Global External Audit

Macro Environment Audit

Costco faces a wide range of external forces that affect the operation of the entire
corporation. The group of forces that most importantly affects Costco’s operation are the
economic forces. According to Costco’s 10K report, general economic factors, domestically and
internationally, may adversely affect their financial performance. Higher interest rates, energy
costs, inflation, levels of unemployment, consumer debt levels, and other economic factors could
adversely affect demand for their products and services or require a change in the mix of
products they sell that adversely affects profitability. These factors can also increase the cost of
sales and operating, selling, general and administrative expenses, and otherwise adversely affect
our operations and results. General economic conditions can also be affected by the outbreak of
war, acts of terrorism or other significant national or international events. The US Economy has
the world’s largest economy and the most technologically advanced. It has a great gap between
the wealthy and the poor as well as those that live comfortable and those who struggle. Such a
huge gap between classes that is continuously getting wider can be a problem for Costco. They
target a middle class and upper middle class which are slowly disappearing and have to struggle
to define who they target. US economic strength is based on diversified industrial and services
sectors, investments abroad, the dollar as a major world currency, a demand driven consumer
society and exports. Service sector employs more people than manufacturing but US remains
leader in industry and high technology. These are all positive factors that affect Costco with a
strong work force and a consumer driven society. Canada is another place Costco does business
and also has one of strongest economies in the world. They are the leader in the production of
gold, silver, copper, uranium, oil, natural gas, agriculture, wood pulp, and timber related
products. In 1993, Canada signed NAFTA with Mexico and the US for freer movement of
capital and goods making it easies for Costco to operate there. Their currency is the Canadian
dollar which is weaker then the American dollar and more then 14 percent of the population live
in poverty. Costco takes a monetary loss when doing business in Canada because of their weaker
currency. Japan Economy is another contender for one of the world’s largest economies. They
do however face many challenges in their operation such as few natural resources forcing them
to import most raw materials. Only 12 percent of the land can be used for cultivation and they
import nearly half of their food supply. The US is Japans biggest trading partner and although
there is some friction between the two nations with trade, overall they support each other in
major economic difficulties. Good relations with Japan allow Costco to more easily do business.
Japan has a record high in unemployment, slipping productivity, low consumer spending, and
high bankruptcy. Also lack of economic reform has inhibited recovery and growth. When
operating in Japan, Costco faces many economic challenges such as the low consumer spending
and high bankruptcy. However, opening new stores there might allow for more employment and
fuel the economy in its favor. Overall, there are many economic factors that Costco faces.
 The next group of significant forces are the demographic forces. In US, Costco’s target is
small businesses and upper/middle class families. In the USA, there are 24.6 million people
married with children under the age of 18 and 24.7 million small businesses. This shows that
Costco has a very large potential market to target in the US. The average income for the US is
$48,201. Since Costco’s target market has an average income of over $100,000 it might be
difficult to reach it’s potential market since the country average is so much lower. Canada’s
average income is about $64,800 and Japan’s is 296.035 yen which might be easier for Costco to
target then the US. US has the largest population with 301,139,947, Japan is next with
127,433,494 and Canada is last with 33,390,141. Larger populations give Costco a greater
potential market.

There are many sociological forces that Costco faces while operating in the US, Canada,
and Japan. For the US, the challenge it faces are to make shopping convenient, deliverer organic
options and awareness of food allergens. In Canada, the challenge is to overcome the many
ethnic groups keep their own culture and who might prefer to other options for shopping then
Costco. They also eat three meals a day, with tea and coffee breaks, which will allow for many
shopping trips. Seafood is a staple, so it might be smart for Costco to a variety of seafood
options for consumers. In Japan Costco is faced with the challenge to deliver the freshness that
locals expect when buying food. In all three countries environment conservation is very import
and Costco is challenged to be environmentally responsible. The US also values portion control,
easiness to open and portability when it comes to food. Japan also values portability which
poses Costco with a challenge of overcoming the huge bulk packing they sell in for more
portable Japanese shopping. Another challenge Costco faces with Canada is to overcome their
pride they have in their culture and allow them to buy items at Costco.

In the US, Canada and Japan there are many laws and regulations Costco must follow in
order to operate there. There are human resource laws such as the Equal Opportunity
Employment, maximum hours a minor can work, required breaks for hourly employees,
minimum wage. Canada’s labour law defines your rights and obligations as workers, union
members and employers in the workplace. Labour Law covers the areas of Industrial relations,
workplace health and safety, employment standards, including general holidays, annual
vacations, working hours, unjust dismissals, minimum wage, layoff procedures and severance
pay and all federally regulated employers are subject to Canadian Labour Law. Canada has
consumer laws governing the following areas: Competition Law, Consumer Safety - General
Consumer Products, Consumer Safety - Food Safety, consumer safety- Automobiles, Labelling,
conditions of sale and warranties, unfair business practices, protection of personal information,
class proceedings. Japan also has numerous laws that must be followed by Costco.

Costco uses technology to track member’s purchases and allow for convenient buying.
Costco tracks each customers purchase with their membership account number which allows the
company to receive data on certain consumer habits such as which brands sell better, the
percentage of brand loyalty and seasonal marketing trends. Costco can use this data when
restocking and repurchasing inventory. By increasing the of products that sell better and limiting
the products that have a long shelf life Costco can increase its asset turnover creating more profit
for the company. Costco’s membership cards are also tied up with major credit cards which
provide customers the convenience of paying with credit.

SEE APENDIX

We also intend to open warehouses in new markets. The risks associated with entering a new market include difficulties in
attracting members due to a lack of familiarity with us, our lack of familiarity with local member preferences and seasonal
differences in the market. In addition, entry into new markets may bring us into competition with new competitors or with
existing competitors with a large, established market presence. While we have a track record of profitable growth, in new markets
we cannot ensure that our new warehouses will be profitably deployed; as a result, our future profitability may be materially
adversely affected.

Any inability to open new warehouses on schedule could hurt our financial performance. We expect to increase
our presence in existing markets and enter new markets. Our opening of new warehouses, domestically and
internationally, will depend on our ability to: identify and secure suitable locations; negotiate leases or real estate
purchase agreements on acceptable terms; attract and train qualified employees; and manage preopening expenses,
including construction costs. We compete with other retailers and businesses for suitable locations for our
warehouses. Our ability to open new warehouses also is affected by environmental regulations, local zoning issues
and other laws related to land use. Failure to effectively manage these and other similar factors will affect our ability
to open warehouses on schedule, which could adversely affect our financial performance.

We are highly dependent on the financial performance of our United States and Canada operations. Our
financial performance is highly dependent on our United States and Canada operations, which comprised 94% of
consolidated net sales in both fiscal 2006 and 2005. Within the United States, we are highly dependent on our
California operations, which comprised 31% and 30% of consolidated net sales in fiscal 2006 and 2005,
respectively. Any substantial or sustained decline in these operations could materially adversely affect our business
and financial results. Declines in financial performance of our United States and Canada operations could arise
from, among other things: failing to meet annual targets for warehouse openings; declines in actual or
estimated comparable warehouse sales growth rates and expectations; negative trends in operating expenses,
including increased labor costs; cannibalizing existing locations with new warehouses; shifts in sales mix
toward lower gross margin products; changes or uncertainties in economic conditions in our markets; and
failing consistently to provide high quality products and innovative new products to retain our existing
member base and attract new members.

Risks associated with the suppliers from whom our products are sourced could adversely affect our financial
performance. The products we sell are sourced from a wide variety of domestic and international suppliers.
Effective global sourcing of many of the products we sell is an important factor in our financial performance. Our
ability to find qualified suppliers who meet our standards, and to access products in a timely and efficient manner is
a significant challenge, especially with respect to suppliers located and goods sourced outside the United States.
Political and economic instability in the countries in which foreign suppliers are located, the financial instability of
suppliers, suppliers’ failure to meet our standards, labor problems experienced by our suppliers, the availability of
raw materials to suppliers, merchandise quality issues, currency exchange rates, transport availability and cost,
inflation, and other factors relating to the suppliers and the countries in which they are located are beyond our
control. In addition, the United States’ foreign trade policies, tariffs and other impositions on imported goods, trade
sanctions imposed on certain countries, the limitation on the importation of certain types of goods or of goods
containing certain materials from other countries and other factors relating to foreign trade are beyond our control.
We may also face changes in the cost to us of accepting various payment methods and changes in the rate of
utilization of these payment methods by our members.

We may not timely identify or effectively respond to consumer trends, which could adversely affect our
relationship with our members, the demand for our products and services, and our market share. It is difficult
to consistently and successfully predict the products and services our members will demand. The success of our
business depends in part on our ability to identify and respond to evolving trends in demographics and consumer
preferences. Failure to timely identify or effectively respond to changing consumer tastes, preferences and spending
patterns could adversely affect our relationship with our members, the demand for our products and services and our
market share.

Changes in accounting standards and subjective assumptions, estimates and judgments by management
related to complex accounting matters could significantly affect our financial results. Generally accepted
accounting principles and related accounting pronouncements, implementation guidelines and interpretations with
regard to a wide range of matters that are relevant to our business, such as revenue recognition, impairment of long-
lived assets and warehouse closing costs, inventories, self insurance, stock-based compensation, income taxes,
unclaimed property laws and litigation, are highly complex and involve many subjective assumptions, estimates and
judgments by our management. Changes in these rules or their interpretation or changes in underlying assumptions,
estimates or judgments by our management could significantly change our reported or expected financial
performance.

Our international operations subject us to risks associated with the legislative, judicial, accounting,
regulatory, political and economic factors specific to the countries or regions in which we operate, which
could adversely affect our financial performance. Our international operations could form a larger portion of our
net sales in future years. Future operating results internationally could be negatively affected by a variety of factors,
many beyond our control. These factors include political conditions, economic conditions, regulatory constraints,
currency regulations and exchange rates, and other matters in any of the countries or regions in which we operate,
now or in the future. Other factors that may impact international operations include foreign trade, monetary and
fiscal policies both of the United States and of other countries, laws and regulations of foreign governments,
agencies and similar organizations, and risks associated with having major facilities located in countries which have
been historically less stable than the United States.

Implementation of technology initiatives could disrupt our operations in the near term and fail to provide the
anticipated benefits. We have made and will continue to make significant technology investments both in our
warehouses and in our administrative functions. The cost and potential problems and interruptions associated with
the implementation of technology initiatives could disrupt or reduce the efficiency of our operations in the near
term. In addition, new or upgraded technology might not provide the anticipated benefits; it might take longer than
expected to realize the anticipated benefits or the technology might fail.
Market expectations for our financial performance is high. We believe that the price of our stock reflects high
market expectations for our future operating results. Any failure to meet these expectations for our comparable
warehouse sales growth rates, earnings per share and new warehouse openings could cause the market price of our
stock to drop.

Cost related to natural disasters could adversely affect our financial performance.

The occurrence of one or more natural disasters, such as hurricanes or earthquakes particularly in California where
over 30% of our net sales are generated) could adversely affect our operations and financial performance. Such
events could result in physical damage to one or more of our properties, the temporary closure of one or more
warehouses or depots, the temporary lack of an adequate work force in a market, the temporary or long-term
disruption in the supply of products from some local and overseas suppliers, the temporary disruption in the
transport of goods from overseas, delay in the delivery of goods to our depots or warehouses within a country in
which we are operating and the temporary reduction in the availability of products in our warehouses.

We are subject to a wide variety of federal, state, regional, local and international laws and regulations
relating to the use, storage, discharge, and disposal of hazardous materials and hazardous and non-hazardous
wastes, and other environmental matters. While we believe that our operations are currently in material
compliance with all environmental laws, any failure to comply with these laws could

result in costs to satisfy environmental compliance, remediation requirements, or the imposition of severe penalties
or restrictions on operations by government agencies or courts that could adversely affect our operations.

We are involved in a number of legal proceedings, and while we cannot predict the outcomes of such
proceedings and other contingencies with certainty, some of these outcomes may adversely affect our
operations or increase our costs. We are involved in a number of legal proceedings, including consumer,
employment, tort and other litigation. We cannot predict with certainty the outcomes of these legal proceedings and
other contingencies, including environmental remediation and other proceedings commenced by government
authorities. The outcome of some of these legal proceedings and other contingencies could require us to take, or
refrain from taking, actions which could adversely affect our operations or could require us to pay substantial
amounts of money. Additionally, defending against these lawsuits and proceedings may involve significant expense
and diversion of management’s attention and resources. Our business requires compliance with a great variety of
laws and regulations. Failure to achieve compliance could subject us to lawsuits and other proceedings, and lead to
damage awards, fines and penalties.

Failure of our internal control over financial reporting could harm our business and financial results. Our
management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting for external purposes in accordance with U.S. generally accepted accounting
principles. Internal control over financial reporting includes: maintaining records that in reasonable detail accurately
and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for
preparation of the

financial statements; providing reasonable assurance that our receipts and expenditures of our assets are made in
accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use
or disposition of our assets that could have a material effect on the financial statements would be prevented or
detected on a timely basis. Because of its inherent limitations, internal control over financial

reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be
prevented or detected. Any failure to maintain an effective system of internal control over financial reporting could
limit our ability to report our financial results accurately and timely or to detect and prevent fraud.
CANADA
CITES:

1.) Culture Grams: World Edition 2008: Asia and Oceania

2.) http://www.smallbusinessnotes.com/aboutsb/sbfacts/sbnumber.html

3.) http://www.census.gov/prod/1/pop/p25-1129.pdf

4.) http://en.wikipedia.org/wiki/Household_income_in_the_United_States

5.) http://www.statcan.ca/Daily/English/070503/d070503a.htm

6.) http://www.stat.go.jp/english/data/kakei/156.htm (THIS ONE IS IMPORTANT)

7.) http://www.dragonstrike.com/mrk/disaster.htm
Natural Disasters for Japan:

- Earthquakes, tsunamis, volcanoes, typhoon

COMPETITOR: BJ’s

- As of 2007 Annual Report: 172 stores in US in 16 states

- New England in 1984

- Ticker: BJ

- 287th on Fortune 500 largest public corps.

Current Objectives:

- Have high sales with rapid inventory turnover

- BJ’s Wholesale Club is dedicated to providing its members with high-quality, brand name
merchandise at prices that are significantly lower than the prices found at supermarkets,
supercenters, department stores, drug stores and specialty retail stores.
-

Current Strategies:

- Warehouse clubs offer a narrow assortment of food and general merchandise items within a
wide range ofproduct categories.
o averaged approximately 113,000 square feet and 19 smaller format warehouse clubs
that averaged approximately 71,000 square feet.
o Including space for parking, a typical full-sized BJ’s club requires 13 to 14 acres of
land. The smaller version typically requires approximately eight acres
o Our clubs are located in both free-standing locations and shopping centers.
o

- In order to achieve high sales volumes and rapid inventory turnover, merchandise selections
are generally limited to items that are brand name leaders in their categories and a growing
private brands assortment.

- Since warehouse clubs sell a diversified selection of product categories, they attract
customers from a wide range of other wholesale and retail distribution channels, such as
supermarkets, supercenters, department stores, drug stores, discount stores, office supply
stores, consumer electronics stores and automotive stores.
- Also target small businesses and households
- First, we place added focus on the individual consumer, our Inner Circle® member, through
merchandising strategies that emphasize a customer-friendly shopping experience
- Second, by clustering our clubs, we achieve the benefit of name recognition and maximize
the efficiencies of our management support, distribution and marketing activities.
- Finally, we seek to establish and maintain the first or second industry leading position in each
major market where we operate.
- For the convenience of our members, we maintain longer hours of operation than our
warehouse club competitors
- While all wholesale clubs sell merchandise in bulk, BJ’s also offers smaller package
sizes that are easier to carry home and store, including sizes that are comparable to those
offered in supermarkets.
o Smaller package sizes can be found in a number of our fresh food categories,
including dairy, meat, bakery, fish
and produce.

- We are also the only major warehouse club operator to accept manufacturers’ coupons, which
provide added value for our members, and we accept more credit card payment options than
our warehouse club competitors.

- We limit the items offered in each product line to fast selling styles, sizes and colors, carrying
an average of approximately 7,500 active stockkeeping units (SKU’s). By contrast,
supermarkets normally stock from 30,000 to 52,000 SKU’s, and supercenters typically stock
up to 125,000 SKU’s.
- Food accounted for approximately 60% of BJ’s total food and general merchandise sales in
2006. The remaining 40% consisted of a wide variety of general merchandise items.
- Paid membership is an essential part of the warehouse club concept. In addition to providing
a source of revenue which permits us to offer low prices, membership reinforces customer
loyalty. We have two types of members: Inner Circle members and business members. Most
of our Inner Circle members are likely to be home owners whose incomes are above the
average for the Company’s trading areas. We believe that a significant percentage of our
business members also shops BJ’s for their personal needs. We had approximately 8.7 million
BJ’s members (including supplemental cardholders) at February 3, 2007. We generally
charge $45 per year for a primary Inner Circle membership that includes one free
supplemental membership. Members in the same household may purchase additional
supplemental memberships for $20 each. A business membership also costs $45 per year and
includes one free supplemental membership. Additional supplemental business memberships
cost $20 each. BJ’s Rewards MembershipSM program, which is geared to high frequency,
high volume members, offers a 2% rebate, capped at $500 per year, on generally all in-club
purchases. The annual fee for a BJ’s Rewards Membership is $80. At the end of 2006,
Rewards Members accounted for approximately 5% of our primary members and
approximately 13% of our food and general merchandise sales during the year.
- As of January 28, 2006, we had approximately 21,200 full-time and part-time employees
(“team members”). None of our team members is represented by a union.
-
Future Plans:

- plan to open 8 to 10 new clubs in 2007, all of which are expected to be in existing markets.
- In each case,
- we replaced an older club with a new prototype. The table above excludes the opening of two
ProFoods Restaurant Supply clubs in 2004 and the closing of those two clubs in 2006.
- Retain new members

- Be more competitive w/ prices

- New assortments and presentation of products

Financial Info:

- Net Sales 2006: $8,303,500

- Construction and site development costs for a full-sized owned BJ’s club generally range
from $6 million to $10 million. Land acquisition costs for a club generally range from $5
million to $10 million but can be significantly higher in some locations. We also invest
$3 to $4 million for fixtures and equipment and approximately $2 million for inventory
(net of accounts payable) and incur approximately $0.9 to $1.0 million for preopening
costs in a new full-sized club.
- Net Income: $72,016 as of Feb 2007

- Stockholders Equity: 1,019,887

CITES:

1.) http://www.bjsinvestor.com/profile.cfm