UPDATE 3-Costco pumped, and pressured, by gasoline sales

Wed May 25, 2011 1:46pm EDT

* Q3 EPS 73 cents including LIFO charge vs St view $0.77

* Sales rise 16.1 percent, membership fees up 10.1 percent

* Same-store sales rose 12 percent

* Shares down 1.5 percent to $80.13 in afternoon trade (Adds CFO comments from call, graphic, updates stock move)

By Jessica Wohl

CHICAGO, May 25 (Reuters) - Costco Wholesale Corp's (COST.O) profit growth was hit by higher prices on the goods it buys and stronger sales of low-margin gas, which pushed shares of the largest U.S. warehouse club down 1.5 percent.

Costco, which sells products from paper towels to diamond necklaces at a discount to its members, on Wednesday posted a higher profit that fell short of analysts' expectations.

The chain took a pretax inventory charge of $49 million, or 7 cents per share, as inflation swelled during the quarter.

Manufacturers are raising the prices Costco pays for coffee, detergent and other products as their own costs rise.

"It's here," Costco Chief Financial Officer Richard Galanti said of inflation. "When will it subside? Hopefully soon."

Meanwhile, Costco is selling more gasoline than usual as drivers who balk at paying $4 or more per gallon elsewhere decide to fill up at the club. While selling gasoline drives revenue, gas is less profitable than other goods.

Gross margin declined 37 basis points to 10.5 percent, missing a consensus forecast of 11.14 percent, according to Wall Street Strategies analyst Brian Sozzi.

"Not to throw cold water on the latest from Costco by any means as the performance overall was solid, but the fact is the market yearned for more," Sozzi said.

Costco earned $324 million, or 73 cents a share, in its fiscal third quarter that ended May 8, compared with a profit of $306 million, or 68 cents a share, a year ago.

Analysts, on average, anticipated a profit of 77 cents per share, according to Thomson Reuters I/B/E/S.

(For a graphic showing Costco's results, click here:r.reuters.com/zag79r)

MEMBERSHIP FEE

Some analysts would like to see Costco raise its membership fees of $50 and $100, which have not been raised since 2006.

BJ's, the No. 3 U.S. warehouse chain, raised its fee by $5 to $50 in January.

Issaquah, Washington-based Costco did not announce any plans to raise its main fees, but it is now charging businesses $50 for extra membership cards, up from $40, Galanti said.

That move, made in March, adds a minimal amount to the company's membership fee revenue as the extra $10 is booked throughout the year of the membership.

Membership fee revenue rose 10.1 percent to $435 million in the third quarter.

Net sales rose 16.1 percent to $20.19 billion. Sales got a lift of about 3 percentage points as the company included sales from a 50-percent owned joint venture in Mexico.

Sales at stores open at least a year, or same-store sales, rose 12 percent. Excluding inflation in gas prices and stronger foreign currencies, same-store sales rose 7 percent.

Warehouse clubs Costco, Wal-Mart Stores Inc's (WMT.N) Sam's Club and BJ's Wholesale Club Inc BJ.N have benefited from inflation in one way, as members fill up their gas tanks at below-market prices at pumps operated by the clubs and often head inside to shop.

Third-quarter sales of gasoline at existing clubs jumped 16 percent in the quarter, well above the low-to-mid single-digit increases Costco has seen in the past, Galanti said.

Around 30 percent of Costco's members buy gas and shop on the same day, he said.

Costco plans to open 20 new stores globally this year and 25 or more next year, Galanti said. It plans to reopen a severely damaged store in Japan during the first quarter of fiscal 2012. (Reporting by Jessica Wohl in Chicago and Renju Jose in Bangalore; Editing by David Holmes, Maureen Bavdek and Gunna Dickson)

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