COSTCO SEES 3RD-QUARTER PROFIT GAINS IN PERISHABLES

Mark Hamstra

ISSAQUAH, Wash. -- Costco Wholesale here said margins on its sales of perishables were up in double digits in the third quarter.

In a conference call with analysts discussing results for the 12-week period that ended May 8, Richard Galanti, chief financial officer, said margins on fresh foods improved about 25 to 30 basis points in the quarter.

"One area where nobody can touch us is fresh food," he said during the call. "It helps when you're doing two and three times the volume of your competitors. You can make a much better-looking presentation."

He said the company has worked to build a customer base that seeks high-quality perishables.

"We've cultivated the best members, and they're buying the best stuff," he said. "The penetration of those [product] areas is increasing -- their comps are greater than the company as a whole, and their margins have increased."

Costco reported comparable-store sales gains of 7% for both the third quarter and year-to-date periods, which helped drive profit gains of 6% for the third quarter, to $209.8 million, and 21% for the year-to-date span, to $708.4 million.

The year-to-date total included a one-time income tax benefit in the second quarter that was partially offset by a one-time charge. Excluding those events, net income for the year-to-date span rose 14%.

Revenues rose 10.1% in the third quarter and 9.9% in the 36-week span, to $12 billion and $36.2 billion, respectively.

Although the company said its margins in fresh foods were growing, Costco previously warned that its results for the third quarter and year would be lower than analysts had expected, largely because of margin pressures on gasoline.

3rd-QUARTER RESULTS

Qtr Ended: 5/8/05; 5/9/04

Sales: $12 billion; $10.9 billion

Change: 10.1%

Comp-store: 7%

Net income: $209.8 million; $198.7 million

Change: 6%

Inc/Share: 43 cents; 42 cents

36 Weeks: 2005; 2004

Sales: $36.2 billion; $32.3 billion

Change: 9.9%

Comp-store: 7%

Net Income*: $708.4 million; $585.6 million

Change: 21%

Inc/share: $1.45; $1.23

* Net income in the 36-week span included $42.1 million in one-time net gains in the second quarter.