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certain warehouses originally scheduled for the first quarter is expected to rise. Overall, we believe that pretax profit in the peri~d ended of the first uarter of fiscal l~. For the full year of fiscal 1986, Costco plans to open ll-to-14 warehouses. ~e believe that the company's net sales of warehouses will amount to S775-to-$850 million, while membership fees will approximate $13-to-$15 million. 'rhereforc, total revenue is expected to range from $788-to-$865 million, up 112.5%-to-132.7% from fiscal 1985. Given the factors impacting the gross margin (as discussed above), we estimate that the gros~ margin for the full year of fiscal 1986 will decline slightly or at best renlain flat with tne 11.21% gross margin reported in fiscal 1985. ~e believe that this is in line with plan. It is important to note that under these projections, groSS profit should increase at a rate roughly equivalent to that of total revenues. Favorably, the rising volume from maturing warehouses is expected to cause both S,G&A expense and preopening expense to decrease as a percentage of sales. Thus, we believe that Costco will report an operating profit of S7.25-to-S10.55 million in fiscal 1986, compared to an operating loss of 53.263 ffiillion in fiscal 1985. Deferred compensation will drop substantially this year, to $50,000 from last year's $1.292 million. Furthermore, interest expense is expecterl to decline from fiscal 1985's $2.058 million to about 5900,000, largely due to the conversion of the 11.5% convertible subordinated note held by Carrefour S.A. into common stock. Reflecting the higher cash balance as a result of the initial public offering, interest income is projected to amount to $1.2-to-$1.4 million, up from $885,000. Therefore, pretax income should swing from a $3.263 million deficit in fiscal 1985 to a S7. 5-to-$1l. 0 million profi.t in fiscal 1986. Tax loss carryfo'rwards and investment tax credits are expected to offset virtually all of fiscal 1986's tax liability, so that net income is projected to also equal $7.5-to-$11.0 million. Based on 24.63 million shares outstanding, earnings for fiscal 1986 are estimated at SO.30-to-SO.45 per share. PRELIMINP.RY EARNINGS PROJECTION FOR 1987 AND BEYOND In fiscal 1987, Costco's management plans to again open about ll-to-14 warehouses. .,'lith the addition,': these units and the increasing volume projected from existing units, net sales of warehouses are expected to increase to approximately $1.3-to-$1.5 billion, representing a year-over-year gain of 67.7%-to-76.5%. Since the group fee program will have been inaugurated }n,al_l but the recently opened warehouses by the end of fiscal 1986, membership' fees are estimated to rise at-a lower rate to $19..0-to-$2LO million. It should be noted that this estimate is conservative, due to the potential revenue from the new Gold Card group membership program. Gold Card members pay a higher annual fee but not the 5% surcharge incurred by regular group members. However, given its recent introduction, it will be several quarters before this program's impact can be more accurately assessed. Total revenues for fiscal 1987 should thus approximate $1.3l9-to-$1.52l billion. The gross margin is projected to decline further, to 10.8%-to-ll.0%. However, we b~li~ve that gross profit will again increase at a rate about in line with the sales gain. As in fiscal 1986, the p~rcentages to total revenues of S,G&A expense and preopening expense arc expected to decrease durinq fiscal 1987. In our estimation, Costco will report operating profi~ in the $23.0-to-$31.8 million range in the year ending August 31, 1987, up over 200% from our estimated figure for this year. ~ith deferred compensation remaining at S50,000 and interest expense projected to approximately equal interest income, pretax income in fiscal 1987 should also rise about 200% to $23.0-to-S31.8 million. Assuming a 46% tax rate, net. income is estimated at $12.40-to-S17.1S 6