UPDATE 5-Costco gains market share; profit tops Street view

Tue Mar 12, 2013 2:40pm EDT

* Sales, membership fees rise in second quarter
    * Analysts say Costco increased its market share
    * Shares up 1.4 percent

    By Dhanya Skariachan
    March 12 (Reuters) - Costco Wholesale Corp lured
shoppers with low prices on everything from produce to gasoline
in the latest quarter, gaining market share at a time when other
retailers saw shoppers pull back due to higher taxes and rising
fuel prices.
    A membership fee hike also helped the warehouse club
discount retailer, which reported higher-than-expected fiscal
second-quarter profit on Tuesday.
    Shares of Costco were up 1.4 percent at $103.82 in afternoon
trade. Last year, the retailer paid out $3 billion in a special
dividend ahead of expected dividend tax increases.   
    Costco, which has gas stations at its stores, is willing to
take a hit on margins to keep prices low so shoppers visit more
often. It offers everyday items like bananas below supermarket
prices, hoping customers will stock up on other goods as well.
    Members pay up to $110 per year to shop at Costco's
cavernous stores and website, which sell items ranging from dog
food to diamond rings. The fee revenue pads the bottom line,
allowing the company to offer low prices and take in thin profit
margins on products it sells.
    "The retailer's ability to keep members engaged and coming
back for more is unparalleled," Planet Retail analyst Sandy
Skrovan said, adding that Costco was outperforming its peers in
terms of sales growth and productivity.
    Costco is the largest U.S. warehouse club chain and competes
with BJ's Wholesale and Wal-Mart Stores Inc's Sam's
Club. 
    Last year, Costco retained the No. 1 spot among warehouse
stores with a 46.5 percent share, compared to 38.4 percent for
Sam's Club, according to Euromonitor International. Costco's
market share grew from 2010 to 2012, a period when Sam's Club's
share declined. 
 
    Janney Capital Markets analyst David Strasser maintained his
"buy" rating on Costco shares, saying Costco remained one of the
most predictable retailers, with strong traffic growth and
operating trends.
    "The machine, known as Costco, continues to gain market
share and square footage growth," Strasser said.
    Last month, Wal-Mart's results showed U.S. consumers were
worried about the impact of higher payroll taxes and gasoline
prices, along with slow tax refunds that put some spending on
hold. 
    Costco, unlike some rivals, did not benefit when the United
States lowered payroll taxes two percentage points two years ago
and wasn't hurt when that tax holiday ended on Jan. 1, Chief
Financial Officer Richard Galanti said on a conference call with
analysts.
    "It can't help, but it doesn't seem to really be impacting
our numbers," Galanti said.
    
    GASOLINE GAINS
    Costco's net income rose to $547 million, or $1.24 a share
in the second quarter ended on Feb. 17 from $394 million, or 90
cents a share, a year earlier.
    Excluding a tax benefit from a special cash dividend, Costco
earned $1.10 a share, beating the analysts' average estimate of
$1.06, according to Thomson Reuters I/B/E/S.
    Sales rose 8 percent to $24.34 billion, while membership
fees rose 15 percent to $528 million.
    Same-store sales, excluding fuel, were up 5 percent in the
United States and up 4 percent internationally. 
    The Issaquah, Washington-based company raised fees for most
U.S. and Canadian members by 10 percent on Nov. 1, 2011. It
previously said the fee increase seemed to have little to no
effect on renewal rates.   
    Shoppers also have been filling up tanks more often at
Costco, which typically prices gasoline lower than nearby
competing stations
    The company may have also benefited from redemptions of
annual American Express rewards, which members received in
February.
    Members who sign up for an American Express card through
Costco earn cash back on eligible purchases, including what they
buy at the chain. They can redeem or cash in their reward
coupons at Costco stores through August.
    Costco has 622 warehouse stores around the world, including
448 in the United States and Puerto Rico.
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