Costco, other warehouse clubs holding their own during recession

People flocked to Costco Wholesale's annual shareholder meeting Thursday afternoon as they do its warehouse clubs on Saturdays.

There were piles of muffins, samples of cheese and bowls of shrimp and chicken salad for a couple thousand investors and employees at Meydenbauer Center in Bellevue.

But they came mostly to hear Costco founders Jeff Brotman and Jim Sinegal talk about the country's third largest retailer. The two covered everything from store openings (16 last fiscal year) to tires (7.3 million sold last year) to Costco rotisserie chicken (which now has its own Facebook page).

It was not one of the somber or apologetic investor gatherings that some retailers have held since being whacked by the recession. Costco's stock trades in the upper $50s, the high end of its 52-week range, although a couple years ago it was into the $70s.

"My only mistake was not buying enough [stock]," said John Takacs, of Bonney Lake, who has owned Costco shares since before it merged with Price Club in the early 1990s.

Costco and other warehouse clubs have done relatively well in an economy that has been particularly brutal to retailers. Overall retail sales were down about 8 percent for the first 11 months of 2009, but sales at warehouse and superstores were up 2 percent, according to the U.S. Census' monthly retail trade report.

The three biggest club players are Sam's Club (605 stores), Costco (566) and B.J.'s Wholesale Club (184, mostly on the East Coast).

The first sign of serious trouble came this week, when Wal-Mart announced that it would lay off 11,200 of its Sam's Club workers as it outsources product demonstrations.

The decision will save money, but is not a sign of desperation from a chain whose net sales for the first nine months of 2009 — the latest available — were down just 1.8 percent to $34.4 billion. Sam's Club's operating income was down less than 1 percent to $1.2 billion; it does not report net income separate from Wal-Mart.

Costco has had no layoffs, aside from its usual reductions in seasonal workers and people hired for big store openings. This month, for example, it let go about 160 of 450 workers at its new store in Manhattan.

Shareholders at Thursday's meeting said repeatedly that they appreciate Costco's sparing people's jobs. "Kudos for keeping people working," one investor said during a question-and-answer session. "People who aren't working can't buy."

The Issaquah-based company knows it well, and has struggled particularly in states like California, where unemployment has reached above 12 percent and the chain has 117 stores. It saw a 15 percent drop in net income (to $1.1 billion) during its fiscal year ended Aug. 30, 2009, but member renewals have not dropped, and the company has gained new members.

That phenomenon has been true for all three major warehouse clubs, and it surprised some investors.

"There were expectations that people would be willing to let their memberships expire, but the numbers have held up quite well," said R.J. Hottovy, a retail analyst at Morningstar in Chicago.

Some new members are even on food stamps. Costco decided last fall to accept food stamps at stores nationwide, a major shift for a company that had said it doubted there would be enough demand.

"The rules are different today," CEO Jim Sinegal said last fall. "People who were in good shape financially all of the sudden are needing some assistance."

Rules have changed for corporations, too. Despite the 15 percent profit decline last year, Costco's stock is trading at 23 times earnings, a rich valuation for a retailer of any sort. Wal-Mart is at 15, and B.J.'s is at 14.

Partly, that's because Costco's numbers continue to improve. In December, sales at stores open at least a year rose 9 percent, one of the best holiday showings for a retailer and better than Wall Street expected.

"Generally, people are looking for big things from these guys," Hottovy said.

Costco's founders discussed some plans for the future, including ramped-up expansion as the economy improves, including in international markets from Asia to Australia.

They want to expand their Costco Business stores, which sell office supplies and food for restaurants and caterers. Costco currently operates eight of these stores. And they might get bigger in the car wash business, if six operations — including one in downtown Seattle — do well. They charge $7.99 a wash.

Costco tries to be environmentally friendly, Sinegal said in answer to a question, "but we don't like to beat our breasts about it. We just like to do it and move on."

This week, Costco was named Sustainable Grocer of the Year by SustainableGrocer.com. Its ecological efforts include less packaging than many stores and warehouses with solar panels, Sinegal said, "but they're not in Seattle yet, because we're waiting for the sun to come out."

He also said that through its customers and employees, Costco has raised almost $6 million to help with relief efforts in Haiti.

One place where Costco will not expand any time soon is China, partly because the company doesn't understand the demographics or the business environment. When the company scouted out one possible location in China, executives asked what would happen to the factory currently occupying that location.

"They'll be moved," Sinegal said the Costco contingent was told. They thought, "in 10 years, that'll be us."

So China plans are on hold, he said. "China's been there a few years. It'll be there in 10 years."

— Melissa Allison

Fred Meyer customers have helped raise more than $27,000 for the American Red Cross Haiti Disaster Relief Fund through contributions to coin boxes at registers at 130 stores in Washington, Oregon, Alaska and Idaho. Before the earthquakes in Haiti, contributions to the boxes — which average $10,000 a week — went to local school districts, and will switch back to them beginning Sunday. — MA

The Enumclaw Chocolate and Wine Festival holds its second annual event this weekend at the Enumclaw Expo Center. It begins at noon Friday, Saturday and Sunday, and closes at 9 p.m. Friday and Saturday and at 5 p.m. Sunday. Admission is $10 for adults, $5 for children. — MA

Redhook Ale Brewery is owned by a Portland, Ore., company now, but it still makes beer in Woodinville and has decided that its Copperhook Copper Ale, previously available only in the spring, will now be available year-round in grocery stores and on draught in the western U.S. — MA

Menchie's, a self-service frozen-yogurt concept that's already big in California, arrived in Washington last weekend, at 1409 S. 348th St. in Federal Way. Local owner Cameron Garner hopes to bring more to Western Washington over the next few years. Customers serve themselves yogurt and toppings, then pay by the ounce (43 cents in Federal Way), plus $1 if you want a waffle cup. — MA

Retail Report appears Fridays. Amy Martinez covers goods, services and online retail. She can be reached at 206-464-2923 or amartinez@seattletimes.com. Melissa Allison covers the food and beverage industry. She can be reached at 206-464-3312 or mallison@seattletimes.com.