Wall St. beats up Costco for sharp drop in profit

Wall Street became impatient Thursday with the patience of Costco Wholesale, which has bucked national trends by not laying off workers or making draconian cuts to meet analysts' profit expectations.

Costco's shares plunged more than $2 before closing down 86 cents at $47.97, then declining an additional 30 cents to $47.67 in after-hours trading.

The main culprit was a 29 percent drop in the warehouse chain's latest-quarter profit, to $209.6 million, or 48 cents a share, and a 5 percent decline in revenue to $15.8 billion.

Analysts had expected profit of 53 cents a share and revenue above $16 billion, according to Thomson Reuters.

"Some retailers cut employees radically to make better [profit] numbers," said David Schick, retail analyst at Stifel Nicolaus.

"Costco doesn't think of things that way. Their metronome is set to the year and decade, when others are set to the week and month and quarter," Schick said.

Costco's revenue and profit would have been higher if not for a one-time $34 million charge related to the settlement of a lawsuit over its membership-renewal policy and to the rising value of the dollar, which makes foreign sales and membership fees worth less to the Issaquah company.

Its profit was also hurt by higher employee-benefits costs, mostly tied to health care, and weak sales particularly of higher-ticket items.

Although some big-ticket items such as televisions and laptop computers are moving fast, their prices have fallen so low that the amount of money Costco receives is flat.

Similarly, meat and produce sales are up, but the average price points fell.

"It's a challenge profitability-wise, but it's still driving business and frequency and loyalty, we believe," Chief Financial Officer Richard Galanti told analysts during a conference call.

Costco's same-store sales fell 7 percent during the third quarter, partly because gasoline costs are lower than they were at this time last year. Same-store sales, a key retail indicator, show how sales have changed at stores open at least a year.

Customers visited Costco more often but spent less during each trip. The average frequency rose about 4.5 percent, but the average transaction dropped about 10.5 percent, affected greatly by lower gas prices and the rising dollar.

The company continues to lower costs to keep customers, but analyst Ed Weller at ThinkEquity Partners said that's not a new recessionary tactic.

"They have been lowering prices to keep people coming in since the day they opened," he said.

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