Costco 2010 Annual Report Download - page 17

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 acquire property, and 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 existing warehouses and 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, attracting members of other
wholesale club operators currently operating in the new market, 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. 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 92% of consolidated net sales in 2010 and 93% in 2009, and 89% of
operating income in 2010 and 92% in 2009. Within the United States, we are highly dependent on our
California operations, which comprised 26% and 27% of consolidated net sales in 2010 and 2009,
respectively. Our California market in general, has a larger percentage of higher volume warehouses
as compared to our other markets. 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.
We depend on vendors to supply us with quality merchandise at the right prices in a timely
manner.
We depend heavily on our ability to purchase merchandise in sufficient quantities at competitive prices.
We have no assurances 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.
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