Costco Posts Sales, Margin Gains 2007-12-17

MARK HAMSTRA

ISSAQUAH, Wash. — Costco Wholesale Corp. here said gasoline sales squeezed the company's margins in the first quarter, but gross-margin gains on core items, including food, helped the chain meet analysts' estimates for profitability.

In a conference call with analysts last week discussing the results, the company said gross margins in its key product areas — food and sundries; hard lines; soft lines; and fresh foods — were up 41 basis points in the 12-week period, which ended Nov. 25, compared with the first quarter of a year ago.

Comparable-store sales were up 8% for the quarter, or 4% excluding gasoline. The sales and margin gains helped drive net income up 10.6% for the quarter, to about $262 million, compared with year-ago results. Revenues, including $338 million in membership fees, were up 11.7%, to $15.8 billion.

Analysts said investors were disappointed in the overall rate of margin growth, however, and also with the rise in savings, general and administrative expenses. The company said such expenses were 10.15% of sales in the first quarter of this year, vs. 9.98% of sales in the first quarter a year ago.

Part of that increased expense came from a repayment of $8.9 million to employees as the company sought to reward workers for sharing the burden of reducing health care costs.

“It has been a combination of some of the changes we made, but more importantly our employees being better consumers of health care [that helped reduce costs,]” said Richard Galanti, chief financial officer. “We felt that a part of that should be shared with them.”