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Merrill Lynch Capita! Markets <br />iMERCHANDISING <br />Charlotte B. Kennedy, CFA <br />February 26, 1986 <br />COSTCO WHOLESALE CORPORATION (COST:$15 3/4) <br />INITIAL INVESTMENT OPINION <br />Price Range: $17 5/8 - 10 (a) Shares Outstanding: 24.6 million (b) <br />EPS: 1985* ($0.51) P/E: 1985 NM <br />1986E $0.30-0.45(c) 1986E 42.Ox Div. Nil <br />1987E $0.45-0.65 1987E 28.6x Yield <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 $0.16-$0.24 per share. <br />* Deficit <br />Not Meaningful <br />Years ending Sunday nearest August 31 of the same calendar year. <br />SUMMARY AND INVESTMENT OPINION <br />This report initiates our research coverage on Costco Wholesale Corporation <br />(COST), a well -positioned company in the attractive cash and carry 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 $3.8 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 members 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 concept 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 />a:fr�'. ., f..._,. '7-, . nfc,r rn; fl r)n no, .jwv <br />'.r ...C'^ :...�1 'i�lr.', .3 SO ;?; Jr� •�•. :I'.�E' O�r'fhdSBtl' <br />•pig r t.1 <br />