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In summary, COST is benefiting from a number of positive Industry and company factors and has rapidly placed itself among the warehouse industry's leaders. Its strong disciplines and potential for hyper growth make it an extremely attractive company with which to be involved. Although the current share price of 17 gives it, relatively high (by overall corporate standards) P/Es of 56.7 times and 26.2 times fiscal 1986 and 1987 estimated earnings per share, respectively, we think that COST's growth rate and resultant total return more then justify we price. We recommend investors consider COST for long-term investment. Brief Description COST is the third largest membership warehouse chain in the U.S., trailing only Price Clua and Sam's Wholesale Club in number of warehouses and average unit volume. The company's 21 units are located in six Western and Mountain states. Florida, and Canada. Warehouses average about 100.000 square feet, carry fewer than 3,700 stockkeeping units, and use standardized floor plans and systems. Product includes a broad range of high -quality, name -brand goods at prices sharply below even traditional price merchants. Sales break down at about 33% food, 28% hard lines. 26% sundries, and 13% soft lines. Like the other membership warehouse leaders, COST uses a disciplined membership policy. Wholesale members pay annual membership fees of S25 and for further fees can designaia supplemental members. In the past, group members (selected government entities, financial organizations, unions, etc.) paid no annual fees. but ware charged 5% more than wholesale members. Since the beginning of the current fiscal year, new group members are being charged S15 innual fees. The company has also introduced a Gold Card membership for $30, including rights to a less -expensive spouse card. which eliminates the 5% surcharge requirement. Warehouse operations emphasize rapid inventory turnover, carrying a limited number of stk,.,ckkeeping units, and attempting to identify those fastest -selling products that will enhance the `ticket." or purchase size. Direct purchasing from manufacturers, fnr shipment directly to warehouses, Is done for virtually all goods. Membership warehouses. like COST. have low-cost operations as a key principle. Relatively inexpensive rentals, averaging about $4.00 per toot in COST's case. lower labor costs in relation to shorter weekly hours and low service levels, and limited advertising and other operating expenses all contribute to COST's ability to operate at significantly lower costs and, as a result, lower product prices compared with its competition. Company operations be6an only in February 1983. and the first warehouse did not open until September of that year. Annual sales, by the end of the current fiscal year (September), will have grown nearly eightfold since the end of COST's first full fiscal year (September 1984) on more than a tripling of units during the same period, Average store volumes, about $29 million In 1984, will be almost $40 million this year and will be annualizing at over $45 million by year-end. 4