Costco Profits Fall 15 Percent in Fiscal Q2

Andrew Klips  |

Costco Wholesale Corp. (COST) , the U.S.’s largest membership warehouse club operator, posted growing revenue in the fiscal second quarter, but deep discounts and slack in some other areas caused profits to sink by 15 percent.

For the quarter ended Feb. 16, the Issaquah, Washington-based company reported total revenue of $26.31 billion, compared to $24.87 billion in the same quarter of 2013. Net income totaled $463 million, or $1.05 per share, versus $547 million, or $1.24 per share, in the year prior quarter.

On average, Wall Street was expecting earnings of $1.17 per share on sales of $26.67 billion.

Global same-store sales were up 3 percent in the quarter, led by a 4-percent improvement in stores in the U.S. Excluding the negative impact of foreign exchange rate and gasoline price deflation, global comparable sales were up 5 percent, paced by a 7-percent improvement at international locations.

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For comparison, rival Wal-Mart (WMT) said that a soft retail environment caused a hit to its fourth quarter, with same-store sales sliding 0.4 percent, primarily because of less sales at its supercenters. Comparable sales at member warehouse Sam’s Club dropped 0.1 percent in the latest quarter. In part, Wal-Mart blamed higher payroll taxes and cuts in food stamp benefits for its customers as reasons for 2014 net sales growth being expected at the low end of its 3 percent to 5 percent guidance.

Costco, which sells everything from carrots to karats at its massive stores, attributed the less-than-expected profit performance to weaker sales and gross margins in certain non-foods merchandise, particularly in the four-week holiday selling season. Soft margins in fresh foods and unfavorable foreign exchange rates were also noted.

“The first four-week period of the quarter represented the majority of earnings underperformance in the quarter," said Richard Galanti, chief financial officer at Costco, in a prepared statement released early Thursday morning.

Costco currently operates 462 locations in the United States and Puerto Rico, 87 in Canada, 33 in Mexico, and 62 stores overseas. Membership fees at the locations generated $550 million during the latest quarter, compared to $528 million in the year earlier quarter.

While sales have risen, so have expenses. Merchandise costs were up from $21.77 billion last year to $23.04 billion. SG&A expenses rose 7 percent to $2.53 billion.

Shares of COST printed an all-time high of $125.78 late in November, but have limped along since. The stock price closed at $116.47 on Wednesday and is down about 2 percent so far in 2014. In early pre-market activity on Thursday, shares are trending lower by another 2.6 percent.

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