that its first store in China, to be located in Shanghai, will open in late September 2019.