December 13, 2007 / 8:42 AM / 10 years ago

Costco profit up nearly 11 percent, but stock down

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<p>A view of the entrance to the Costco store in Superior, Colorado June 7, 2007. Costco Wholesale Corp said on Thursday its quarterly profit rose almost 11 percent, meeting Wall Street targets, as bargain-hunting customers headed to its discount stores to buy cheaper gasoline and food.Rick Wilking</p>

NEW YORK (Reuters) - Costco Wholesale Corp (COST.O) said on Thursday its quarterly profit rose almost 11 percent, meeting Wall Street targets, as bargain-hunting customers headed to its clubs to buy cheaper gasoline and food.

But shares of the largest U.S. warehouse club operator, which had risen 33 percent year-to-date through Wednesday, were down $1.60 or 2.3 percent in busy afternoon Nasdaq trading to $68.59.

Analysts said quarterly gross margins, a measure of profitability, did not improve as much as some investors had expected.

"We believe that investors have high expectations for gross margin increases at Costco in the near- and long-term, and believe that some might be disappointed by the small improvement seen in first-quarter," wrote Uta Werner, an analyst with Sanford C. Bernstein, in a note.

Costco said net income rose to $262 million, or 59 cents per share, for its fiscal first quarter ended November 25, from $237 million or 51 cents per share a year earlier. The results matched Wall Street's average estimate for earnings of 59 cents per share, according to Reuters Estimates.

Total revenue rose to $15.81 billion from $14.15 billion.

Net sales rose to $15.47 billion from $13.85 billion, while membership fee revenue rose to $338 million from about $299 million a year earlier.

"Provided the stock's material outperformance year-to-date, Costco's first-quarter earnings per share of 59 cents probably won't be enough today, particularly at the open" to push the stock higher, wrote JP Morgan analyst Charles Grom.

"Net, Costco reported a good, not great, quarter."

Gasoline as a Lure

Analysts expect warehouse clubs like Costco, Wal-Mart Stores Inc's (WMT.N) Sam's Club and BJ's Wholesale Club Inc BJ.N to be bright spots this holiday as shoppers flock to the lower-priced clubs to try to offset rising food and fuel prices and the housing market slump.

Customers pay an annual membership fee to shop in the clubs, which sell everything from flat-panel TVs to toilet paper to diamond rings. The clubs also attract shoppers seeking bargains on milk, eggs, cheese and prepared food.

Many of Costco's clubs have gas stations, a lure to shoppers looking to fill their cars with cheap fuel as the average price for unleaded gasoline hovers around $3 a gallon.

Costco said its comparable-store sales, which measure sales at clubs open at least one year, rose 5 percent in its U.S. locations and 17 percent internationally. Total first-quarter comparable-store sales rose 8 percent.

Those figures were helped by higher gasoline prices. Costco said its average sales price per gallon of gasoline rose 21 percent compared with a year ago. Without the price jump, it said U.S. same-store sales would have risen 4 percent.

It also said its international results were boosted by strength in foreign currency.

Goldman Sachs analyst Adrianne Shapira said Costco's first-quarter gross margin rate improved 9 basis points, compared with a 38 basis point improvement in the fourth quarter. She termed the smaller gain "a likely disappointment."

Slowing Sales of Big Ticket Items

Chief Financial Officer Richard Galanti, on a call with analysts, said sales of some big-ticket items were faltering.

In the past few months, he said Costco has seen a "big deterioration" in jewelry sales, particularly in sales of non-diamond jewelry, like watches and pearls.

But he said the retailer feels good about its inventory level and expects to come out of the Christmas season "clean."

"We don't see any issues there at this point," he said.

For the second quarter, he said analysts' average forecast of 74 cents per share is probably at the high end of expected results. He said $2.99 is a "fair number" for an estimate of full-year results, but also at the high-end of a reasonable range.

He said he would be a little cautious on the full year "given the craziness out there."

Costco has 388 locations in the United States and Puerto Rico, and 284 gas stations at its U.S. clubs.

The warehouse club operator also has stores in Canada, the United Kingdom, Korea, Taiwan, Japan and Mexico.

Reporting by Nicole Maestri and Emily Chasan, editing by Gerald E. McCormick and Dave Zimmerman

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