Higher operating expenses pinch Costco profit

Wed Dec 11, 2013 1:45pm EST

Shoppers push a trolley outside a Costco Wholesale store in Los Angeles, California March 6, 2013. REUTERS/Mario Anzuoni

Shoppers push a trolley outside a Costco Wholesale store in Los Angeles, California March 6, 2013.

Credit: Reuters/Mario Anzuoni

(Reuters) - Costco Wholesale Corp (COST.O) reported a first-quarter profit that fell short of analysts' estimates, hurt by higher stock-based compensation expenses and spending on technology.

Shares of the warehouse club operator, which sells everything from carrots to coffins at its cavernous stores, fell as much as 3 percent in morning trading on Wednesday.

"While Costco has generally been prudent in controlling costs, Q1 selling, general and administrative (expense) was higher than we expected," Cowen and Co analyst Faye Landes wrote in a note.

Operating expenses rose 5.5 percent, while selling, general and administrative (SG&A) expenses rose 7.2 percent in the quarter.

Chief Financial Officer Richard Galanti said employee stock option expenses rose due to a 24 percent year-over-year increase in the company's stock price, which spurred vesting by long-term and senior employees.

Stock option expenses reduced earnings by 2 cents per share in the quarter, while IT investments increased SG&A expenses by $12 million, Galanti said on a conference call.

Technology spending will remain high through fiscal 2014 ending October and perhaps beyond that, Galanti said.

S&P Capital IQ analyst Ian Gordon said that while operating expenses were higher than he expected, gross margins were strong despite widespread discounting.

Janney Montgomery Scott analyst David Strasser said the company's gross margin of 10.8 percent was better than his estimate of 10.7 percent.

The company's profit rose to $425 million, or 96 cents per share, in the first quarter ended November 24 from $416 million, or 95 cents per share, a year earlier.

Analysts on average had expected the company to earn $1.02 per share, according to Thomson Reuters I/B/E/S.

Sales rose 5 percent to $24.47 billion, but missed the average analyst estimate of $25.35 billion. The company announced quarterly sales last week.

Sales at stores open at least a year rose 3 percent, including the impact of lower gasoline prices and a stronger dollar. Analysts on average were expecting same-store sales to rise 3.54 percent.

Excluding fuel and forex, same-store sales rose 5 percent.

Rival Wal-Mart Stores Inc (WMT.N) reported a third-straight quarterly decline in U.S. same-store sales last month and forecast a lower-than-expected profit for the holiday quarter.

Costco, whose members pay up to $110 per year to shop at its big stores and website, operates 648 warehouses, including 461 in the United States and Puerto Rico.

It also has stores in Canada, Mexico, the United Kingdom, Australia, Japan and other Asian countries.

Shares of the Issaquah, Washington-based company were down 0.4 percent at $119.49 in afternoon trading on the Nasdaq.

(Reporting by Siddharth Cavale in Bangalore)

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Comments (4)
YoungTurkArmy wrote:
Interesting how the unionized Costco compares in sales, revenues, and profits to the non-unionized Wal Mart.

Dec 11, 2013 10:42am EST  --  Report as abuse
Lemming wrote:
Costco used to provide fair product pricing which made for an enjoyable shopping experience. Now Costco can’t even beat prices set by a grocery chain or box store! Costco needs to provide pricing as good as competitors or face declining sales. It’s my hopes that Costco will be worth the membership fee once again someday.

Dec 11, 2013 11:07am EST  --  Report as abuse
Timbuk3 wrote:
Glad to see sales increasing for a business that pays a reasonable wage as opposed to W@lmart. Makes me want to continue to give Costco my business.

I’m not really sympathetic for the Wall Street “investors”.

Dec 11, 2013 11:52am EST  --  Report as abuse
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