Big Ticket Item Slowdown Hits Costco Margins in August

ISSAQUAH, Wash. -- A slowdown of consumer splurging on items such as Plasma TVs and minibars due to higher fuel costs and related price hikes lowered August margins for wholesale club Costco Wholesale Corp., leading the retailer to revise its earnings outlook.

Fortunately for the retailer, the drop was mitigated by the fact that these same consumers continue to visit Costco because of its cheaper motor fuel.

Fresh foods, meanwhile, continue to fare well, although increased energy and freight costs dropped margins by a half-point, according to Richard Galanti, Costco c.f.o.

"The drop in furniture sales surprised us," said Jim Sinegal, c.e.o. during yesterday's earnings conference call.

"Last summer, we brought in a lot of big-ticket furniture, and we went through it so fast we left margin on the table," added Galanti. "Flat screen TVs also sold well."

Costco saw net sales of $4.55 billion for the four weeks ended August 27, an increase of 11 percent from last year's $4.08 billion. For the first 52 weeks of its 53-week 2006 fiscal year ending September 3, sales were $57.78 billion, an increase of 11 percent from $51.86 last year.

The company revised its outlook for its fiscal Q4 2006 fourth quarter (17 weeks this year vs. 16 weeks in fiscal 2005) and fiscal year (53 weeks this fiscal year vs. 52 weeks last year) with earnings per share for the Q4 expected to be 68 cents to 71 cents, and for the fiscal year $2.23-$2.26 per share. On May 31st, Costco reported earnings per share estimates for the quarter and year at 77 cents and $2.33, respectively.

Comparable sales for the month were 5 percent, and 7 percent for the 52 weeks to date.

Costco currently operates 487 warehouses, including 358 in the United States and Puerto Rico, 68 in Canada, 18 in the United Kingdom, five in Korea, four in Taiwan, five in Japan and 29 in Mexico. The company also operates Costco Online, an electronic commerce web site, at and at in Canada. The retailer plans to open an additional 20 to 21 new warehouses in the first four months of fiscal 2007, prior to the end of calendar year 2006.
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