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Although recognizing all the risks Inherent In a very young company In a new segment, we feel that COST, will benefit from a number of Industry and company factors: 1. We believe warehousing to be the single most important product distflbut!on trend now under way. It is, perhaps. the most potentially disruptive force to hit retailing since discounting developed late in the 1950s and early: in the 1960s. By the early to mid-1990s. we expect almost all markets of 100.000 or more people to be well serviced by 8 variety of warehouse entities (e.g.. wholesale membership. food warehouse. deep-discount drug. do-it-yourself warehouse units. etc.) 2. Wholesale member:ihip warehcvses are, to us. the most opportune segment of warehousing. Their bulk packaging. and membership techniques appeal mostly to commercial customers (60-70% of sales generally) and have much less competition than other forms of warehousing. primarily taking share from middle people and suppliers. Extremely low gross margins (normally 10-12%) and tight operating reins further ent dnce their competitiveness, The .proof of the puddingM is that. at this time. the membership warehouses appear to have stronger al'd more consistent profitability than other forms of warehousing. For example. Price Club and Sam's Wholesale Club (Wal-M..rt) are achieving consistently improved profitability; COST has turned steadily profitable. and two to three other firms appear to be nearing ::Iack ink. 3. Costeo adheres most closely to proper membership warehouse principles. Like Price Club. COST is driven by extremely strong Information systems. capable of generating regular store profit and loss data and stocHeeping units (SKU). traHic. and inventory information. The company has a rigorous membership pOlicy--over 80% of its most recent business is to wholesale and Gold Card priority customers (over 60% wholesale)--and has consi~tently increased its membership totals each month in each store 10 line with sales trends. Membership fees. at its six-month mark. were 240% higher than last year versus a 114% gain in overall revenue, Like-s:ore . membership totals are up 41% for the first half. COST has avoided the pitfalls of inventory distortions risked by other warehouses by tightly keeping to less than 3.700 SKUs. enabling it to maintain 10.S% gross margins. consistently lower prices. and rapid illventory turnover. Operating costs are controllod at less than 10% of revenues. For perspective. we note that most warehouse entrants have mbderately more SKUs. higher gross margins. and fewer inventory turns, . ' 4. The company is rapid/~' expanding its real.estate base. Now operating 21 units. COST has opened nine warehouses in the last 12 months and will have more than 30 outlets by the end of thr. c81enGar year (approximately 23 at the September fiscal year-end). About 10- 1 S warehouses will be opened annuallv. we think. during the next two to three years. Operating in 12 U.S metropolitan markets in its Pacific No~hwest base. Alaska. and Florida and in two metros in Canada. the company recently announced. Minneapolis. Minnesota; Milwaukee. Wisconsin; and Southern California es new markets for 1986. !t should be able to open 8 number of new metros in the nexl three to Tour years. Expansion will probably be concentrated along the West Coast (including Western Canada). through the Midwest's northern 2