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Costco posts better-than-expected profit

Costco Wholesale Corp. posted a better-than-expected 10 percent rise in quarterly profit on Thursday, helped by a big jump in membership fees.
/ Source: Reuters

Costco Wholesale Corp. posted a better-than-expected 10 percent rise in quarterly profit on Thursday, helped by a big jump in membership fees.

The largest U.S. warehouse club operator also said it would take a $70 million charge related to company stock options. Costco said in October that it had found certain “imprecisions” in its stock options practices, and formed an options review committee.

Earnings rose to $237 million, or 51 cents per share, in the fiscal first quarter ended November 26, from $216 million, or 45 cents per share, a year earlier. Analysts, on average, expected 50 cents a share, according to Reuters Estimates.

Charles Grom, retail analyst with J.P. Morgan, said the better-than-expected earnings were reassuring, particularly after consumer electronics chain Best Buy Co. Inc. posted disappointing results earlier this week, largely because of steep price declines for flat-panel televisions.

Costco also sells flat-panel TVs, and some on Wall Street had worried about margin pressure. The retailer has also struggled with an increase in returned merchandise after customers had trouble installing plasma TVs.

Sales for the first quarter rose 9 percent to $13.85 billion. On a “comparable-warehouse” basis — which uses data from warehouses open at least one year — net sales rose 4 percent.

Total revenue, which includes membership fees, was $14.2 billion, compared with $12.9 billion a year earlier.

“Sales were slightly better than our forecast but membership fees exceeded (our) estimate significantly,” ThinkEquity Partners analyst Edward Weller said.

Membership fees rose nearly 14 percent to $299 million, above Weller’s estimate of $285 million.

On May 1 Costco raised its basic membership fee by $5, to $50 a year.

Customers buy memberships at Costco in order to shop in the company’s warehouses. The company’s main rivals are Sam’s Club, owned by Wal-Mart Stores Inc., and BJ’s Wholesale Club Inc.

The retailer’s sales growth has slowed in recent months as falling gasoline prices have cut into revenue from its gasoline stations. However, its growth has outpaced that of Sam’s and BJ’s.

Costco thrives by stocking unexpected “treasure hunt” items such as designer clothing, high-end jewelry and fine wines, along with the normal warehouse club selection of supersized bottles of ketchup and 30-roll packs of toilet paper.

Costco said in connection with a review of stock options it announced in October that its compensation committee had approved a program designed to “protect over 1,000 of its employees who are U.S. taxpayers from certain adverse tax consequences.”

The program increases the exercise prices on certain stock options granted from 2000 to 2003, while the company makes payments to employees to reduce adverse income tax consequences from their options having been granted at lower prices, it said.

It said it expected to take a nonrecurring charge relating to stock options. It expects a pretax charge of about $70 million, or $45 million after tax, in the second quarter of fiscal 2007 — the three months to February 18.

Costco Chief Executive Officer Jim Sinegal said in a statement, “We do not intend for our options-holding employees to be penalized for historical issues associated with some of our stock options grants.”