Costco Wholesale Corp., Issaquah, Wash., said Thursday weak holiday sales, combined with several “anomalies,” resulted in lower earnings for its fiscal second quarter and first half, which ended Feb. 16, while sales increased for both periods.
John Heinbockel, managing director at Guggenheim Securities, New York, said Costco’s customer value proposition is as strong as ever “and the comp spread with its primary competitors remains very wide. Rather, these misses are more the product of the company’s unwillingness to take steps to protect near-term earnings and overly optimistic Street expectations.”
For the 12-week quarter net income fell 15.4% to $463 million, which the company said it attributed to weaker sales and gross margins in severalcategories, particularly during the four weeks leading up to Christmas; weaker gross margins in fresh foods; lower international profits as a result of significant weakening of foreign exchange rates; and the positive impact a year ago of a tax benefit.
“The first four-week period of the quarter represented the majority of earnings underperformance,” Richard Galanti, EVP and CFO, said, while earnings in the subsequent eight weeks “turned positive as the quarter went on.”
Sales for the quarter rose 5.8% to $25.8 billion, and comparable sales were up 3%.
For the half net income was down 7.8% to $888 million, while sales increased 5.6% to $50.2 million and comps rose 3%. Galanti said sales in February, which included the last two weeks of the second quarter, are up 4% to $7.9 billion, with comp sales up 2%.
He said sales of fresh foods were in the mid- to high-single-digit range for the second quarter, with produce strongest, and in the mid-single-digit range for the half.
In response to a question, he said margin pressures in fresh foods, particularly in, pork and poultry, were due almost totally to Costco’s desire to keep margins low.
Costco opened 13 new warehouses in the first quarter and three more in the second (in Illinois, Texas, and Ontario, Canada). Galanti said it plans three more openings in the third quarter including its first store in Spain — in Seville — scheduled to open in May, and 11 openings in the fourth.
Galanti said the company contemplates expanding into France sometime in 2015 and is looking for additional overseas locations in Europe, China and South America.
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