Deep discounting eats into Costco’s holiday-quarter profit

ReutersMarch 7, 2014 

Warehouse retailer Costco reported a bigger-than-expected 15 percent fall in quarterly profit as unusually deep discounting in the holiday shopping season hurt margins, sending its shares down as much as 3.6 percent.

Bad weather and six fewer shopping days between Thanksgiving and Christmas prompted many U.S. retailers to offer deeper discounts and increase promotions to lure shoppers.

Weaker gross margins, particularly during the holiday shopping season, and lower international profit because of a weakening of foreign exchange rates hurt earnings in the second quarter, Chief Financial Officer Richard Galanti told analysts.

Walmart Stores Inc., the world’s largest retailer, last month blamed sharp cuts in food stamp benefits and higher payroll taxes for a disappointing full-year profit forecast.

At Sam’s Club, Walmart’s warehouse chain that competes with Costco, sales at stores open at least a year — a key retail metric called same-store sales — fell 0.1 percent in the quarter ended Jan. 31. In contrast, Costco’s sales at stores open at least a year rose 3 percent in the second quarter ended Feb. 16.

The company’s comparable sales rose 2 percent in February, missing the average analyst estimate of an increase of 2.3 percent.

Costco said February sales were hurt by club closures prevalent across the United States, Canada and even in Japan because of frequent snow storms.

Even so, Nomura analyst Robert Drbul said Costco’s consistent low-mid single digit traffic gains during the past year in spite of the challenging retail environment was “particularly encouraging.”

“We continue to believe the fundamentals of the company are intact,” Drbul said.

The warehouse club operator, which offers discounted merchandise to members, said membership renewals had improved in the quarter.

“Our renewal rates continue at record levels and we continue to see increasing penetration of the executive membership,” CFO Galanti said.

Executive members are the company’s highest spending customers and represent about 38 percent of total cardholders. They pay an annual fee of $110 and are eligible for a 2 percent annual reward.

New membership sign-ups rose 13 percent in the quarter, mainly driven by new stores in Japan and Australia.

Costco’s sales rose 6 percent to $25.76 billion in the quarter, missing the average analyst estimate of $26.65 billion, according to Thomson Reuters I/B/E/S.

Excluding fuel and forex, same-store sales rose 5 percent in the 12-week period.

The company’s net profit fell to $463 million, or $1.05 per share, in the quarter from $547 million, or $1.24 per share, a year earlier.

The Issaquah-based company’s shares were down 2.4 percent at $113.65 in late evening trading on the Nasdaq. They fell to a low of $112.27 earlier in the session.

Costco’s shares trade at roughly 23 times the company’s expected earnings, well above the multiples for Walmart and Target, according to Thomson Reuters data.

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