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Supermarket Strike Gives Boost to Costco Earnings

But the stock price falls 3.5% on concerns that the warehouse retailer will see a sales drop-off.

March 04, 2004|From Reuters

Costco Wholesale Corp. posted higher quarterly profit Wednesday as Southern California shoppers flocked to its warehouse stores amid strikes at competing supermarkets.

Costco shares slid, however, as analysts noted that the Issaquah, Wash.-based retailer continued to struggle with steep costs. Wall Street also questioned whether Costco could sustain sales strength that had been inflated by strikes and lockouts at three Southern California grocery chains, as well as steep gasoline prices and a weak dollar, which boosts sales abroad.

The largest U.S. warehouse club operator said earnings rose to $226.8 million, or 48 cents a share, in the second quarter ended Feb. 15, from $182.1 million, or 39 cents, including a 3-cent after-tax charge, a year earlier.

Analysts on average expected Costco to earn 47 cents a share, according to Reuters Research.

Analysts said higher-than-expected interest income of $4.8 million was the biggest surprise in the earnings statement, and added about 1 cent a share to profit -- accounting for the better-than-expected results.

Quarterly sales jumped 14% to $11.33 billion in the second quarter. February same-store sales, a key measure for retailers, rose 11%, as did second-quarter same-store sales.

The retailer has said that the recently resolved strikes and lockouts at three Southern California grocery chains helped its food sales as shoppers went to Costco to avoid crossing picket lines elsewhere.

Some analysts worry that sales will suffer now that the labor dispute has been settled, but others contend that Costco's selection of gourmet food will help it keep many of those customers.

"Undoubtedly, many consumers liked the Costco experience," said Martin Bukoll, a retail analyst with Northern Trust. "However, if only for convenience, many consumers will return to grocery chains for the bulk of their grocery purchases."

A weak dollar also inflated results from Costco's 113 foreign stores, and steep gasoline prices helped sales too as more people filled up at its gas stations.

Despite the strong sales, some analysts have questioned Costco's ability to control costs, noting that its salaries and benefits are more generous than Wal-Mart's, and its workers' compensation costs have skyrocketed in California, where it has the largest number of stores.

Costco shares closed down $1.40 at $38.31 on Nasdaq.

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