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Projections We believe that COST's disciplined adherence to the best warehousing principles, aggressive expansion, and tight operating controls and systems will help to produce burgeoning earnings. Further enhancing the company's opportunities for growth are the warehouse industry's growing consumer acceptance and fast-growing market share. For the full year of 1986 (ending September), we project .that sales will grow 105-110%. Earnings should equal about 50.30 per share (untaxed) versus last year's $0.51 loss for the same period. Preliminarily, we forcast that 1987 sales and EPS will jump 70-75% and 60-65%, respectively. Note that we have modestly lowered our earnings estimate fc' 1986 from our previous forecast of 50.35-0.40 per share to reflect timing of the convertible interest paid versus interest benefits from investment, heavy pre -opening costs re COST's aggressive expansion and dilution. Dilution from the recent convertible offering, timing of warehouse openings, allocation of other expenses, and unit immaturity all can significantly influence and/or disrupt quarterly EPS patterns. Q1 Table 2 Costco Wholesale Corp. Quarterly EPS Projections 02 Q3 04 F 1985 S(O.13) ($0.08) (50.13) (50.18) F1936E O.00A 0.09A 0.04 0.17 F 1987E 0.04-0.05 0.10-0.11 0.12-0.13 0.34-0.36 F198SE Underlying our estimates are the following assumptions: Ycar (Sept.) (50.'S1) 0.30 0.60-0.65 1.15-1.20 1. Continued ra,,.;,id sales growth. Contributing to gains in volume are our expectations of 25-30% same -store sales growth in each of 1986 and 1987 and 10-15 new units opened each fiscal year through at least fiscal 1988. By that time, warehouses should be annualizing at $50-60--million average volume. 2. Net margins o1 at least 1.2-1.400. by the end of fiscal 1988. Net of 1.8-2.0% is attainable, we think, in a reasonable period thereafter. Aiding the improvement in margins will primarily be sharp operating -ratio leverage from stronger per -unit sales. Gross margins are expected to remain relatively near current levels, as product -mix benefits are offset by aggressive pricing. The company would actually like to cut prices moderately. SGA operating ratios should decline at least 200 basis points from today's level of about 10%. No significant further borrowings and resultant Interest costs are anticipated during the rest of the current fiscal year, but financing for expansion is a possibility later next year. 3. Increased competition in most areas. COST now faces warehouse competition in most of the markets in which it operates. While all new competition can hurt, we discern very little difference in COST location performance with or without present L