Costco (NASDAQ:COST) is one of the kings of warehouse wholesaling in the United States. If you’re looking for great bargains, by buying company brands like Kirkland, Costco can definitley bring value to the table. As far as its stock valuation is concerned the market has more than rewarded the company thanks to robust comparable store sales figures of 8%. The company stock has been Wall Street darlings recently.
Moreover, it just got rid of its credit card exclusive card processing deal with American Express and has got in what is hoped to be a better deal with another credit provider. With that said, there are serious risks with this stock.
I’ve always been a firm believer of buy on bad news sell on good news. Since Costco has been enjoying its share of great news recently, this might be a good time to start dumping the stocks. One key of risk that comes to mind is that the company is monolithic when it comes to geographical distribution. While the company operates 700 warehouse stores all over the world and is present in large economies like Mexico, the United Kingdom, and Japan. It concentrates most of its presence in the United States. A whopping 70% of its business comes from the USA. This should be cause for concern. If you want to invest in a company you need to invest in a company that is diversified as far as sales sources are concerned. It has a way of spreading out its risks.
Also, another cause for concern is that within the United States, close to one third of its sales volume comes from one state. California accounts for close to one third of all the sales value of Costco. This is a serious problem because if the local economy in California tanks or if there are certain local issues, Costco’s performance will be a disproportionately impacted. While it’s true that California’s economic fortunes tend to be joined at the hip with the broader US economy. There are specific economic pressures that are unique to California. For example, the current drought that the state is going through or the possibilities of earthquakes might have a dramatic impact at the local economy which can then have a negative effect on Costco’s sales volume.
