Costco raises fees after profit margin narrows

Costco Wholesale Corp., the largest U.S. warehouse-club chain, increased membership fees 10 percent after rising costs hurt profit margins in the fourth quarter.

Costco will boost annual membership fees to $55 from $50 effective Nov. 1 for U.S. Goldstar or individual members, as well as business and Canada Business members, the retailer said today in a statement. U.S. and Canada executive fees will rise to $110 from $100. The increases will affect about 22 million members, half of them in the executive program, Costco said.

The retailer’s profit margins have narrowed this year as costs climb for gasoline and food items such as coffee and cheese. The company said the rising cost of inventory reduced profit by $32 million, or 4 cents a share, last quarter. The company reported a combined $55 million in such charges in the second and third quarters after more than two years without those expenses.

“The margins didn’t materialize,” Brian Sozzi, an analyst for Wall Street Strategies in New York, said in an interview. He recommends buying Costco shares. “The fee increase softens the blow, but overall it’s a really disappointing quarter.”

Costco fell 93 cents, or 1.1 percent, to $80.72 at 9:37 a.m. New York time in Nasdaq Stock Market trading. The Issaquah, Washington-based company’s shares advanced 13 percent this year before today.

Costco’s gross margin, or the percentage of sales left after subtracting the cost of goods sold, narrowed to 12.4 percent from 12.9 percent a year earlier.

The company last raised all of its membership fees in 2006. The increases may add as much as 25 cents a share to profit in this fiscal year, David Strasser, a New York-based analyst for Janney Montgomery Scott LLC, wrote today in a note to clients.

Net income in the period ended Aug. 28 advanced to $478 million, or $1.08 a share, from $432 million, or 97 cents, a year earlier, the company said. The average of analysts’ estimates compiled by Bloomberg was for profit of $1.09 a share.

Sales for the five weeks ended Oct. 2 rose 15 percent to $8.61 billion, the company said. Revenue at stores open at least a year gained 8 percent, excluding fluctuations in gas prices and currency exchange rates.

The retailer announced last month that Chief Executive and co-founder Jim Sinegal will step down Jan. 1 and be replaced by current chief operating officer Craig Jelinek.