Costco profit drops 16% as sales rise

Costco Wholesale Corp. said Thursday that its fiscal second-quarter profit dropped 16%, hurt in part by costs associated with revamping its consumer electronics return policy.

Net income for the quarter ended Feb. 18 fell to $249.5 million, or 54 cents a share, from $296.2 million, or 62 cents, a year earlier.

Last week, the discount retailer announced a new return policy for consumer electronics devices including televisions, computers, cameras, camcorders, digital music players and cellphones. In the past, the company gave customers unlimited time to return those items, but the new policy shortens that window to 90 days.

Costco Chief Financial Officer Richard Galanti said the company had conducted a detailed review of when customers were returning items such as TVs, which he said brought in about $2.5 billion in revenue each year. Costco found that “the lag time for certain returns is longer than previously estimated,” he said.

He added that the company had a harder time recouping losses from those consumer electronics products, either by reselling the items at full price or at a discount, or returning the items to the merchants.

As a result, Costco said, it raised the amount it typically subtracts from quarterly sales by $224.4 million to cover returns, and took a charge of $48.1 million in the quarter.

Results also included a $46.4-million charge related to the company’s effort to fix stock option accounting. The charges were tempered by a $10.1-million tax refund on phone cards.

Excluding those items, Costco said, profit totaled 66 cents a share, matching the forecast of analysts surveyed by Thomson Financial.

Revenue increased 7.5% to $15.11 billion, with merchandise sales and membership fees both gaining.

Galanti expects earnings of 52 cents to about 56 cents a share in the third quarter.

Shares of Costco fell $1.86 to $54.26.