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Costco Posts Modest Rise in Earnings

Profit increases less than 1% as revenue soars 19%. An internal review of option practices finds no evidence of fraud.

October 13, 2006|From the Associated Press

Costco Wholesale Corp. said Thursday that its fiscal fourth-quarter profit edged up less than a percentage point as its revenue climbed 19% and operating results were unexpectedly strong late in the quarter.

The results from the nation's largest wholesale club operator beat Wall Street estimates, and Costco shares surged 7.7%.

Also Thursday, Costco said a committee it had appointed, along with independent counsel and forensics experts, had found no evidence of fraud in an internal review of the company's stock option grant practices.

However, the company did note that in several cases, the review could not precisely determine the date on which certain options were granted -- only a range of dates.

Costco's net income grew to $355.6 million, or 75 cents a share, for the period ended Sept. 3, up 0.25% from $354.7 million, or 73 cents, a year earlier.

Last year's fourth quarter was a week shorter and included several one-time expenses.

Revenue, including sales and membership fees, increased 19% to $19.9 billion. Sales at warehouses open at least a year jumped 8%.

Analysts polled by Thomson Financial were predicting earnings of 73 cents a share on revenue of $19.1 billion.

Costco shares rose $3.83 to $53.90.

In late August, Costco lowered its outlook for fourth-quarter profit, saying sales on items such as jewelry and furniture had slowed as consumers were saddled with higher gasoline prices.

On Thursday, Chief Financial Officer Richard Galanti said results for the final five weeks of the quarter came in better than the company had predicted.

Among the improved results, Costco made more money on gasoline in the final week of the quarter, said Jeff Elliott, director of investor relations and finances.

Costco also said workers' compensation expenses were lower than expected.

In a conference call with analysts, Jim Sinegal, Costco's chief executive, said the company's expectations for the holiday shopping season had improved in recent weeks.

"At the moment, we think Christmas looks promising, certainly more promising than we thought five or six weeks ago," Sinegal said.

Costco, based in suburban Issaquah, Wash., opened 27 new stores in fiscal 2006 and plans to open more stores even faster in the coming years, Galanti said. Costco expects to open 37 new stores in fiscal 2007 and more in 2008.

Costco operates 488 warehouses, including 359 in the United States and Puerto Rico, 68 in Canada, 29 in Mexico, 18 in Britain, five in South Korea, four in Taiwan and five in Japan.

In the option review, the company said the panel had found that none of the options in question was issued to Costco's CEO, chairman or nonemployee directors, except in April 1997, when the CEO and chairman received a grant that may have benefited each by as much as $200,000.

Although he gave Costco credit for being forthcoming about the review, Bob Toomey, senior vice president at E.K. Riley Investments, said he was concerned and thought the disclosure might prompt a government investigation.

"When there's imprecision there, you wonder, 'Is there more to it than this?' " Toomey said.

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