Price/Costco Canada Inc.: Confirms at R-1 (low)

Sean Mason / Bob Weir, CFA / David Schroeder

(416) 593-5577

The commercial paper rating of Price/Costco Canada Inc. is based on the unconditional guarantee from its parent, Costco Companies Inc. and reflects the Company’s strong balance sheet and liquidity ratios, and its dominant position in the warehouse club marketplace. The Company is generating substantial free cash flow as strong increases in profitability are translating into sharply rising cash flow from operations that are more than sufficient to fund the significant new store capital expenditure program. A major challenge facing the Company is how to invest this substantial build-up in cash as net debt has fallen to about 18% of total capital. The balance sheet’s strength is also reflected in the substantially high coverage and liquidity ratios. Operationally, same store sales are experiencing high single digit increases, 9 new units were opened in fiscal 1997 with a further 18 planned for the current fiscal year, and membership fees have risen about 10%-11% over the past year. Profitability should continue to be strong in the near term, based on the popularity of the concept, the Company’s solid market position, and the continued emphasis on cost savings. The Company’s move into major urban markets marks a change in direction and represents new challenges.