Fresh Food Profits Help Costco Stock Hit 52-Week High

ISSAQUAH, Wash - A keen eye on costs drove a rise in fresh food profits at membership club retailer Costco Wholesale Corp., reversing a negative year over year trend the company saw in its second and third quarters.

"If you look back at the last couple of quarters, there [were] some issues of higher spoilage," said Costco c.f.o. Richard Galanti during an earnings conference call yesterday. "[If] a little bit too much was brought in when sales were just a couple of percentage points, you can get some extra spoilage. And they've been working on it. They improved some of the components -- not the pricing, but the components of a margin, like spoilage."

Cost cutting, in addition to a rebound in same-store sales growth and a tighter returns policy for electronics also gave a lift to Costco's fourth-quarter earnings.

In addition, net sales for the 16-week fourth quarter ended September 2, 2007, increased 3 percent, to $20.09 billion, up from $19.50 billion during the 17-week fourth quarter last year. Comparable warehouse sales for the quarter increased 5 percent over the same period last year.

Net sales for the fiscal year were $63.09 billion, up 7 percent from $58.96 billion last year, with comps up 6 percent over fiscal 2006.

Net income for the quarter was $372.4 million, or 83 cents per share, compared to $355.6 million, or 75 cents per share last year, a jump of 11 percent. These results were negatively affected by a non-recurring, non-cash pre-tax charge of $56.2 million to increase the company's deferred membership revenue liability (and reduce membership fee revenue), Costco said. Excluding this charge, fourth quarter net income would have been $408.2 million, or 91 cents per share, representing a 21 percent jump over last year.

"Historically, membership fee revenue was recognized using a 'monthly' convention starting from the month the membership payment was received," said Galanti. "We are now recognizing membership fees using a 'daily' convention, based on the specific membership terms and timing of payments. The net cash flow effect to the company is slightly positive, due to a reduction of current income taxes payable of approximately $20 million."

Net income for Costco's fiscal 2007 was $1.08 billion, or $2.37 per share, compared to $1.10 billion, or $2.30 per share, during fiscal year 2006.

Costco shares rose $5.82, or 9.19 percent, to close at $69.13 yesterday, and hit a 52-week high of $69.95 earlier in the day.

Costco operates 520 warehouses, including 385 in the United States and Puerto Rico, 71 in Canada, 19 in the United Kingdom, five in Korea, four in Taiwan, six in Japan, and 30 in Mexico. It plans to open an additional ten to eleven new warehouses (including the relocation of two warehouses to larger and better-located facilities) by year's end.
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