Costco's revenue and profit jump in 3Q

AP News
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Posted: May 25, 2011 3:41 PM
Costco's revenue and profit jump in 3Q

Costco Wholesale Corp.'s third-quarter net income rose 6 percent as rising sales and membership fees made up for declining margins.

But the wholesale club operator warned that rising costs for everything from meat to cotton for T-shirts will continue to pose a challenge, as it did during the third quarter. The dark news from one of the nation's strongest retailers spooked some investors Wednesday.

"Overall, inflation's hitting everybody," Costco's Chief Financial Officer Richard Galanti told investors. "It's going to continue."

Costco reported earnings of $324 million, or 73 cents per share, short of the 77 cents analysts anticipated. That was up from $306 million, or 68 cents per share, earned a year ago. But Costco's shares fell $1.19 to $80.16 in afternoon trading.

A $49 million charge for an accounting adjustment was what captured the most attention. The LIFO charge, which stands for last-in-first-out, reflects a requirement that the company to revalue its inventory if prices rise or fall notably. Because prices are up, Costco had to value its inventory higher and that added 7 cents per share to its expenses.

Costco said it expects to take a similar charge in the current quarter and potentially beyond as commodity prices continue to rise. Galanti said other retailers may make similar moves.

It's part of a larger struggle for the industry. The rising costs of many common goods like fuel, grain, cotton and coffee are being passed along by manufacturers. Nearly every food and beverage maker in the U.S. has raised prices recently to offset these pressures.

Costco and other retailers, in turn, try to balance those higher prices that they face with consumers' desire for low prices. Costco has raised prices on some goods but resisted raising prices on others. For example, the company only recently raised prices in its bakery even though prices for wheat and other ingredients had soared for several quarters.

Shoppers have flocked to Costco, based in Issaquah, Wash., during the down economy for deals on everything from food to furniture. That trend continued during the most recent quarter.

Costco's revenue rose 16 percent to $20.62 billion, just above expectations of analysts polled by FactSet. The number of shoppers in its stores and the amount they spent per visit continued to climb.

Analysts said that the company continues to post impressive sales trends and its underlying fundamentals remain strong.

"The performance overall was solid," said Brian Sozzi, an analyst with Wall Street Strategies Inc. "But the fact is the market yearned for more."

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AP Business Writer Michelle Chapman contributed to this report from New York.