1. 1 Patrick Burke Elvina Mintarno Alex Kreter Peter Shepard Lindsay Meck Peter Zaroulis Not a Buy

2. 2 Agenda 1.Business Model Cutting Cost, not Quality 2.Industry Competitors Expansion 3.Valuation OVERPRICED

3. 3 Retail is Detail: What makes Costco Unique Wholesale Membership ProductsServices 1983 – Foundation 1993 – Merger 1996 – Branding 1997 – Incorporation Business Model * Industry * Valuation

4. 4 Leading the Industry New Store Criteria –80,000 households –9,000 businesses Employees –Better Pay –Better Benefits Over Saturation –Cannibalization Business Model *Industry *Valuation Total Stores Under Performing BJ’s 17229 Sam’s Club 55150 Costco 37734

5. 5 Membership -Gold Star -17,338,000 members -Executive Business -5,214,000 members Demographic Targets -Small business owners -High income families Ringing Up Results Business Model * Industry * Valuation

6. 6 Got Ads? No Frills –Low Overhead –No “paper or plastic?” Limited Advertising –E-marketing –Costco Connection Business Model * Industry * Valuation

7. 7 Retail Sector Trends Consumer Confidence Index –July: up 7.3 to 112.6 points Consumer Price Index (CPI) –Rising Gas Price Forecasting –Leveling-off in 2008 Year200620072008 All grades 2.622.842.82 Regular2.582.792.78 July ‘07 Aug. ‘07 Sep. ‘07 Oct. ‘07 Nov. ‘07 Dec. ‘07 208.9209.4209.8210.2210.7211.0 CPI Index CPI Forecast (CPI: 1982-1984 = 100) Average Gas Prices ($/gallon) Business Model * Industry * Valuation

8. 8 Market Share Sales/ ft 2 StoresRetention Rate Targeted Locations Operating Profit per warehouse 50%79537789% Coasts- Suburban/ Urban $3MM 40%516551-- East of Mississippi Coast - Suburban $1.8MM 10%41117285% Northeast- Urban Areas$1.1MM Costco Conquers Competitors Business Model * Industry * Valuation

9. 9 Growth Online sales International expansion Penetrate the U.S. Market Private label with Martha Stewart Pharmacies Membership growth Business Model * Industry * Valuation

10. 10 Discounted Cash Flow Costco Price Per Share Current: $64. 39 Our Price: $41.60 Historical Data Wall Street Expectations Key Assumptions: 1. Sales Growth: 12% 2. Membership Rev. Growth: 12.5% 3. Gross Profit (ex MFI): 10.9% Management Guidance Business Model * Industry * Valuation

11. 11 Overvalued based on Comparables Current Price: $64 Target price based on P/E: $38.4, EV/Eb.: $43.4 Costco is overvalued based on Enterprise and Equity Multiples 22.6x 20.4x 20.7x 16.0x 20.9x 13.0x 17.2x 14.7x 15.2x 10x 15x 20x 25x CostcoWalmartBJTargetMean EV/(EBITDA-Capx)P/E Fwd Business Model * Industry * Valuation

12. 12 Say “No” to Costco “Costco’s corporate philosophy is to put its customers first, then its employees, then its vendors and finally its shareholders.” – Bill Dreher, financial analyst Low Profit Margin -Compete with Wal-Mart Prices Employee Benefits Business Model * Industry * Valuation

13. 13 Works Cited Desjardins, Doug. "Costco Eyes Steady Growth Here, Abroad." LookSmart. 7 Feb. 2005. 1 Aug. 2007. Greenhouse, Steve. "How Costco Became the Anti-Wal-Mart." The New York Times 17 July 2005. 29 July 2007. Grom, Charles, Paul Trussell, and Matthew R. Boss. Costco Wholesale Corporation: a Closer Look - New Store Economics, Overweight. New York, NY: JP Morgan Securities, Inc., 2007. Holmes, Stanley, and Wendy Zellner. "The Costco Way." Business Week 3878 (2004). Academic Search Premier. 1 Aug. 2007. Kozloff, Emme, and Ian Gordon. The Warehouse Club Industry. New York, NY: Sanford C. Bernstein & Co, 2004.