Costco Cites Inflation's Impact

ELLIOT ZWIEBACH

ISSAQUAH, Wash. — Costco Wholesale Corp. here said last week inflation might be affecting its operations a little sooner than it impacts other retail outlets because its locations turn inventory faster.

However, the company continues to take advantage of manufacturer deals prior to price increases, Richard Galanti, executive vice president and chief financial officer, said. “Then we hold the price for a few weeks and benefit on the tail end to cover our costs.”

There are some instances when Costco will hold off increases even further “and eat into our margin, but those are the exception, not the norm,” Galanti added.

Speaking with analysts during a conference call to discuss financial results, Galanti said another round of price increase announcements are due later this week, “and we will probably get hit first. But it is what it is, and we're fighting to delay passing the increases on and to sell as much at the old price as we can.”

Asked about private-label penetration, he said Costco expanded its offerings into canned fruits and vegetables last fall “where the amount of water in the can is lower and the quality is a little better — a high-end item at a great price — and that has helped penetration.

“But we're not seeing a trade down because if you're trading the customer down, it's darned tough to get him back. And I think our customers are higher-end shoppers, so we're not impacted as much as some retailers who appeal more to lower-medium-end shoppers.”

Net income for the 12-week third quarter, which ended May 8, rose 5.9% to $324 million, while sales increased 16.1% to $20.2 billion. Comparable-store sales, excluding gasoline, were up 7%. For the 36-week period, net income climbed 13% to $984 million, with sales up 12.9% to $59.5 billion and comps, excluding gas, up 6%.

Average transaction counts for the quarter were up nearly 7% and frequency was up nearly 5%.

Q3RESULTS

*EXCLUDING FUEL.