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Costco's Profit Warning Sends Major Retail Stocks Plunging

Earnings: Wall Street favorite says it expects to see slower growth, sparking a sell-off in shares of Home Depot, Wal-Mart, Best Buy.


Costco Wholesale Corp. told Wall Street on Wednesday that it expects to enter a period of slower profit growth, a pronouncement that sent shock waves through financial markets, dragging down the shares of the warehouse discount chain and other big retailers.

Shares of Issaquah, Wash.-based Costco plunged $8.75, or 22%, to close at $31.88 on Nasdaq. The plunge shaved nearly $4 billion in market value from the retailer, which had been a Wall Street favorite because of its consistent earnings growth.

The company also found itself facing criticism because its quarterly financial data reached some investors before being disclosed publicly.

In what was seen as an ominous signal for other retailers, Costco, which has 50 stores in Southern California, said earnings growth next year will be in the 11%-to-13% range, down from about 15%. Company officials told analysts that sales had slowed this month in the Pacific Northwest and in the New York metropolitan area, regional economies seen as particularly sensitive to Wall Street's current bear market.

"There is this whole concern about the economy and what has happened with the stock market right now," said Costco Chief Financial Officer Richard Galanti.

Other factors pressuring Costco's earnings include increased expenses from what will be nearly 30 store openings by year-end, many of them in new markets where the company must do extensive marketing. Costco operates 305 stores, mostly in the United States and Canada, where members pay an annual fee to shop.

Costco also is raising entry-level wages by as much as 20%, to $10 and $10.50 an hour, to attract employees. "The strength of the economy is putting pressure on wages," Galanti said. "We want to get the best people."

Investors were quick to dump shares of Costco because of its standing as one of the better-managed retailers, said Karen Sack, an analyst with S&P Equity Group in New York.

Galanti's comments, combined with the Costco report, sparked a sell-off in a wide variety of retailers ranging from home improvement giant Home Depot Inc. (off $3 to close at $46.75), No. 1 retailer Wal-Mart Stores Inc. (down 31 cents at $56.88), consumer electronics and appliance chain Best Buy Co. (down $6 at $67) and even luxury goods retailer Tiffany & Co. (off $2.69 at $58.81). All trade on the New York Stock Exchange.

"There certainly is an echo effect. Investors are saying that if Costco is seeing a slowdown in sales, then others are seeing a slowdown too," Sack said.

Costco is a good indicator of consumer spending, because although it is a discounter, its shoppers have a wide range of demographics. It sells everything from apples to diamonds.

"The Costco news cracked the safe-haven shell that had protected some of the better retailers during the recent turmoil on the stock market," said Douglas Gordon, analyst with Banc of America Securities in San Francisco.

Though earnings may have slowed, Costco did post double-digit sales growth in its third quarter ended May 7. The company said sales increased 14%, to $6.77 billion, from $5.94 billion during the same period in fiscal 1999. Sales at stores open a least 12 months, a key measure of growth, rose 10%.

Third-quarter profit rose 14%, to $120.3 million, or 26 cents per share, from $105.9 million, or 23 cents per share, in the same period a year earlier. The per-share figure was a penny short of analysts' expectations and contributed to the financial market's ire.

Costco also said that earnings for its fiscal fourth quarter, which ends Sept. 3, probably would fall 1 cent to 2 cents per share below the consensus estimate of 45 cents per share.

The earnings report generated additional controversy Wednesday. Costco said it had planned a 2 a.m. fax and e-mail distribution of the report to 1,000 key investors, to be timed with the transmission of the data over Business Wire, a financial reporting service.

But because of what Business Wire said was an error on its part, the release was delayed more than four hours and trading in Costco shares opened with only some investors knowing that the company had downgraded its outlook.

Business Wire transmitted Costco's release at 6:16 a.m., after a Costco official called and asked why the report had not gone out.

"You had people who were selling at 40 who may have known the news," said analyst Scott Swanson of Roger Engemann & Associates, which owns 5.1 million Costco shares.

Costco's stock closed Tuesday at $40.63. It opened Wednesday morning at $29. Its shares have seen a steady decrease throughout this month, falling from a 52-week high of $58.44 on May 1.


Times staff writer Abigail Goldman and Bloomberg News contributed to this report.


Costco's Slide

The price of Costco's stock has plunged since May 1, when it hit a 52-week high of $58.44.

Wednesday: $31.88, down $8.75

Source: Bridge News

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