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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

FOR THE QUARTERLY PERIOD ENDED MARCH 28, 2004

OR

/   / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _________ TO ___________

COMMISSION FILE NUMBER 0-24543

COST-U-LESS, INC.
(Exact name of registrant as specified in its charter)

3633 136^th Place SE, Suite 110
Bellevue, Washington 98006
(Address of principal executive office)  (Zip Code)

(425) 945-0213
(Registrant's telephone number, including area code)

8160 304^th Avenue SE, Building 3, Suite A
Preston, Washington 98050
(Former address of principal executive office)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| YES |_| NO.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). |_| YES |X| NO

The registrant had 3,736,556 common shares, par value $0.001, outstanding at May 7, 2004.

COST-U-LESS, INC.

INDEX TO FORM 10-Q

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

COST-U-LESS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

(Unaudited)

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

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COST-U-LESS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

(Unaudited)

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

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COST-U-LESS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share data)

(Unaudited)

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

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COST-U-LESS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

(Unaudited)

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

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COST-U-LESS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Business and Summary of Significant Accounting Policies

   Nature of Business

     Cost-U-Less, Inc. (the “Company”) operates mid-sized warehouse club-style stores in the United States Territories (“U.S. Territories”), foreign island countries in the Pacific and the Caribbean, the Hawaiian Islands and Sonora, California. At March 28, 2004, the Company operated eleven retail stores as follows: two stores in each of Hawaii and Guam, and one store in each of St. Thomas, St. Croix, American Samoa, Fiji, Curacao, St. Maarten and Sonora, California. On December 8, 2002, the Company’s two stores on the island of Guam suffered damage from Supertyphoon Pongsona, resulting in the immediate closure of both stores. The Company’s Tamuning store lost its generator in the storm, but reopened shortly thereafter on December 12th. The Company’s Dededo store, however, suffered more significant damage and had to be closed for reconstruction. The store was rebuilt and it reopened for business on October 3, 2003.

   Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and pursuant to the rules and regulations of the SEC. In the opinion of management, the financial information includes all adjustments that the Company considers necessary for a fair presentation of the financial position at such dates and the operations and cash flows for the periods then ended. The condensed consolidated balance sheet at December 28, 2003 has been derived from the audited financial statements at that date. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to SEC rules and regulations on quarterly reporting. Operating results for the 13 weeks ended March 28, 2004, are not necessarily indicative of results that may be expected for the entire year. All quarterly periods reported consist of 13 weeks. For further information, refer to the financial statements and footnotes included in the Company’s annual report on Form 10-K filed with the SEC on March 26, 2004.

   Fiscal Year

     The Company reports on a 52/53-week fiscal year, consisting of four thirteen-week periods and ending on the Sunday nearest to the end of December. Fiscal 2004, ending on December 26, 2004, and Fiscal 2003, which ended on December 28, 2003, are 52-week years.

   Principles of Consolidation

     The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries in the U.S. Virgin Islands, Netherlands Antilles, Guam, American Samoa, Nevada, Fiji and New Zealand. All significant inter-company accounts and transactions have been eliminated in consolidation.

   Foreign Currency Translations and Comprehensive Income

     The U.S. dollar is the functional currency for all locations, except for Fiji and Netherlands Antilles, where the local currency is the functional currency. Assets and liabilities denominated in foreign currencies are translated at the applicable exchange rate on the balance sheet date. Net sales, costs and expenses are translated at the average rates of exchange prevailing during the period. Adjustments resulting from this process are reported, net of taxes, as Accumulated Other Comprehensive Income (Loss), a component of Shareholders’ Equity. Realized and unrealized gains on foreign currency transactions are included in Other Income (Expense). The cumulative translation adjustment resulting from a net investment in a country is recognized as income or expense in the period the Company has substantially liquidated operations in that country.

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COST-U-LESS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

   Use of Estimates

     The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to: allowance for doubtful accounts; depreciable lives of assets; reserves for inventory; and deferred tax valuation allowances. Future events and their effects cannot be determined with certainty. Accordingly, the accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results could differ from those estimates.

   Stock-Based Compensation

     The Company has elected to apply the disclosure-only provisions of Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation. Accordingly, the Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations under APB No. 25, whereby compensation cost for stock options is measured as the excess, if any, of the fair value of the Company’s common stock at the date of grant over the stock option exercise price. The Company usually grants stock options at exercise prices equal to fair market value on the date of grant; as a result, no compensation cost has been recognized.

     Had stock option compensation expense for the Company’s stock option plans been recognized based on the estimated fair value on the grant date under the fair value methodology allowed by FAS 123, as amended by FAS 148, the Company’s net income and earnings per share amounts would have been as follows:

Reclassifications

     Certain reclassifications of prior years’ balances have been made for consistent presentation with the current year.

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COST-U-LESS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

New Accounting Pronouncements

     In April 2003, the FASB issued Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. The Company believes its adoption of this new accounting standard will not have a material impact on the Company’s results of operations or financial position, as the Company does not have derivatives nor does it participate in hedging activities.

2. Earnings Per Share

     Basic earnings per share is computed using the weighted average number of common shares outstanding during the period and excludes any dilutive effects of stock options and warrants. Diluted earnings per share are computed using the weighted average number of common shares and potentially dilutive shares outstanding during the period. Potentially dilutive shares are excluded from the computation if their effect is anti-dilutive.

     The following table sets forth the computation of basic and diluted earnings per common share (in thousands, except share and per share data):

3. Insurance Receivable

     On December 8, 2002, the Company’s two stores on the island of Guam suffered damage from the Supertyphoon Pongsona, resulting in the immediate closure of both stores. The Company’s Tamuning store lost its generator in the storm, but reopened shortly thereafter on December 12th. The Company’s Dededo store, however, suffered more significant damage, and had to be closed for reconstruction. The store was rebuilt and it reopened for business on October 3, 2003.

     The Company lost inventory, leasehold improvements and equipment as a result of the supertyphoon. At December 28, 2003, the Company had a $1.1 million receivable balance remaining on its books for losses that it expected to be recovered from insurance. In January 2004, the Company received payment for the entire remaining $1.1 million of insurance receivable.

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COST-U-LESS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(Unaudited)

4. Line of Credit

     On April 9, 2003, the Company entered into a line of credit with Wells Fargo Business Credit for a three year term, expiring on April 9, 2006. The line of credit consists of a $6.0 million committed, secured revolving credit line with a sublimit for letters of credit and bankers acceptances in the amount up to $0.5 million. At March 28, 2004, there were $0.1 million in borrowings outstanding on the line of credit, $0.1 million utilized for standby letters of credit and $0.1 million set aside for other reserves.

     Borrowings are limited to the lesser of $6.0 million or the amount calculated under the borrowing base. The borrowing base is equal to the lesser of (a) $6,000,000 or (b) the sum of 70% of eligible inventory in the United States of America, plus 60% of eligible inventory in the U.S. Virgin Islands and Guam, less specified reserves. On March 2, 2004, the Company and Wells Fargo Business Credit entered into the Second Amendment to Credit and Security Agreement. The amendment provided for the following: (i) an immediate reduction in the interest rate on the line of credit of one half of one percent (0.50%), (ii) a further reduction in the interest rate of one half of one percent (0.50%) if we meet certain net income levels from December 29, 2003, through June 27, 2004, and (iii) the adoption of new measurement values for fiscal 2004. Borrowings under the amended line of credit bear interest at the financial institution’s prime rate plus 1.0% (5% at March 28, 2004). A fee of 0.25% is charged on the unused portion of the line of credit. The line of credit contains various covenants, including a requirement that we maintain minimum pre-tax income and tangible net worth and limitations on acquisitions, additional debt, change in control and capital expenditures. The Company believes that it is currently in compliance with all such covenants.

     Prior to April 9, 2003, the Company maintained a $6.75 million line of credit with a different commercial bank. This line of credit was satisfied and terminated on April 10, 2003.

5. Commitments and Contingencies

   Legal Proceedings

     The Company is involved from time to time in claims, proceedings and litigation arising from its business and property ownership. The Company does not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company’s business, financial condition or results of operation.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain Factors That May Affect Future Results of Operations

     This discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto appearing in Item 1 of this report. In addition to historical information, this quarterly report on Form 10-Q contains, and may incorporate by reference, statements which may constitute forward-looking statements which involve known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms, variations of such terms or the negative of those terms, but the absence of such terms does not mean that a statement is not forward-looking. Factors that could affect our actual results include, but are not limited to: (i) competition; (ii) a decline in general economic conditions, (iii) risks associated with a small store base; (iv) fluctuations in foreign currency; (v) isolation of store operations from corporate management; (vi) challenges associated with island and international operations; (vii) dependence on, and uncertainties associated with, expansion outside the U.S.; (viii) transportation difficulties; (ix) weather and other risks associated with island operations; (x) implementation of growth strategy; (xi) dependence on key personnel and local managers; (xii) ability to maintain existing credit and obtain additional credit; (xiii) reliance on information and communication systems provided by third-party vendors; and (xiv) ability to utilize tax benefits. The September 11, 2001 terrorist attacks on the United States of America, hostilities in the Middle East, other acts of war or hostility, the effects on consumer demand, the financial markets, product supply and distribution and other conditions increase the uncertainty inherent in forward-looking statements. Forward looking statements reflect the expectations of our management at the time that they are made and do not represent an opinion about what may happen in the future. More information about factors that could affect our financial results is included in the “Risk Factors that May Affect Future Results” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of our annual report on Form 10-K for the year ended December 28, 2003, which was filed on March 26, 2004, with the Securities Exchange Commission.

     The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with management’s discussion and analysis of financial condition and results of operations included in our annual report on Form 10-K for the year ended December 28, 2003.

     As used in this quarterly report on Form 10-Q, unless the context otherwise requires, the terms “we,” “us,” “our,” “the Company,” and “Cost-U-Less” refer to Cost-U-Less, Inc., a Washington corporation, and its subsidiaries.

Overview

     We operate mid-sized warehouse club-style stores in the United States Territories, foreign island countries in the Pacific and the Caribbean, the Hawaiian Islands and Sonora, California. Our primary strategy is to operate in island markets, offering predominately U.S. branded goods. During the 13 weeks ended March 28, 2004, we operated eleven retail stores as follows: two stores in each of Hawaii and Guam, and one store in each of St. Thomas, St. Croix, American Samoa, Fiji, Curacao, St. Maarten and Sonora, California.

     On December 8, 2002, our two stores on the island of Guam suffered damage from Supertyphoon Pongsona, resulting in the immediate closure of both stores. Our Tamuning store lost its generator in the storm, but reopened shortly thereafter on December 12th. Our Dededo store, however, suffered more significant damage, and had to be closed for reconstruction. The store was rebuilt and it reopened for business on October 3, 2003.

     Our stores are patterned after the warehouse club concept, although the stores (i) are smaller (averaging approximately 30,000 square feet vs. large format warehouse clubs of approximately 115,000 square feet), (ii) generally target niche markets, mainly U.S. Territories, U.S. island states and foreign island countries, where demographics do not support large format warehouse clubs, (iii) carry a wide assortment of local and ethnic food items, and (iv) do not charge a membership fee. Although we do not have large seasonal fluctuations in sales, the fourth quarter is typically the highest sales quarter due to additional holiday sales.

     Our management focus relative to our core island store operations includes reviewing our merchandising strategies, both those that apply to all stores and those specific to each store in light of the different conditions in each market. We are currently in the process of analyzing opportunities in selected markets and relocation opportunities for existing stores with leases expiring

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in the next one to two years. While we believe these actions can improve profitability, there can be no assurance that these actions will be successful.

     We also continue to explore ways to maximize long-term value for our shareholders, including focusing on efforts to increase earnings, responding to competition, and improving same store sales and gross margins. We believe the number of new island markets with the attributes for our existing growth strategy is limited as a result of, among other things, changing market conditions. We are currently evaluating alternative methods of implementing future expansion, including exploring expansion opportunities in selected markets and relocation opportunities for existing stores with leases expiring in the next one to two years.

Results of Operations

     During the fiscal first quarter ended March 28, 2004, we continued to experience improvements in comparable-store sales and gross margin, which resulted in higher net income and EPS. These improvements were due to several factors including better sourcing, pricing, merchandising and mix of goods in our stores.

     Our total sales increase in the fiscal first quarter ended March 28, 2004, was due in part to the successful reopening of our Dededo, Guam store in October 2003, which had sufferered substantial damage from Supertyphoon Ponsonga on December 8, 2002, forcing it to close. The store was rebuilt and reopened on October 3, 2003. As a result of the reopening of our Dededo, Guam store, we expect our fiscal 2004 sales to increase as compared to 2003.

     We reported net income of $537,000 for the fiscal first quarter ended March 28, 2004, compared to a net income of $226,000 for the same period in fiscal 2003. The improvement in net income was primarily due to comparable-store sales increases and improved gross margin.

Comparison of the 13 Weeks Ended March 28, 2004 to the 13 Weeks Ended March 30, 2003

     Net Sales: Net sales of $50.1 million for the first quarter of fiscal 2004, increased 18.3% as compared to net sales of $42.3 million for the first quarter of fiscal 2003. Approximately 50% of the increase in sales was due to the reopening of our Dededo store in Guam in October 2003 after it suffered significant damage from Supertyphoon Pongsona that swept through the island on December 8, 2002. The balance of the increase is due to comparable-store sales increases offset by a 40% decline in business-to-business sales as compared to fiscal 2003. Although lower than the sales in the same period in the prior year, our business-to-business sales were comparable to those experienced in our third and fourth quarters of fiscal 2003. We expect the level of business-to-business activity for the remainder of fiscal 2004 to be consistent with current levels.

     Comparable-store sales (stores open for a full 13 months) increased 15.3% for the first quarter of fiscal 2004 as compared to the first quarter of fiscal 2003. Comparable-store sales are calculated on stores excluding the Guam market as our Dededo, Guam store was closed during the first quarter of fiscal 2003. Most of our stores experienced increased sales in the first quarter of 2004 as compared to 2003 due to improvements in our assortment of food and general merchandise, and improved economies from more tourism in some of our markets.

     Gross Profit: Gross profit of $9.1 million, or 18.1% of sales, for the first quarter of fiscal 2004, increased as compared to gross profit of $7.4 million, or 17.4% of sales, in the first quarter of fiscal 2003 due to a stronger mix of retail store sales, with typically higher margins, as compared to business-to-business sales, which generally provide a lower gross margin but are executed at minimal direct expense, and improved sourcing, pricing and merchandising in our stores.

     Store expenses: Store expenses of $6.3 million for the first quarter of fiscal 2004 increased $1.0 million compared to expenses of $5.3 million for the first quarter of fiscal 2003. Approximately 60% of the increase in store expenses was attributable to the increased expenses associated with operating two stores in Guam in the first quarter of fiscal 2004 as compared to one store in the first quarter of fiscal 2003. The remainder of the increase is primarily attributable to higher volume-related payroll, insurance and utility expenses. As a percentage of sales, store expenses remained flat at 12.6% of sales for the first quarter of fiscal 2004 compared to 12.5% for the same period in the prior year. Payroll costs declined and insurance costs increased as a percent of sales in the first quarter of fiscal 2004 as compared to the first quarter of fiscal 2003.

     General and administrative expenses: General and administrative expenses for the first quarter of fiscal 2004 remained flat at $1.7 million as compared to $1.6 million for the first quarter of fiscal 2003. As a percent of sales, general and administrative expenses for the first quarter of fiscal 2004 decreased to 3.5% as compared to 3.8% for the first quarter of fiscal 2003. The slight increase in general and administrative expense dollars was primarily due to increased personnel related costs and insurance costs, partially offset by a decrease in consulting fees.

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     Store opening expenses: Store opening expenses were $40,000 in the first quarter of fiscal 2004 compared to $28,000 in the first quarter of fiscal 2003. Store opening expenses in both periods related to costs associated with the evaluation of potential new store locations. We expect store opening expenses in fiscal 2004 to be slightly higher than those incurred in fiscal 2003 as we evaluate alternative methods of implementing future expansion, including exploring expansion opportunities in selected markets and relocation opportunities for existing stores with leases expiring in the next one to two years.

     Interest expense, net: Interest expense, net increased to $126,000 in the first quarter of fiscal 2004 as compared to $93,000 in the first quarter of fiscal 2003 primarily due to commitment fees associated with our new line of credit entered into in April 2003 and interest expense associated with our equipment lease entered into in January 2004.

     Other income: Other income in both the first quarter of fiscal 2004 and fiscal 2003 was primarily attributable to gains on foreign currency transactions, and translation of intercompany balances for transactions that exceed the permanent investments in those countries.

     Income tax provision: The tax provisions for the first quarter of fiscal 2004 and fiscal 2003, represent taxes associated with income generated in the U.S. and U.S. Territories. Our effective tax rate is higher than the expected federal statutory rate because no tax benefits were provided on foreign losses, as we have no assurance that we will be able to generate an adequate amount of taxable income in the future to utilize such benefits.

     Net income: Net income was $537,000, or $0.14 per fully diluted share, for the first quarter of fiscal 2004 compared to a net income for the first quarter of fiscal 2003 of $226,000, or $0.06 per fully diluted share. Weighted average diluted common shares outstanding were 3,859,987 for first quarter of 2004 as compared to 3,613,792 in the same period in the prior year.

Liquidity and Capital Resources

     We currently finance our operations with proceeds from various credit facilities, and internally generated funds. Net cash provided by operations was $0.5 million for the first quarter of fiscal 2004 as compared to $1.3 million used by operations for the first quarter of fiscal 2003. The increase in cash provided by operations in the first quarter of fiscal 2004, as compared to the same period in the prior year, was primarily due to an increase in accounts payable and the receipt of insurance proceeds related to the inventory and equipment damaged by the Supertyphoon on December 8, 2002, partially offset by a decrease in payments received on other receivables as compared to the same period in the prior year.

     Net cash used in investing activities was $0.3 million for the first quarter of fiscal 2004 as compared to $0.1 million in the same period in the prior year. We currently have no plans to open new stores during fiscal 2004, but we are in the process of exploring expansion opportunities in selected markets and relocation opportunities for existing stores with leases expiring in the next one to two years.

     We utilized $31,000 of cash for financing activities in the first quarter of fiscal 2004, as compared to $1.2 million provided by financing activities in the first quarter of fiscal 2003. The decrease was due to a reduction in borrowings under our line of credit partially offset by funds received on the sale-leaseback of equipment in Guam. Our current ratio has improved to 1.36 at March 28, 2004, versus 1.25 at March 30, 2003.

     On April 9, 2003, we entered into a line of credit with Wells Fargo Business Credit with a three-year term, expiring on April 9, 2006. The line of credit consists of a $6.0 million committed, secured revolving credit line with a sublimit for letters of credit and bankers acceptances in the amount up to $0.5 million. At March 28, 2004, there were $0.1 million in borrowings outstanding on the line of credit, $0.1 million utilized for standby letters of credit and $0.1 million set aside for other reserves.

     Borrowings are limited to the lesser of $6.0 million or the amount calculated under the borrowing base. The borrowing base is equal to the lesser of (a) $6,000,000 or (b) the sum of 70% of eligible inventory in the United States of America, plus 60% of eligible inventory in the U.S. Virgin Islands and Guam, less specified reserves. On March 2, 2004, we entered into the Second Amendment to Credit and Security Agreement with Wells Fargo Business Credit. The amendment provided for the following: (i) an immediate reduction in the interest rate on the line of credit of one half of one percent (0.50%), (ii) a further reduction in the interest rate of one half of one percent (0.50%) if we meet certain net income levels from December 29, 2003, through June 27, 2004, and (iii) the adoption of new measurement values for fiscal 2004. Borrowings under the amended line of credit bear interest at the financial institution’s prime rate plus 1.0% (5% at March 28, 2004). A fee of 0.25% is charged on the unused portion of the line of credit. The line of credit contains various covenants, including a requirement that we maintain minimum pre-tax income and tangible net worth and limitations on acquisitions, additional debt, change in control and capital expenditures. We believe that we are currently in compliance with all such covenants.

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     Prior to April 9, 2003, we maintained a $6.75 million line of credit with a different commercial bank. This line of credit was satisfied and terminated on April 10, 2003.

     A significant portion of our cash flow is generated by our operations. If our operating results deteriorate, as a result of a decrease in customer demand or severe pricing pressures from our customers or our competitors, our ability to generate positive cash flow from operations may be jeopardized. We believe that amounts available under our various credit facilities, existing cash available for working capital purposes, and cash flow from operations will most likely be sufficient to fund our operations through the next 12 months. There can be no assurance that we will be able to obtain additional financing when needed, or that any available financing will be on terms acceptable to us.

Contractual Obligations

     As of March 28, 2004, our commitments to make future payments under long-term contractual obligations were as follows (in thousands):

Critical Accounting Policies

     We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. The significant accounting policies are summarized in Note 1 to the consolidated financial statements included in our annual report on Form 10-K for the year ended December 28, 2003.

     The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

     We believe that the following accounting policies are the most critical in the preparation of our financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.

Inventories

     Inventories are carried at the lower of average cost or market. We provide for estimated inventory losses between physical inventory counts on the basis of a percentage of sales. The provision is adjusted periodically to reflect the trend of actual physical inventory count results.

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Long Lived Assets

     When facts and circumstances indicate that the carrying values of long-lived assets, including intangibles, may be impaired, an evaluation of the recoverability is performed by comparing the carrying value of the assets to projected future cash flows. Upon indication that the carrying value of such assets may not be recoverable, we recognize an impairment loss by a charge against current operations.

Foreign Currency Translation

     The U.S. dollar is the functional currency for all our locations, except for Fiji and Netherlands Antilles, where the local currency is the functional currency. Assets and liabilities denominated in foreign currencies are translated at the applicable exchange rate on the balance sheet date. Net sales costs and expenses are translated at the average rates of exchange prevailing during the period. Adjustments resulting from this process are reported, net of taxes, as Accumulated Other Comprehensive Income (Loss), a component of Shareholders’ Equity. Realized and unrealized gains on foreign currency transactions are included in Other Income (Expense). The cumulative translation adjustment resulting from a net investment in a country is recognized as income or expense in the period we substantially liquidated operations in that country.

Income Taxes

     Income tax expense includes U.S. and foreign income taxes. We account for income taxes under the liability method. Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We apply judgment in determining whether it is more likely than not that the deferred tax assets will be realized, and valuation allowances are established when necessary. Our effective tax rate is currently higher than the expected federal statutory rate because valuation allowances have been established against the tax benefits of foreign losses, as we have no assurance that we will be able to generate an adequate amount of taxable income in the future to utilize such benefits. We are developing and implementing certain tax planning strategies, which may affect our ability to recognize some of the deferred tax assets that are currently allowed for and may ultimately change our estimate of the valuation allowance.

Accounting Pronouncements

     In April 2003, the FASB issued Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. We believe that our adoption of this new accounting standard will not have a material impact on our results of operations or financial position, as we do not have derivatives nor do we participate in hedging activities.

Risk Factors That May Affect Future Results

     You should carefully consider the following factors that may affect future results and other information included in this quarterly report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that are currently deemed immaterial also may impair our business operations or could cause actual results to differ from historical results or those anticipated. If any of the following risks actually occur, our business, financial condition and operating results could be materially adversely affected.

     Our ability to operate profitably in existing markets and to expand into new markets may be adversely affected by competing warehouse clubs or discount retailers. The warehouse club and discount retail businesses are highly competitive. If we fail to successfully respond to competitive pressures in this industry, or to effectively implement our strategies to respond to these pressures, our operating results may be negatively affected. Many of our competitors have substantially greater resources, buying power and name recognition than we have. The cost of doing business in island markets is typically higher than on the U.S. mainland because of ocean freight and duty costs and higher facility costs. In addition, our gross margin and operating income are generally lower for stores in markets where traditional warehouse clubs and discount retailers also operate stores, due to increased price competition and reduced market share. We may be required to implement price reductions and other actions in order to remain competitive in our markets. Furthermore, our ability to expand into and operate profitably in new markets may be adversely affected by the existence or entry of competing warehouse clubs or discount retailers. These factors could result in reduced sales and margins or loss of market share, any of which could negatively affect our results of operations.

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     A decline in the general economic condition in the United States or in island markets in which we operate could have a significant impact on our financial performance. The success of our operations depends to a significant extent on a number of factors relating to discretionary consumer spending, including employment rates, business conditions, interest rates, inflation, population and Gross Domestic Product levels in each of our island markets, taxation, consumer spending patterns and customer preferences. We cannot fully foresee the changes in business and economic conditions that may result from domestic or foreign factors. There can be no assurance that consumer spending in our markets will not be adversely affected by these factors, thereby affecting our growth, net sales and profitability. A downturn in tourism or a decline in the national or regional economies of the United States and the U.S. Territories where we currently operate or any foreign countries in which we currently or will operate, could have a material adverse effect on our business, financial condition and operating results.

     Because we have a small store base, adverse store performance or increased expenses will have a more significant adverse impact on our operating and financial results than if we had a larger store base. We opened our first store in 1989 and opened a total of 21 stores through December 2003, and presently operate eleven stores. Our closure of the ten other stores prior to March 2001, adversely affected our operating results. Should any existing store experience a significant decline in profitability or any new store be unprofitable, the negative effect on our business would be more significant than would be the case if we had a larger store base, and could have a material adverse effect on our business, financial condition and operating results. In addition, if our general and administrative expenses increase, the negative effect on our business and results of operations would be more significant than if we had a larger store base. Although we intend to carefully plan for the implementation of additional stores, there can be no assurance that such plans can be executed as envisioned or that the implementation of those plans will not have a material adverse effect on our business, financial condition and operating results. In addition, our ability to acquire products at a lower cost than competitors or obtain volume-based pricing can be adversely affected because of our small store base.

     If we cannot obtain sufficient funds to grow our business, our operations and business may suffer. We expect to have substantial future capital requirements to expand our business. Currently, we believe we have sufficient funds from our existing cash, various credit facilities and cash flow from operations to fund our operations through the next 12 months. We do not, however, have sufficient funds to pursue a rapid growth strategy. Our ability to expand our business and pursue a rapid growth strategy will depend on our ability to obtain significant external financing. Our ability to obtain additional financing on acceptable terms depends on a number of factors, such as market conditions and our operating performance. There can be no assurance that we will be able to obtain additional financing in a timely manner and upon acceptable terms, if at all. If we fail to obtain necessary funds upon acceptable terms, we may be forced to delay expansion of our business or otherwise curtail our operations and our operations and business may suffer.

     A prolonged decrease in tourism and air travel could have an indirect but significant impact on our financial performance, operations and liquidity. Because our operations are primarily located in the U.S. Territories and foreign island countries throughout the Pacific and Caribbean, the success of our operations depends to a significant extent on tourism and the travel industry. Prolonged adverse occurrences affecting tourism or air travel, particularly to non-U.S. destinations, including political instability, armed hostilities, terrorism, or other activity that involves or affects air travel or the tourism industry generally, could have an indirect but adverse and significant impact on our financial performance, operations liquidity or capital resources.

     If we are unable to overcome challenges resulting from the isolation of store operations from our corporate management and our increased dependence on local managers, we may experience decreased productivity or other operational problems. Our headquarters and administrative offices are located in Washington State; however, ten of our eleven stores and a majority of our employees are located on islands. Although we invest resources to hire and train our on-site managers, the inability of our executives to be physically present at our current and planned store sites on a regular basis may result in the following:

     We may need to invest significant resources to update and expand our communications systems and information networks and to devote a substantial amount of time, effort and expense to national and international travel in order to overcome these challenges; failure to do so could have a material adverse effect on our business, financial condition and operating results.

     Our business could suffer if we are unable to manage the challenges associated with island and international operations. Our net sales from island operations represented approximately 90.6% of our total net sales for fiscal 2003. We expect that our island and international operations together will continue to account for nearly all of our total net sales. The distance, as well as the time-zone differences, involved with island locations impose significant challenges to our ability to manage our operations. Logistical challenges are presented by operating individual store units in remote locations, whether in terms of information flow

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or transportation of goods. Our inability to effectively manage our island and international operations could have a significant adverse effect on our business, results of operations and financial condition

     We may encounter disruption in the transportation of our products, which would significantly harm our business. Our island locales require the transportation of products over great distances on water, which results in the following:

     Moreover, only a limited number of transportation companies service our regions, none of which has entered into a long-term contract with us. The inability or failure of one or more key transportation companies to provide transportation services to us, changes in the regulations that govern shipping tariffs or any other disruption in our ability to transport our merchandise could have a material adverse effect on our business, financial condition and operating results.

     We face a number of uncertainties associated with expansion outside U.S. Territories. Our failure to adequately address these uncertainties could cause our business to suffer. Currently, three of our stores are located outside the U.S. Territories. Our future expansion plans may involve entry into additional foreign countries, which may involve additional or heightened risks and challenges that are different from those we currently encounter, including risks associated with being further removed from the political and economic systems in the United States and anti-American sentiment as a result of political or military action. We do not currently engage in currency hedging activities. On February 15, 2001, we closed one of the two stores we operated in Fiji due primarily to the impact that the political turmoil in Fiji was having on the tourist industry, with the resulting economic downturn severely impacting our store in Nadi. Our remaining store in Fiji is located in the city of Suva, which is the capital of Fiji and the primary population center. There can be no assurance that further political and economic changes in Fiji, or political and economic changes in other markets, will not have a material adverse effect on our business, financial condition and operating results. The failure to adequately address the additional challenges involved with international operations could have a material adverse effect on our business, financial condition and operating results.

     We are exposed to weather and other risks associated with island operations, which could affect our business and results of our operations. Our operations are primarily located on islands subject to volatile weather conditions and natural disasters, which could result in delays in construction or result in significant damage to, or destruction of, our stores. On December 8, 2002, our two stores on the island of Guam suffered damage from Supertyphoon Pongsona, resulting in the immediate closure of both stores. Our Tamuning store lost its generator in the storm but reopened shortly thereafter on December 12th. Our Dededo store, however, suffered more significant damage and had to be closed for reconstruction. The store was rebuilt and it reopened for business on October 3, 2003.

     In addition to weather, island operations involve uncertainties arising from such as:

     There can be no assurance that we will be able to devote the resources necessary to meet the challenges posed by island operations, or that losses from business interruption will be adequately compensated by insurance; any failure to do so would have a material adverse effect on our business, financial condition and operating results.

     If we are unable to manage our fluctuating comparable store sales or our comparable store sales decline, our business and results of operations could suffer. Historically, our comparable store sales have fluctuated significantly. A variety of factors affect our comparable store sales, including, among others, actions of competitors (including the opening of additional stores in our markets), the retail sales environment, general economic conditions, weather conditions and our ability to execute our business strategy effectively. In addition, our future expansion may result in opening additional stores in markets where we

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already do business. Historically, we have experienced a reduction in sales at an existing store when we open a new store in the same market. These factors may result in future comparable store sales declines. Moreover, there can be no assurance that comparable store sales for any particular period will not decrease in the future. If our comparable store sales decline, our business, results of operations and financial condition would suffer.

     If we are unable to execute our growth strategy, our business could suffer. The success of our future growth strategy will depend to a significant degree on our ability to do the following:

     We have not opened stores in foreign island markets at a rapid pace. Currently, we have no plans to open new stores during 2004, but we are in the process of exploring expansion opportunities in selected markets and relocation opportunities for existing stores with leases expiring in the next one to two years. We do not have operating experience in many of the markets in which we may open new stores. In fact, in June 2000, we closed the two stores that we had opened in New Zealand in 1999, as they had performed below expectations, due in part to competitive and merchandising challenges that are different from our other stores. Additionally, in February 2001, we closed one of our two Fiji stores, due primarily to the impact that the political turmoil and resulting economic downturn in Fiji were having on the tourist industry. New markets may present operational, competitive, regulatory and merchandising challenges that are different from those we currently encounter. There can be no assurance that we will be able to adapt our operations to support our future expansion plans or that our new stores will be profitable. Any failure on our part to manage our growth could have a material adverse effect on our business, financial condition and operating results.

     Additionally, we rely significantly on the skill and expertise of our on-site store managers. We will be required to hire, train and retain skilled managers and personnel to support any growth, and may experience difficulties locating store managers and employees who possess the training and experience necessary to operate our new stores, including our management information and communications systems, particularly in island markets where language, education and cultural factors may impose additional challenges. Further, we have encountered, and may continue to encounter, substantial delays, increased expenses or loss of potential sites due to the complexities, cultural differences, and local political issues associated with the regulatory and permitting processes in the island markets in which we may locate our stores. There can be no assurance that we will be able to open new stores according to our business plans, or that we will be able to continue to attract, develop and retain the personnel necessary to pursue our growth strategy. Failure to do so could have a material adverse effect on our business, financial condition and operating results.

     We believe that there are certain attributes of appropriate markets into which we may expand our operations through the opening of new stores, including:

     We believe the number of new island markets with these attributes is limited in number as a result of, among other things, the entry by many of our larger competitors into these markets. If we are unable to expand into new island markets ahead of large warehouse club competitors, our business, financial condition and results of operations may be adversely affected.

     We also will need to continually evaluate the adequacy of our existing systems and procedures, including store management, financial and inventory control and distribution systems. As we grow, we will need to continually analyze the sufficiency of our distribution depots and inventory distribution methods and may require additional facilities in order to support our planned growth. There can be no assurance that we will anticipate all the changing demands that our expanding operations will impose on such systems. Failure to adequately update our internal systems or procedures as required could have a material adverse effect on our business, financial condition and operating results.

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     The loss of key personnel could harm our business and results of operations. Our success depends in large part on the abilities and continued service of our executive officers and other key employees. In addition, we do not currently carry key-man life insurance. There can be no assurance that we will be able to retain the services of such executive officers and other key employees, the loss of any of whom could have a material adverse effect on our business, financial condition and operating results.

     A disruption of our information systems could cause our business and results of operations to suffer. Our business is highly dependent on communications and information systems, primarily systems provided by third-party vendors. Although we have taken a number of precautions against certain events that could disrupt the operation of our management information systems, we may experience systems failures or interruptions, which could have a material adverse effect on our business, financial condition and operating results. Any failure or interruption of our systems or systems provided by third-party vendors could cause delays or other problems in our operations, which could have a material adverse effect on our business, financial condition and operating results.

     We may not be able to utilize certain tax benefits, which could have a material adverse effect on our results of operations. Our ability to utilize various tax benefits is dependent on our ability to generate adequate taxable income in the United States and in foreign jurisdictions. As of December 28, 2003, we had recognized an aggregate foreign tax benefit of $2.3 million on foreign operating losses and a corresponding valuation allowance of $2.2 million. Approximately one-half of the Net Operating Losses, or NOLs, will begin expiring in the year 2006. The remaining NOLs were generated in Curacao and St. Maarten and are not subject to expiration time limits. Utilization of the tax benefit is dependent on our generating future taxable income. There can be no assurance that we will be able to produce adequate future taxable income to utilize this tax benefit, and failure to generate such income may have a material adverse effect on our business, financial condition and operating results.

     Certain provisions in our charter documents and otherwise may discourage third parties from attempting to acquire control of our Company, which may have an adverse effect on the price of our stock. Our board of directors has the authority, without obtaining shareholder approval, to issue up to 2,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions of such shares without any further vote or action by our shareholders. Our articles of incorporation and bylaws also provide for a classified board and special advance notice provisions for proposed business at annual meetings. In addition, Washington law contains certain provisions that may have the effect of delaying, deferring or preventing a hostile takeover of our company. Further, we have a shareholder rights plan that is designed to cause substantial dilution to a person or group that attempts to acquire our company without approval of our board of directors, and thereby make a hostile takeover attempt prohibitively expensive for a potential acquirer. These provisions, among others, may have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of our company, even if shareholders may consider such a change in control to be in their best interests, which may cause the price of our common stock to suffer.

     We are subject to various governmental regulations, which may have an adverse effect on our business. Governmental regulations in foreign countries where we plan to expand our operations might prevent or delay entry into the market or prevent or delay the introduction, or require modification, of certain of our operations. Additionally, our ability to compete may be adversely affected by foreign governmental regulations that encourage or mandate the employment of citizens of, or purchase of supplies from vendors in a particular jurisdiction. We may also be subject to taxation in these foreign jurisdictions, and the final determination of our tax liabilities may involve the interpretation of the statutes and requirements of the various domestic and foreign taxing authorities. We may also be subject to currency repatriation restrictions. There can be no assurance that any of these risks will not have a material adverse effect on our business, financial condition and operating results.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We operate stores in foreign countries and have market risks associated with foreign currencies. However, sales are primarily made in U.S. cash or foreign currencies with minimal trade credit extended and no borrowings exist in foreign currencies. Cash deposited from sales are remitted back to the U.S. bank account, routinely.

     We record gains and losses on foreign currency transactions, and translation of intercompany balances for transactions that exceed the permanent investments in those countries in Other Income (Expense). Gains and losses are primarily attributable to appreciation and (depreciation) in the Fijian dollar as compared to the U.S. dollar.

     We have also assessed our vulnerability to interest rate risk associated with our financial instruments, including, cash and cash equivalents, lines of credit and long term debt. Due to the nature of these financial instruments, we believe that the risk associated with interest rate fluctuations does not pose a material risk. Our line of credit and long-term debt can be expected to vary in the future as a result of future business requirements, market conditions and other factors.

     We do not have any derivative financial instruments as of March 28, 2004.

ITEM 4. CONTROLS AND PROCEDURES

     (a) Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

     (b) There has been no significant change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

(b) Reports on Form 8-K

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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