Costco profit surges 32% in third quarter, tops forecasts

Costco Wholesale reported a 32 percent jump in its fiscal third-quarter profit today, topping Wall Street expectations, as cash-squeezed customers flocked to its warehouse clubs in search of bargains on food and toiletries.

But the Issaquah company's shares closed down 26 cents at $72.98 after Costco said Wall Street's forecast for the fourth quarter might be too high.

Costco reported net income rose to $295.1 million, or 67 cents a share, from $224 million, or 49 cents a share, a year ago, which included a $30.3 million charge.

Sales increased 13 percent to $16.26 billion from $14.34 billion in the year-ago period. Including membership fees, revenue rose to $16.61 billion from $14.66 billion.

Analysts surveyed by Thomson Financial had expected a profit of 65 cents a share on revenue of $16.35 billion.

Net sales for the first three quarters of fiscal 2008 increased 12 percent to $48.35 billion from $43 billion during the same period last year. Excluding the sales return reserve adjustments recorded in the second and third quarters of fiscal 2007, which totaled $452.6 million, the net sales increase would have been 11 percent.

Same-store sales, the key retail performance measure of sales at stores open for at least a year, rose 4 percent in the U.S. excluding gas price inflation. Sales in California, one of the states hardest hit by the housing crisis, were weaker than in other regions, Chief Financial Officer Richard Galanti said in a conference call.

International same-store sales rose 6 percent excluding the effect of the weak U.S. dollar. Costco operates 538 warehouses in the U.S., Canada, the U.K., South Korea, Taiwan, Japan and Mexico.

Discount warehouses and stores like Costco and Wal-Mart have stood apart from other retailers as consumers squeezed by record gas and food prices hunt for bargains and buy in bulk.

Costco's revenue from food rose in the quarter, while sales of jewelry, home furnishings and other hard- and soft-line goods dropped.

Galanti also said that shoppers are waiting longer to upgrade items like digital cameras, televisions and computers.

"In these trying times, even if what you perceived — you can get a great laptop now under $1,000 — even though it is under $1,000 you are not just rushing out to get the new and latest and greatest, because your old one does movies and Internet, e-mail just fine."

But while rising food prices helped drive people to Costco in the quarter, boosting sales, Banc of America Securities analyst David Strasser wrote in a note to investors that rising gas prices in the last four weeks of the quarter likely cut into the company's margins.

That pressure is expected to continue. Looking ahead to Costco's current fourth-quarter performance, Galanti said Wall Street's view for a profit of $1.01 a share is "on the high end, if not too high," in part due to the impact of gas prices.

"We don't expect big surprises in sales, but tomorrow is another day," he said.

Costco, which also sells iPods, flat-screen TVs and all manner of other high-end items, may yet fall victim to eroding consumer confidence, wrote Stifel Nicolaus & Co. analyst David Schick in a research note.

"It's hard to poke too many holes in this story, but we do believe (the) high-end consumer is showing cracks, and that could continue to hurt durable sales at the company," he wrote.

AP business reporter Jennifer Malloy in New York contributed to this report.