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<br /> <br />Merrill Lynch Capital Markets <br /> <br />: '," ,.: ,:. : ..:. ~ :~. .. ~ 1'- . ~ =- <br /> <br /><€RCHANDISING <br /> <br />Charlotte B. Kennedy, CPA <br /> <br />Feoruary 26, 1986 <br /> <br />COSTCO WHOLESALE CORPORATION (COST:$15 3/4) <br /> <br />INITIAL INVESTMENT OPINION <br /> <br />Price Range: $17 5/8 - 10 (a) <br /> <br />Shares Outstanding: 24.6 million (b) <br /> <br />EPS: 1985* (50.51) <br />1986E $0.30-0.45(c) <br />1987E 50.45-0.65 <br /> <br />PIE: 1985 NM <br />1986E 42. Ox <br />1987E 28.6x <br /> <br />Div. Nil <br />Yield <br /> <br />a) Since the initial public offering on November 27, 1985. <br />b) Including common share equivalents. <br />c) If earnings were taxed at the full 46% rate, the 1986 estimate would <br />be SO.16-S0.24 per share. <br />* Deficit <br />NM - Not Meaningful <br /> <br />Years ending Sunday nearest August 31 of the same calendar year.' <br /> <br />SUMMARY AND INVESTMENT OPINION <br /> <br />This report initiates our research coverage on Costco Wholesale Corporation <br />(COST), a well-positioned company in the attractive cash and carr.y membership <br />warehouse industry. This specialty retailing sector is projected to grow at a <br />compound rate of 40% over the next five years, from approximately S3.8 billion <br />in 1985 to about $20.0 billion in 1990. The format fills a market void <br />between wholesalers and retailers, thus meeting the demands of the more <br />educated consumer of the 1980's. By offering memb~rs the opportunity to <br />purchase a wide variety of national brand merchandise at a substantial <br />discount, the cash and carry warehouse is becoming an increasingly important <br />distribution channel. The operating conc~pt was originated in the U.S. in <br />1976 by The Price Company. Its success can be attributed to combining two key <br />disciplines: maintaining high sales volumes--and therefore rapid inventory <br />turnover--in large, no-frills, self-service facilities: and focusing on <br />operating efficiencies, especially in purchasing and inventory control. These <br />disciplines enable many cash and carry wholesale membership clubs to achieve <br />high returns while operating at substantially lower margins than their major <br />competitors, including traditional wholesalers, discount retailers and <br />supermarkets. <br /> <br />. '., '., .. .... I _:.' I .... : ...~, - ..':' '.,", :. r! I:~' :.t! ! ,~' '.'. t' <br />. : ..,' I'... _... I ..': . ..... -" '1'1..' ~T1d~"1I "0)' .In'/ <br />. . ;'. '. . ~. .~.f- ':",. .. ::.. '" :: ,'~! .;\....;! .:. ,:,1.. 'I! <br /> <br />, .- ...........' <br />