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Donaldson, Lufkin & Jenrette tier, and Into the Middle Atlantic. Although warehousing competition Is rapldl" Increasing. it's Important to no!e that warehouses are present in only about 35-40, or 11-12%, of the 324 U.S. standard metropolitan areas, and, In our opinion, only 10-'15 appear to be currently adequately stored. COST, however, has significant cor"petitive experience, already competing with warehouses in most of the markets In 'Nt-,ich it operates. '.:. 5. COST has passed the critical junctures to profitability. Despite heavy preopening and interest costs (S 1.6 million and S 1.2 million, respectively, in the first half), the company reached profitability ahead of expectations. The previously mentioned gross margins and operating ratios make COST at or very near the lowest-cost producer in the industry, giving it significant pricing advantages versus mo~t competitors. Its units are annualizing at S41-million average volume, totals exceeded only by Price Club and Sam's (about S 115 million and S60 million estimated annual per-store revenues, respectively), both of which have much older units. COST's year-to-date same-store sales gains are averaging about 30%. As important. lik.e-store business and group memberships are up even more substantially. While these increases are obviously positively influenced by store immaturity, combined with the company's rapid expansion they are a good indicator of strong momentum, 6. The company's financIal struCture and market opportunitIes should allow it extraordinary near-term growth. Having recentlv called its earlier convenible securities and converted them to common stock by its major investor (Carrefour. Europe's leading hypermarket). COST was left with virtually no long-term debt at that time, other than leases. and a significantly diminished interest burden.' Its debt structure, current position (2.2-to-1.0 current ratio), and recent $ 11 S-million convertible financing (April 1986) should allow it to finance even its rapid growth at least late into 1987. In fact. COST's cash position now totals about $135 million, providing near-term interest-income opportunities and, even more important. sizable real-estate negotiating clout. The company's improving returns, on-budget cost situation, and strong sales performance should allow it at least 50% annual EPS growth in the two to three years beyond fiscal 1986. Our ~Orf!casts, shown above. assume ,no. acql,Ji.si,tion~._ .-.-..-... - - 7. Management is extremely strong and much more experienced than the managements of most warehouse competitors. Much of top management was trained in warehouse and discount-store backgrounds similar to that of Price Club's management. In .our opinion, COST's warehouse managers' el<perience and training are not exceeded in the industry. and its central management provides an extremely high level of talent. k.nowledge. and, most important, warehouse discipline. The training and systems that are provided stores are very sophisticated. particularly for a company so young. Of the 21 present warehouse managers, 16 have some kind of warehousing experience in their backgroun.d, and. In all but one case. retailing experience before coming to COST. In general, the levels of background are far superior to those of the competition. 3