Costco's earnings drop as shoppers focus on cheaper basics

At a time when Costco Wholesale is getting deals on high-end luggage and prime-grade meat, it's notable that its hottest sellers these days are food and sundries.

Strapped, worried shoppers are focused on basics, and Costco continues to lower prices on those items to keep them loyal to its stores.

The reductions are one reason the Issaquah-based company reported a 27 percent drop in second-quarter profit Wednesday, to $239.7 million, or 55 cents a share.

Total revenue slipped less than 1 percent to $16.8 billion, but Costco's same-store sales — which measures sales at stores open at least a year — fell 3 percent during the quarter that included Christmas. It was Costco's first quarterly drop in same-store sales since 1994.

The per-share profit was about 4 cents lower than analysts expected, according to Thomson Reuters, but investors were not surprised by the results released before the market opened and sent the stock up 12 cents to $40.81.

The stock still has not recovered from a 7 percent drop last month, when Costco warned that second-quarter profit would be "substantially below" what Wall Street expected. Over the past year, shares traded between $40.15 and $75.23.

Despite the profit drop, Costco is faring better than most retailers, who are expected today to report double-digit declines in same-store sales for February.

The chain's discounts on basics like milk, cheese, butter and chicken might hurt profits in the short run, but they're important for Costco's future, said David Abella, a portfolio manager at Rochdale Investment Management, which manages assets of $2 billion including Costco stock.

"You don't want to get people out of the habit of going to Costco," Abella said. "When things pick up, especially in states hard hit like California, it could be a stock that does really well in a recovery. Consumers who are already shopping there will start to pick up more (items)."

Costco officials said in a conference call with analysts Wednesday that the company instituted a hiring freeze about two months ago at its corporate and regional offices, which represent about 8,000 of its 140,000 employees.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com