Costco's profit up 32 percent, beating estimates

By Nicole Maestri

NEW YORK (Reuters) - Costco Wholesale Corp (COST.O), the biggest U.S. warehouse club operator, on Thursday reported a 32 percent jump in quarterly profit, beating expectations, as shoppers flocked to its stores for discounts on food and gasoline.

The results came the same that day that Sears Holding Corp (SHLD.O), which is controlled by hedge fund manager Edward Lampert, reported an unexpected first-quarter loss, as sales fell at its Kmart and Sears stores and markdowns hurt margins.

"Sears' management is using the challenging economy as an excuse for their poor performance, and Costco on the other hand is capitalizing on the economy to push their core value proposition with American consumers," said Craig Johnson, president of retail consulting firm Customer Growth Partners.

"(Costco) is building market share by taking share from folks like Sears and Kmart."

Costco and its rivals like Wal-Mart Stores Inc's (WMT.N) Sam's Club and BJ's Wholesale Club Inc (BJ.N) have emerged as bright spots in the struggling U.S. retail sector, as cash-strapped shoppers, worried about the weakening U.S. economy, increasingly seek out deals in the clubs.

Meanwhile, Sears is trying to overhaul its business as its shoppers pass over clothes and home decor purchases in favor of basics like food, and competitors have chipped away at Sears' dominant market share in appliances.

Costco said net income was $295.1 million, or 67 cents per share, for the fiscal third quarter ended May 11, compared with $224.0 million, or 49 cents per share, a year earlier, when Costco took a charge related to increased reserves for customer returns.

Analysts, on average, had expected earnings of 65 cents per share, according to Reuters Estimates.

Sales in the quarter rose 13 percent to $16.26 billion, excluding membership fees, which rose to $350.9 million from $317.7 million, the Issaquah, Washington-based company said.

FLOCKING TO THE CLUBS

Customers pay an annual fee to shop in Costco's warehouse clubs, which sell everything from discounted televisions and fresh foods to bulk-sized packages of toilet paper and soda. Costco also operates gasoline stations at many of its locations, typically offering prices cheaper than those of local competitors.

Quarterly sales at locations open at least a year, or same-store sales, rose 8 percent. Same-store sales at its U.S. locations rose 6 percent, while international same-store sales advanced 16 percent.

Excluding gasoline price inflation, it said U.S. same-store sales would have risen 4 percent, while on a local currency basis, international same-store sales increased 6 percent.

On a conference call, Chief Financial Officer Richard Galanti said its same-store sales were driven by an increase the number of times shoppers came into its stores and the amount they spent during their visits.

In a research note, JPMorgan analyst Charles Grom said given that Costco's quarter ended May 11, its 8 percent same-store sales increase "implies solid top-line trends at the beginning of the month."