Costco 1Q Profit up, Shares Fall

Source from:  businessweek.com By ELIZABETH M. GILLESPIE 12/14/2007

Warehouse retailer Costco Wholesale Corp. said Thursday its fiscal first-quarter profit rose 11 percent on increased sales and higher revenue from membership fees. The results met Wall Street expectations, but the company's shares slipped slightly because of investors' disenchantment with Costco's operating margins, especially in its gasoline operations. Costco reported earnings of $262 million, or 59 cents per share, for the 12 weeks ended Nov. 25, compared with $236.9 million, or 51 cents per share, in the same period a year earlier. Quarterly revenue rose 12 percent to $15.81 billion. Net income and revenue results met the consensus estimates of analysts polled by Thomson Financial. Nevertheless, Banc of America Securities analyst David Strasser wrote in a client note that Costco shares aren't worth their current lofty price -- close to $70 a share -- based on the company's disappointing operating margins. Adrianne Shapira of Goldman Sachs noted Costco's stock will be squeezed Thursday due in part to lower-than-expected gross margin results. "Gross margin expansion remains a key variable to the Costco story as management indicated its intent to continue elevating this ... in 2008," she wrote in a research report. Compared with an unusually strong first quarter for gas sales in 2006, sales at the pump shaved 4 cents per share from earnings in the latest quarter. When Costco has to pay more for the gas customers pump, its profit margins shrink," Bob Nelson, vice president of financial planning and investor relations, told The Associated Press. With prices declining now, results are expected to improve in the current second quarter, which will more likely compare favorably with the same period last year, when gas sales were relatively weak, Chief Financial Officer Richard Galanti said. Galanti said Wall Street's second-quarter profit forecast of 74 cents per share "sounds pretty good," and, like analysts' estimate for a full-year profit of $2.99 cents a share, is at the "high-end of the reasonable range." Costco shares fell $1.65, or 2.4 percent, to close at $68.54 Thursday. Food and sundries sold well, despite lower tobacco sales. Electronics also fared well, though price declines on televisions and other items slowed sales growth a bit. Other strong categories included women's apparel and jewelry. Hardware sales fell slightly, but Galanti said that didn't matter much because it's not a high-dollar category this time of year. Costco, based in suburban Issaquah, reported membership fee revenue rose to $338 million, up 13 percent from $299.3 million. Same-store warehouse sales rose 8 percent during the quarter, while U.S. same-store sales grew 5 percent. Excluding the impact of rising gas prices, U.S. same-store sales increased 4 percent. International same-store sales surged 17 percent on favorable currency exchange rates and climbed 5 percent on a local currency basis. Same-store sales, or sales at stores open at least a year, is a key indicator of retailer performance since it measures growth at existing stores rather than newly opened ones. Costco runs 529 warehouses, including 389 in the United States and Puerto Rico, 75 in Canada, 19 in the United Kingdom, five in Korea, five in Taiwan, six in Japan and 30 in Mexico. The company opened 10 stores in the first quarter. It expects to open seven in the second quarter and a total of about 30 for the year, Galanti said. Its other properties include Costco Online, which Galanti said performed better than the company expected in the latest quarter, and is expected to surpass in $1.5 billion in sales this year. Enditem