COSTCO HOPES TO RETAIN HALF OF STRIKE GAINS

MARK HAMSTRA

ISSAQUAH, Wash. -- Costco Wholesale Corp. here predicted that it could retain about half of the incremental business it picked up in Southern California during the recently ended supermarket strike-lockout.

In a conference call with analysts discussing Costco's second-quarter results, Richard Galanti, chief financial officer, said the warehouse-club operator estimates that in Southern California, where Costco operates about 10% of its stores, the company saw an increase in comparable-store sales of about 7% to 10%.

"My guess is that we'll keep half or slightly less than half of that, and we won't know for a few weeks," he said. "There's going to be at least a month of highly promotional supermarket stuff to get people back in the door. Maybe we'll lose all of it for a couple of months and then get back half, but that's an educated guess on my part."

Galanti said Costco did not aggressively market for new members in that region, but instead paid close attention to pricing and in-stock levels on food products. "We made sure we weren't running out of rotisserie chickens, we weren't running out of steaks and we weren't running out of muffins," he said.

Fresh food continues to be productive at Costco overall, Galanti said, noting that profit margins improved in three of the four fresh departments (meat, bakery, deli and produce). Although he did not specify which of the three did not improve, Galanti did say that margins improved in meat, the company's largest fresh department.

Sales of food and sundries, which account for about 60% of Costco's total sales, were up about 10% on a comparable-store basis in the 12-week second quarter ended Feb. 15, the company said. Fresh-food sales were up 17% on a comp-store basis for the quarter.

Total comp-store sales increased 11% for the quarter, which included an average transaction-size increase of 6% and an average frequency increase of 5%.

The company said it had net income of $226.8 million in the second quarter on revenues of $11.5 billion, increases of 25% and 14%, respectively, over year-ago levels. Through the first half, net income rose 18%, to $387 million, on a 14% increase in revenues, to $22.1 billion.

The company continued to add ancillary businesses during the quarter, including 10 new pharmacies (for a total of 347), nine new food courts (402), nine one-hour photo labs (398), nine optical shops (386), seven hearing-aid centers (139) and 10 gas stations (200).

The company operates 431 stores, including 318 in the United States. It plans to open 18 to 19 new stores in fiscal 2004, down from previous projections of 25 new stores, as some openings have been pushed into the next fiscal year.

2nd-QUARTER RESULTS

Qtr Ended: 2/15/04; 2/16/03

Revenues: $11.5 billion; $10.1 billion

Change: 14%

Comp-store: 11%

Net income: $226.8 million; $182.1 million

Change: 25%

Inc/Share: 48 cents; 39 cents

24 Weeks: 2004; 2003

Revenues: $22.1 billion; $19.3 billion

Change: 14%

Comp-store: 11%

Net Income: $387 million; $328 million

Change: 18%

Inc/share: 82 cents; 70 cents