* January same-store sales fell 2 percent
* Sees Q2 EPS below First Call consensus of 70 cents
* Says will not provide earnings forecasts
* Shares fall 6.8 pct, Wal-Mart down 1.9 pct (Adds CFO comments, updates share price)
NEW YORK, Feb 4 (Reuters) - Costco Wholesale Corp (COST.O) warned that quarterly earnings would be well below Wall Street estimates after it cut prices in the holiday season, and said it would not give earnings forecasts for the fiscal year, pushing shares down 6.8 percent.
The largest U.S. warehouse club also said on Wednesday that January sales at stores open at least a year, or same-store sales, fell 2 percent.
"It is increasingly difficult, with everything going on, to provide guidance that we don't have to then change," said Chief Financial Officer Richard Galanti on a conference call.
Galanti said the U.S. economy has "kind of hit a bottom," but it could get a little worse or stay depressed for many months, if not a year. The retailer has instituted a hiring freeze at its central and regional administrative offices.
The warning rattled Costco's competitors with shares of Sam's Club owner Wal-Mart Stores Inc (WMT.N) down almost 2 percent and BJ's Wholesale Club Inc BJ.N down 4.2 percent. Costco fell $3.03 to $43.09 in early afternoon trading.
"You do hate to see a Costco come out and say they're not going to give guidance," said Gary Bradshaw, portfolio manager at the Hodges Funds, which owns Costco shares. "It tells you that everybody is hunkering down and we may be in a prolonged period" of recession.
The warehouse club operator said profit for the second quarter ending Feb. 15 is expected to be "substantially below" the First Call consensus of 70 cents a share.
Analysts on average were expecting earnings of 71 cents a share, before special items, according to Reuters Estimates.
Six analysts polled by Thomson Reuters research were expecting the company's same-store sales to decline 3.7 percent in January.
FIGHT TO WIN MARKET SHARE
Costco has won customers by offering unexpected items, like Burberry handbags, alongside typical warehouse club goods, such as bulk-sized packages of toilet paper and crates of fresh fruit. As a U.S. recession squeezed budgets, shoppers have come to its clubs for low prices on food, and last year, customers flocked to its gas stations for cheap fuel.
But Costco's business has slowed as shoppers avoid splurging on unnecessary items, like jewelry. In addition, falling gas prices have deflated sales while a strengthening U.S. dollar has lowered the value of its international sales.
Costco has said that to keep its customers during the recession, it intends to be aggressive cutting prices or delaying price increases, although Wall Street analysts have warned that strategy could hurt profits.
Galanti said the retailer's margins were hurt, especially in December, as it marked down prices on popular food items, like rotisserie chicken, to increase market share.
"We're leading the price down because that's what our customer recognizes," he said.
Bradshaw said that while the price cuts hurt profits, they will help Costco increase shopper loyalty.
"I would expect that Costco would come out of this decline a much stronger company because of what they're doing," he said.
Indeed, Galanti said customers are making more trips to its clubs, although they are spending less during their visits. He also said its shoppers, who pay an annual fee to shop in its clubs, are renewing their memberships at a strong rate.
DEFLATION TO THE RESCUE
Galanti said such extensive price cuts may not be repeated as deflation in commodities translates into lower prices for basic items, like eggs, butter and trash bags. He said Costco is already making "good margins again" in some of these products as inflation has moderated.
As other retailers struggle to clear through excess inventory or cancel orders, Galanti said Costco is getting better access to high end, branded products like clothes, electronics and handbags.
But Galanti did said that sales of discretionary products, like jewelry and home furnishing, continue to struggle.
Costco said that in January, same-store sales at its U.S. outlets were flat, while international division sales fell 9 percent. Excluding the impact of gasoline price deflation, U.S. comparable sales would have been up 4 percent, it said.
Net sales for the four weeks ended Feb. 1 fell to $5.10 billion from $5.11 billion in the same period last year. (Additional reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by David Holmes, Dave Zimmerman and Gunna Dickson) (Reporting by Nicole Maestri)