Profit down at Costco, BJ's beats view with food sales

NEW YORK Wed Mar 4, 2009 3:24pm EST

Shoppers walk out of Costco Warehouse in Arlington, Virginia in this May 29, 2008 file photo. REUTERS/Molly Riley

Shoppers walk out of Costco Warehouse in Arlington, Virginia in this May 29, 2008 file photo.

Credit: Reuters/Molly Riley

NEW YORK (Reuters) - Costco Wholesale Corp posted lower profit on Wednesday as it aggressively cut prices to win market share, while smaller rival BJ's Wholesale Club Inc topped Wall Street expectations by attracting shoppers with fresh food and prepared meals.

Warehouse clubs have been appealing to shoppers looking for discounts on necessities like groceries and toiletries as the recession crimped budgets. But they are facing greater challenges compared with a year ago when high gas prices drove sales at their fuel stations, and a weak U.S. dollar boosted Costco's international results.

Costco and BJ's said that winning market share was a priority, and that they would keep prices low to achieve it.

"We're strategically looking to take advantage of this downturn to gain market share," BJ's Chief Executive Officer Laura Sen on a conference call with analysts.

"The search for value has never been more important to our members, who still do the bulk of their food shopping in supermarkets," she said. "Our goal is to be the first stop for grocery shopping with supermarkets being used for fill in."

Costco, the No. 1 U.S. warehouse club, said its February sales at clubs open at least a year, or same-store sales, fell 3 percent, more than the 2.7 percent decline analysts had been expecting. BJ's February same-store sales rose 0.6 percent, lower than the 1.6 percent rise expected by analysts.

Separately, close-out retailer Big Lots reported a higher-than-expected quarterly profit, helped by improved gross margins, and said it paid down its credit facility, leaving it in a net cash position.

Costco shares rose 33 cents to $41.02. Big Lots shares rose 19 percent to $17.35, and BJ's shares rose almost 9 percent to $29.84.

Major U.S. retailers are due to post February same-store sales on Wednesday and Thursday. Analysts expect an industry decline of 1.2 percent for the month, with a drop of 4.8 percent excluding results for Wal-Mart Stores Inc, according to Thomson Reuters.

PROFITS DIVERGE

Costco's profit was $239.7 million, or 55 cents per share, for its fiscal second quarter ended February 15, down from $327.9 million, or 74 cents per share, a year earlier. The results missed analysts' average estimate of 60 cents per share, according to Reuters Estimates.

Sales fell 1 percent to $16.49 billion, excluding membership fees, which rose about 4 percent to $355.6 million.

Costco's Chief Financial Officer Richard Galanti said results were hurt by weak sales of discretionary items as shoppers bought basics like food. Margins in food and other categories were hit by price cuts "to drive sales and increase market share," he said.

Galanti declined to provide a current quarter or full-year earnings forecast, saying the climate was too volatile.

The stronger U.S. dollar also hurt results from its international operations in countries including Canada, the United Kingdom, and Mexico.

Costco is still benefiting from consumers buying in bulk and wanting lower gas prices, said JP Morgan's Charles Grom.

"On the negative side, the company is focused more on preserving market share than driving margins higher, leaving earnings growth at risk," Grom wrote in a research note.

BJ's, the No. 3 U.S. warehouse club operator, said it took market share from supermarkets and restaurants as shoppers bought fresh food and prepared meals. It said margins would remain flat this year as it keeps prices low.

Net income rose to $52.7 million, or 91 cents per share, for the fiscal fourth quarter ended January 31, from $50.2 million, or 80 cents per share, a year earlier. Earnings excluding items were 89 cents per share, compared with Wall Street estimates of 86 cents per share.

BJ's forecast fiscal year earnings of $2.26 to $2.36 per share, assuming share repurchases of roughly $100 million, with the strongest growth in the third and fourth quarters.

BIG LOTS PROFIT FALLS

Big Lots' income from continuing operations was $81.8 million, or $1.00 per share, compared with $85.6 million, or 97 cents per share, a year ago. The results topped analysts' estimates of 93 cents per share.

Standard & Poor's equity research analyst Jason Asaeda said Big Lots' gross margin was better than expected, helped by higher initial price mark-ups and lower freight expenses.

On a conference call, it said it had paid down its credit facility and it is now in a net cash position.

For the full-year, it expects same-store sales to be in a range of flat to down 2 percent.

Big Lots forecast first quarter earnings per share of 34 cents to 40 cents from continuing operations and full-year earnings per share of $1.75 to $1.90 on that basis. Analysts, on average, had been expecting Big Lots to earn 35 cents for the first quarter and $1.70 for the full year.

(Additional reporting by Jessica Wohl in Chicago; Editing by Derek Caney, Dave Zimmerman)

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