Costco Cuts Profit Outlook, Stock Sinks

ISSAQUAH, Wash. -- Costco Wholesale Corp. warned yesterday that its quarterly earnings would miss expectations because of rising costs for everything from meat to employee health care, sending its stock down nearly 19 percent.

The largest U.S. warehouse club operator, grappling with increasing competition from Wal-Mart Stores, Inc.'s Sam's Club, said in a conference call that the recent mad cow disease scare in Canada had driven up prices it paid for beef.

Costco wasn't able to pass on the higher meat costs to customers, however, in part because Sam's was aggressively pushing down its prices, c.f.o. Richard Galanti said during the call.

The company also cited steep health care costs, as well as workers' compensation issues in California, where it said the system was "absolutely out of control."

Costco defended its efforts to fend off Wal-Mart, which told analysts recently it was in the process of "establishing price leadership" at Sam's. Analysts took that as a worrisome sign of a brewing price war between Wal-Mart and Costco, and questioned why Costco would risk profits to try to match Wal-Mart's prices.

Costco executives said the company's strong sales tally for July showed it wasn't losing customers to Sam's, but added that it had "no illusions that we purchase better than Sam's."

Costco said its July sales at stores open at least a year rose 8 percent, more than most analysts had expected, boosted by an 18 percent gain in its international operations. Total sales for the four-week period ended Aug. 3 rose 12 percent from a year earlier, to $3.34 billion.

But the company said it now expects to earn 46 cents to 48 cents for the fourth quarter, which ends Aug. 31, instead of its earlier forecast of 54 cents to 56 cents.

Analysts on average were expecting 55 cents per share, according to Reuters Research, a unit of Reuters Group Plc.
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