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start-up and rapid expansion caused the S,G&A expense -to -revenue ratio to be
<br />13.34% of total revenue and preopening expense to be 1.45%. Therefore, Costco
<br />Posted an operating loss of $3.673 million in fiscal 1984. Moreover', deferred
<br />compensation of $248,000 was accrued in fiscal 1984. This charge reflected
<br />the initial installment of an expense to be recorded through fiscal 1989 which
<br />arises from current and future cash and stock compensation for 11 key
<br />management personnel, excluding the Chairman and President, to offset income
<br />tax obligations connected with certain stock awards. (The company may obtain
<br />tax deductions totalling $1.9 million in excess of the amounts to be recorded
<br />for financial accounting purposes.) Interest expense equalled $63,000, and
<br />interest income was $72,600. Therefore, the net loss for the 53 weeks of
<br />fiscal 1984 was $3.258 million or $0.28 per share.
<br />For fiscal 1985 (a 52-week period), net sales of the seven warehouses opened
<br />in fiscal 1984 were $241.712 million, up 139.3% year -over -year, while sales of
<br />warehouses opened in fiscal 1985 equalled $124.654 million. Comparable net
<br />sales (for, the weeks in fiscal 1985 corresponding to the same weeks in fiscal
<br />1984 during which Costco's initial seven warehouses were open) increased an
<br />impressive 43%. Membership fees amounted to $4.436 million, which was 221.7%
<br />above the level of the prior year. Of total revenues of $370.802 million,
<br />98.80% were from net sales of warehouses and 1.20% from membership fees.
<br />During fiscal 1985, the number of wholesale members (excluding supplemental
<br />cardholders designated by the primary cardholder) increased 202.6% to 115,000
<br />at year-end, compared to 38,000 at the end of fiscal 1984. Group memberships
<br />grew 195.1% to 608,000 at the end of fiscal 1985, up from 206,000 at the end
<br />of'fiscal 1984. In the fourth quarter of fiscal 1985, memberships at Costco's
<br />first seven warehouses rose at an annualized rate of approximately 55% for
<br />wholesale and 39% for group memberships. Total revenues were again impacted
<br />by the pattern of openings, with 12 units in operation at the end of each of
<br />the first three quarters and 15 at September 1, 1985. While the full year
<br />gross margin remained at 11.21%, there were quarterly variations caused by two
<br />factors. The first was competitive pricing in certain markets. The second
<br />reflected the rising percentage of sales made to wholesale members, who do not
<br />pay the group members' 5% surcharge on items purchased. Whereas sales to
<br />wholesale members provided 53% of net sales to warehouses in fiscal 1984, this
<br />figure had risen to 58% of net sales in fiscal 1985. The impact of these
<br />factors resulted in a decline in the gross margin during the second and,
<br />particularly, the third quarters; however, by the end of the latter period,
<br />competitive pricing pressure eased and improved margin levels were evident in
<br />the fourth quarter. Importantly, the maturing of the warehouse base resulted
<br />in both S,G&A and preopening expense substantial) declining as a
<br />of total revenue, amounting to 11,28% and 0. y g Percentage
<br />the fiscal 1985 operating loss decreased to $3.263emillion. Notably,spectively. As arthistwas
<br />roughly equivalent to the pre -opening expense of $3.002 million. Deferred
<br />compensation increased to $1.292 million during fiscal 1985. Due to interest
<br />paid on the 11.5% convertible subordinated note (held by Carrefour S.A.) and
<br />on a $3.0 million mortgage loan secured by the company's Lynnwood, Washington
<br />facility, interest expense rose substantially to $2.058 million. Although
<br />some offset was provided by interest income of $88,500 million, the net loss
<br />rose to $5.728 million or $0.51 per share in fiscal 1985.
<br />REVIEW OF FIRST QUARTER OF 1986
<br />Costco reported total revenue of $137.499 million for the 12 weeks ended
<br />November 24, 1985, representing a year -over -year
<br />n
<br />million, net sales of warehouses comprised 97.80% of the total. For $134.470
<br />warehouses open in both fiscal years, the comparable weeks' net sales
<br />increased by a sizable 33%, to $77.619 million. During the first quarter, the
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