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Costco profit just misses view

NEW YORK (Reuters) - Costco Wholesale Corp COST.O posted a lower quarterly profit on Thursday that fell just short of Wall Street's expectations, as shoppers cut spending on discretionary items like clothes and jewelry.

Shoppers walk out of Costco Warehouse in Arlington, Virginia, May 29, 2008. REUTERS/Molly Riley

Costco’s sales have slipped recently as the economic slump douses demand for unnecessary items. Still, the No. 1 U.S. warehouse club chain has said it intends to keep prices low to win market share, even if that should crimp profits.

As the recession squeezes household budgets, consumers have focused more on buying only everyday items like food and toiletries.

That has helped warehouse clubs like Costco, Wal-Mart Stores Inc's WMT.N Sam's Club and BJ's Wholesale Club Inc BJ.N lure customers who want low prices on necessities.

The trend has also helped close-out retailer Big Lots Inc BIG.N, which posted a better-than-expected quarterly profit and raised its full-year forecast, as it saw an unwavering demand for basic household items.

“Customer shopping patterns have likely changed, and discounts and saving money are likely here to stay,” Big Lots’ Chief Executive Steven Fishman said on a conference call.

But its shares fell 4 percent, as it forecast same-store sales for the second quarter would be down 1 percent to 3 percent.

COSTCO MISSES

In its latest quarter, Costco faced “ongoing weakness in sales, particularly sales of higher-ticket, discretionary items,” CFO Richard Galanti said.

The company, shares of which fell 1.7 percent, did not provide a financial forecast for the current fourth quarter.

Galanti added that May sales would be “maybe a shade further negative” compared with April, after April was a little weaker than March. Costco is still seeing overall deflationary pressures and he did not predict when they would ease.

For warehouse clubs, lower gasoline prices are hurting comparisons from a year earlier, when high prices boosted sales at their gas stations. A stronger U.S. dollar has added to the pressure on Costco, hurting its international results.

Costco’s profit fell to $209.6 million, or 48 cents a share, in the third quarter ended May 10 from $295.1 million, or 67 cents a share, a year earlier.

Excluding litigation costs, Costco’s profit was 52 cents a share, a penny shy of the 53 cents that analysts on average were expecting, according to Reuters Estimates.

Quarterly sales fell about 5 percent to $15.48 billion, excluding membership fees, which dropped about 6 percent to $328.4 million.

Costco’s sales at clubs open at least a year fell 7 percent, but would have risen 2 percent without the impact of gasoline deflation and foreign exchange.

New member sign-ups were off 5 percent in the quarter, but Galanti cited fewer new-store openings. He said that rate could rise a little in the fourth quarter as new stores open.

A year ago, tax rebates had been a “general tailwind” for retailers, making comparisons tough this time around for companies like Costco, said Jefferies & Co analyst Daniel Binder. Consumer thrift has not been a surprise, he said.

Citing the weakening in Costco's quarterly earnings, William Blair analyst Mark Miller said in a note that "we continue to recommend investors swap out of Underperform-rated Costco into Outperform-rated Wal-Mart, Target (Corp TGT.N), and/or Kohl's (Corp KSS.N)."

A day earlier, Costco said it would start accepting food stamps at its two New York City stores.

BIG LOTS TOPS

Big Lots’ net profit rose to $36.2 million, or 44 cents per share, in the first quarter ended May 2 from $34.5 million, or 42 cents per share, a year earlier.

Analysts on average had expected 40 cents per share.

Sales fell 0.9 percent to $1.14 billion, while sales at stores open at least two years at the start of the fiscal year fell 0.5 percent.

Big Lots, whose shares fell 5 percent, pointed to a rough start to May, saying same-store sales so far in the month have been down in the low-single-digit percentage range.

The retailer, which buys excess inventory in bulk and sells it at low prices, expects a second-quarter profit per share of 26 to 32 cents from continuing operations.

Analysts have been expecting 29 cents per share.

Shares of Big Lots, which is up against tough comparisons against last year, are “giving a little bit back based on Q2 concerns,” said Pali Capital analyst Stacey Widlitz.

For the full year, Big Lots forecast profit of $1.85 per share to $1.95 per share from continuing operations. Its prior forecast called for $1.75 to $1.90 on that basis, while analysts have been expecting $1.88.

Big Lots expects full-year sales to be flat to off 1 percent and said it is on track to open 45 stores this year.

Costco shares were down 97 cents at $47.86 on Nasdaq, while Big Lots fell 95 cents to $22.70 on the New York Stock Exchange.

Reporting by Aarthi Sivaraman in New York, Ben Klayman in Chicago and Esha Dey in Bangalore; Editing by Gerald E. McCormick and Dave Zimmerman

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