Costco 2008 Annual Report Download - page 17

also increase our merchandise costs and/or selling, general and administrative expenses, and
otherwise adversely affect our operations and results. General economic conditions can also be
affected by the outbreak of war, acts of terrorism or other significant national or international events.
Our growth strategy includes expanding our business, both in existing markets and in new
markets.
Our future growth is dependent, in part, on our ability to build or lease new warehouses. We compete
with other retailers and businesses for suitable locations. Local land use and other regulations
restricting the construction and operation of our warehouses, as well as local community actions
opposed to the location of our warehouses at specific sites and the adoption of local laws restricting
our operations and environmental regulations may impact our ability to find suitable locations, and
increase the cost of constructing, leasing and operating our warehouses. We also may have difficulty
negotiating leases or real estate purchase agreements on acceptable terms. Failure to manage these
and other similar factors effectively will affect our ability to timely build or lease new warehouses, which
may have a material adverse affect on our future growth and profitability.
We seek to expand our business in existing markets in order to attain a greater overall market share.
Because our warehouses typically draw members from their local areas, a new warehouse may draw
members away from our nearby existing warehouses and may adversely affect comparable warehouse
sales performance and member traffic at those existing warehouses.
We also intend to open warehouses in new markets. The risks associated with entering a new market
include difficulties in attracting members due to a lack of familiarity with us, our lack of familiarity with
local member preferences and seasonal differences in the market. In addition, entry into new markets
may bring us into competition with new competitors or with existing competitors with a large,
established market presence. While we have a track record of profitable growth, in new markets we
cannot ensure that our new warehouses will be profitably deployed; as a result, our future profitability
may be delayed or otherwise materially adversely affected.
We are highly dependent on the financial performance of our United States and Canada
operations.
Our financial and operational performance is highly dependent on our United States and Canada
operations, which comprised 93% and 94% of consolidated net sales in fiscal 2008 and 2007,
respectively, and 92% and 93% of operating income in 2008 and 2007, respectively. Within the United
States, we are highly dependent on our California operations, which comprised 27% and 28% of
consolidated net sales in 2008 and 2007, respectively. Our California market in general, has a larger
percentage of higher volume warehouses as compared to our other markets. As a result, the operating
income from our California operations is generally higher as a percentage of total operating income
than other regions. Any substantial slowing or sustained decline in these operations could materially
adversely affect our business and financial results. Declines in financial performance of our United
States operations, particularly in California, and our Canada operations could arise from, among other
things: failing to meet targets for warehouse openings; declines in actual or estimated comparable
warehouse sales growth rates and expectations; negative trends in operating expenses, including
increased labor, healthcare and energy costs; cannibalizing existing locations with new warehouses;
shifts in sales mix toward lower gross margin products; changes or uncertainties in economic
conditions in our markets; and failing consistently to provide high quality products and innovative new
products to retain our existing member base and attract new members.
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