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Costco Stock Falls on Warning

The warehouse club's shares drop 19% after it says earnings for the fiscal fourth quarter will miss forecasts.

August 06, 2003|From Reuters

Costco Wholesale Corp. warned Tuesday that its quarterly earnings would miss expectations because of rising costs for everything from meat to employee health care. The news sent the retailer's stock tumbling 19%.

The largest U.S. warehouse club operator, grappling with increasing competition from Wal-Mart Stores Inc.'s Sam's Club, said on a conference call that the recent "mad cow" scare in Canada had driven up prices it paid for beef.

Costco wasn't able to pass on the higher meat costs to customers, however, in part because Sam's was aggressively pushing down its prices, Chief Financial Officer Richard Galanti said.

The company also cited steep health-care costs, as well as workers' compensation issues in California.

Costco defended its efforts to fend off Wal-Mart, which told analysts recently it was in the process of "establishing price leadership" at Sam's. Analysts took that as a worrisome sign of a brewing price war between Wal-Mart and Costco, and questioned why Costco would risk profit to try to match Wal-Mart's prices.

Costco executives said the company's strong sales tally for July showed it wasn't losing customers to Sam's, but added that they had "no illusions that we purchase better than Sam's."

Costco said its July sales at stores open at least a year rose 8%, more than most analysts had expected, boosted by an 18% gain in its international operations. Total sales for the four-week period ended Aug. 3 rose 12% from a year earlier to $3.34 billion.

But the company said it now expected to earn 46 cents to 48 cents a share for its fiscal fourth quarter, which ends Aug. 31, instead of its earlier forecast for 54 cents to 56 cents. Analysts on average were expecting 55 cents.

"Costco has once again demonstrated its inability to translate strong sales growth into the bottom line, as a combination of lower-than-planned gross margins and higher-than-expected ... costs negatively impacted earnings," J.P. Morgan Chase & Co. analysts said in a research note.

Costco's shares dropped to a session low of $29.97 before closing at $30.06, down $6.90, or 19% on Nasdaq.

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