updated 5/31/2007 6:27:35 PM ET 2007-05-31T22:27:35

Costco Wholesale Corp. said Thursday its fiscal third-quarter profit fell 5 percent as the company continued to factor in the higher cost of product returns it discovered during an internal study this year. However, sales at the warehouse retailer advanced at a double-digit pace.

Earnings for the quarter ended May 13 slid to $224 million from $235.6 million. Per-share profit was unchanged year-over-year at 49 cents.

In the third quarter, Costco completed a detailed study of merchandise return patterns, including a closer look at how long customers take to return items to a store.

Costco found that customers wait longer than expected to return merchandise. The company factored that in and raised the amount it sets aside to cover costs associated with returns, sending merchandise back to vendors, reselling at reduced prices or scrapping the items entirely.

The Issaquah, Wash.-based company’s third-quarter results included a $30.3 million after-tax charge reflecting the changes. Excluding the charge, profit totaled 56 cents per share, matching analysts’ average estimate, according to a Thomson Financial poll.

Sales rose 10 percent to $14.34 billion from $13.01 billion. The increase in the returns reserve cut sales by $228.2 million.

Membership fees rose 15 percent to $317.7 million from $276.2 million in the year-ago quarter.

Together, total revenue rose 10 percent to $14.66 billion, just shy of the consensus estimate of $14.68 billion.

Same-store sales, which measures sales at stores open at least a year, rose 7 percent, the company said.

In a conference call with analysts, Chief Financial Officer Richard Galanti said the average amount customers spent per transaction rose just under 5 percent in the quarter. Galanti also said membership renewal rates were at 87 percent, in spite of a $5 increase in membership fees last year.

Electronics, sporting goods and lawn and garden items were strong sellers in the quarter, the CFO said. In Canada, tobacco sales, which make up nearly 11 percent of the company’s food and sundries category, dropped after Costco’s relationship with the largest tobacco products manufacturer ended.

Galanti said that while everyone is worried about higher fuel prices, they haven’t hurt Costco yet.

Electronics returns hurt Costco’s margins the most, Galanti said. The company recently started limiting returns on some electronics products, including TVs and MP3 players, to 90 days.

Costco’s online store sales rose 38 percent in the quarter, and Galanti said he expects that business to reach $1 billion for the fiscal year.

He forecast fourth-quarter profit of 81 cents to 83 cents per share, and $2.54 to $2.56 per share for the full fiscal year. Analysts expect 83 cents per share for the current quarter, and $2.56 per share for the year.

In the current fourth quarter, Galanti said the company plans to open eight new stores, bringing the total net new stores to 30 for the fiscal year.

Galanti also said the company is working to improve margins, but did not give details.

Dan Geiman, an analyst at McAdams Wright Ragen, said that without details, it’s hard to say what the effect might be.

“In the past, Costco has thrown out targets in terms of their improving margins. They haven’t necessarily made good on those, at least not to date,” he said.

Overall, the analyst said it seems like trends have been “pretty positive,” and pointed out growth in overall sales and same-store sales.

Costco shares fell 6 cents to $56.47 Thursday.

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