Costco 1st-quarter profit rises but shares fall on disappointing margins

ISSAQUAH — Warehouse retailer Costco Wholesale Corp. said Thursday its fiscal first-quarter profit rose 11 percent as sales and membership fees both grew.

The results were in line with Wall Street expectations, but its shares slid almost 5 percent in morning trading on disappointment at Costco's operating margins, especially in its gasoline operations.

For the period ended Nov. 25, Costco reported earnings of $262 million, or 59 cents per share, compared with $236.9 million, or 51 cents per share, in the prior year.

Quarterly revenue rose 12 percent to $15.81 billion from $14.15 billion on increased membership fee revenue and higher sales.

Both net income and revenue results met the consensus estimates of analysts polled by Thomson Financial.

While expectations were met, Banc of America Securities analyst David Strasser said in a client note Costco shares aren't worth their current lofty price based on the company's disappointing operating margins.

Adrianne Shapira of Goldman Sachs said Costco's stock will be squeezed Thursday due in part to lower-than-expected gross margin results.

"Gross margin expansion remains a key variable to the Costco story as management indicated its intent to continue elevating this metric in 2008," she wrote in a research report.

Gas margins were likely the culprit, said JP Morgan analyst Charles Grom, who estimated low-margin gas sales shaved 3 to 5 cents from earnings results.

Costco reported membership fee revenue rose to $338 million from $299.3 million.

Same-store warehouse sales rose 8 percent during the quarter, while U.S. same-store sales grew 5 percent. Excluding the impact of rising gas prices, U.S. same-store sales increased 4 percent. International same-store sales surged 17 percent on favorable currency exchange rates and climbed 5 percent on a local currency basis.

Same-store sales, or sales at stores open at least a year, is a key indicator of retailer performance since it measures growth at existing stores rather than newly opened ones.

Costco shares fell $3.37, or 4.8 percent, to $66.82 in morning trading.

Costco currently runs 529 warehouses, including 389 in the United States and Puerto Rico, 75 in Canada, 19 in the United Kingdom, five in Korea, five in Taiwan, six in Japan and 30 in Mexico. Its other properties include Costco Online.