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Although recognizing all the risks Inherent In a very young companyin a new s feel that COST, will benefit from a number of industry and company factors: Qllment, we I. We believe warehousing to be the single most important product dstribution trend now un*r 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 a variety of warehouse entities (e.g., wholesale membership, food warehouse, deep -discount drug, do-it-yourself warehouse units, etc.) 2. Wholes8le membership warehouses are, to us, the most opporrune 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 enhance their competitiveness The 'proof of the pudding` is that, at this time, the membership warehouses appear to have stronger and more consistent Profitability than other forms of warehousing. For example, price Club and Sam's "Wholesale Club (Wal-Marl) are achieving consistently Improved profitability: COST has turned steadily profitable. and two to three other firms appear to be nearing black Ink. CaStCo a► eves most Closely to griper mVmb&rshjP warehouSe ,principles. Like Price Club. COST is driven by Oxtrernely strong Information systems. Capable of generating regular store profit and loss data and stockkeeping units (SKU). trattic, and inventory information. The company has a rigorous membership polic.,,__v r Of its most recent business IS to wholesale and Gold Card priority customers (over oSO°+ ,• 60% wholesale) --and has consistently increased Its membership totals each month in each store in 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 -.store . 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 SYUs. enabling It to maintain 10.5% gross margins. co nsistentl�p lor+vttr prices, and rapid ioiventorV turn%)vor. Operating costs are controlled at less then r p% of revenues: For porsp@ciive. are note that most warehouse entrants have moderately more SKUs. higher gross margins,. and tower inventory turns: 4, The COmpany is raa 1* +expernafrog 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 the calendar year (approximately 23 at thtl ;September fiscal Year-end) About 10-1 S warehouses will be opened annually. we thinlo, during the next two to throe years. Operating in 12 US metropolitan morktsts in its Pacific Northwest base, Alaska, and Florida and in two metro& in e a. n recently announcsc� Minneapolis. Minnesota, ad$, the company as new markets for 1566. It should be able t*o open a in,um d Southern er of now metros in the next three to four years. Expansion will probably be concentrated along the West Coast (including Western Canada), through thd Midwest's northern 2