Costco Earnings Drop on Charge

ISSAQUAH, Wash. — Costco Wholesale Corp. here last week posted a rare decline in net income after taking a charge for the third quarter.

The club-store operator posted net income of $224 million for the 12-week period, which ended May 13, a decline of about 5% from year-ago levels. The company took a pre-tax charge of $48.1 million in the period, reflecting reduced gross margin related to estimated future merchandise returns.

Comparable-store sales for the quarter were up 7%. Total sales increased 10%, to $14.34 billion, including a sales reduction of $228.2 million for the return reserve. Through three quarters net income was down about 5%, to $710 million, on a sales gain of 9%, to $43 billion.

In a conference call with analysts, Richard Galanti, chief financial officer, said the company has seen some decline in comp-store sales of fresh foods from previous gains.

“I think for several years we were enjoying mid-teen comps in that business — every quarter it was like clockwork,” he said. “It's still generally stronger than the company's comp. This quarter it was in the high singles, and so it's still an important part of our business and expanding.”

He added that perishables also generate “a good margin” and help distinguish the chain from the competition in terms of quality.

“I would expect to see the comp grow at a rate faster than the rest of the company, in part because we continue to find new things to expand in that wide category,” he said.