* 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)
By Nicole Maestri
NEW YORK, Feb 4 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
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
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)