July 23, 2008 / 8:37 AM / 9 years ago

Costco warns on profit, stock tumbles

NEW YORK (Reuters) - Costco Wholesale Corp warned on Wednesday that its quarterly profit would miss current Wall Street targets because of soaring energy costs and other inflationary pressures, sending shares of the No. 1 U.S. warehouse club operator down as much as 13.5 percent.

The warning sparked fears that competitors like Wal-Mart Stores Inc and BJ’s Wholesale Club, which have been standouts in a struggling U.S. retail sector, could be facing similar woes. Shares of those companies also fell.

Despite inflationary pressures, Costco said it has delayed passing along price increases to shoppers to boost its sales and appeal to cash-strapped consumers.

“It is times like this, painful as it may be, that holding off on price-increasing certain key items, by even a few weeks, we believe helps and strengthens our business for the longer term,” Chief Financial Officer Richard Galanti said on a conference call with analysts.

Costco said it expects earnings for the fourth quarter ending August 31 to be “well below” analysts’ current forecast of $1 per share due to a higher-than-expected charge for inventory, declining profits in its gasoline business and lower merchandise margins.

“If Costco is not going to raise prices, they’re going to go after share even more aggressively,” said Telsey Advisory Group retail analyst Joseph Feldman. “I’d be afraid if I was competing with Costco on any product.”


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

Costco and rivals like Wal-Mart’s Sam’s Club and BJ’s have been seen as bright spots in the struggling retail sector, as shoppers, worried about the weakening U.S. economy, increasingly seek out deals in the clubs.

The trend has spurred sales gains. In June, Costco posted a 9 percent rise in sales at stores open a least a year, while BJ‘s, the third-largest U.S. warehouse club, had a 16.5 percent sales jump on that basis. Comparable-club sales at Sam’s Club, which ranks second, rose 8.3 percent.

But some of those gains are being driven by inflation, like higher transportation costs, which is increasing the price of the goods retailers sell.

Rising energy costs are “impacting the direct cost of merchandise frankly at a faster and higher rate of increase in the past six to eight weeks than before,” Galanti said.

While Costco is paying more for the items it sells in its stores, Galanti said it is not always immediately marking up prices. “We will always strive to be the last to raise the price of merchandise to our members.”


While Costco’s margins are being pressured by its decision to delay implementing higher prices, they are also being hit by the recent run-up in gas prices.

Rapid increases in gasoline prices can hurt Costco, which replenishes its supplies of the fuel every day. By contrast, traditional gas stations may turn their inventory weekly, meaning they can be selling supplies they had bought when prices were lower.

So far in Costco’s fourth quarter, the national average retail price for gasoline has risen to $4.06 a gallon from roughly $3.10 in mid-May, according to data from the U.S. Energy Information Administration.

Costco said profit in its gasoline operations had fallen from a year earlier.

The company also declared a quarterly cash dividend of 16 cents a share on its common stock and said its board had approved a buyback of common shares worth up to $1 billion.

This stock repurchase is in addition to the aggregate $5.8 billion amount previously authorized by the board, it said.

Costco shares, which had risen almost 18 percent in the past year, were down 11.9 percent at $63.40 in midday trading after falling to $62.31. BJ’s shares fell 9.5 percent and Wal-Mart declined by 3.1 percent.

Additional reporting by Dhanya Skariachan in Bangalore; Editing by Mark Porter and Erica Billingham

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