November 12, 2009 / 1:13 AM / 10 years ago

Costco CFO: Fingers crossed consumers will spend

NEW YORK/SAN FRANCISCO (Reuters) - Costco Wholesale Corp (COST.O) is hoping that consumers are becoming more comfortable making purchases as the No. 1 U.S. warehouse club operator heads into the year-end holiday shopping season.

A shopper wheels his cart from a Costco Wholesale store in Arlington, Virginia August 6, 2009. REUTERS/Richard Clement

“We still are cautious but are keeping our fingers crossed that people are buying a little bit,” said Chief Financial Officer Richard Galanti on Wednesday.

He made the comments at the retailer’s investor day, which was held in its new store in Manhattan.

Costco’s monthly same-store sales fell through much of this year as shoppers shunned purchases of its discretionary merchandise, like jewelry and clothes. Unlike a year ago, when gasoline prices rose to record levels, Costco received no recent sales boost from the price of gas.

But same-store sales returned to positive territory in September and October, marking an improvement from August, when same-store sales fell 2 percent. The retailer has also said it is seeing demand return for products besides food, like sporting goods, clothes and cameras.

Costco also said at the meeting that it plans to ramp up store openings in the next five years. While the majority of those new stores will be opened in the United States, it said it sees potential to expand its store base in Japan, Taiwan, Korea and Australia.

R.J. Hottovy, an analyst with Morningstar, said he was pleased with what he heard at the meeting, and it reinforced his view that Costco has a strong business model.

“In the downward economic cycle that we’re in, I think the value proposition that Costco provides, it really sells itself,” Hottovy said.

OPENING PLANS ACROSS THE GLOBE

Costco operated 559 warehouses as of August 30, the end of its fiscal year. That including 406 clubs in the United States and Puerto Rico; 77 in Canada, 21 in the United Kingdom, seven in Korea, six in Taiwan, nine in Japan, 32 in Mexico and one in Australia.

It expects to open 15 to 20 stores this current 2010 fiscal year, up to 20 stores in each of its fiscal years 2011 and 2012, and more than 25 in fiscal years 2013 and 2014.

In Japan, Taiwan and Korea, where business is performing well, Costco said it has the capacity to operate 100 stores. In Australia, where it recently opened its first location, it has the capacity to operate roughly 20 stores, it said.

CEO Jim Sinegal said Costco does not plan to raise prices to boost margins. Instead, he said Costco will be smarter about the products it stocks on shelves to reduce costs — like making round jars square so that more can fit on a shelf or reducing the size of packaging.

“We prefer to make our additional margin by being smarter, by buying better and being more efficient in our business,” Sinegal said.

He also said a reasonable goal for Costco’s operating profit margin would be about 3.5 percent. While that is slimmer than the 4 percent margin he discussed during the boom years, it is still fatter than some analysts have expected.

“That seems to be the big debate — how high can operating margins go for Costco,” said Hottovy. “Generally speaking I think 3.5 percent is higher than most people look at.”

Even though Sinegal said he was not sure when Costco would achieve that margin, Hottovy said he was encouraged that the target set a new base for general profit expectations.

Sinegal also said the retailer has no plans to resume issuing earnings forecasts. Costco stopped providing the forecasts in the past year, saying the climate was too volatile.

Sinegal said that issuing the forecasts is “a terrible distraction for management.”

Costco shares closed up 36 cents, or less than 1 percent, at $60.40 on the Nasdaq on Wednesday.

Writing by Nicole Maestri; Editing by Matthew Lewis, Bernard Orr

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