Costco’s profit rises 4.7%; sales rebound

Costco Wholesale Corp. reported a better-than-expected rise in profit Wednesday as margins improved, and the No. 1 U.S. warehouse club operator said September sales at stores open at least a year exceeded Wall Street’s forecasts.

The September sales results marked a rebound from August, when Costco reported weaker-than-expected sales, hurt by a decline in store traffic that it attributed to a heat wave in California.

“It was a nice bounce back from a weak August,” said Mitchell Kaiser, a retail analyst at Piper Jaffray, adding that Costco continued to take market share as consumers consolidated shopping trips.

Issaquah, Wash.-based Costco’s net income rose to $372.4 million, or 83 cents a share, in its fiscal fourth quarter ended Sept. 2, up 4.7% from $355.6 million, or 75 cents, a year earlier.

Excluding a one-time charge of 8 cents a share related to how the company recognizes membership fees, earnings were 91 cents a share. Analysts, on average, had been expecting 83 cents, according to Reuters Estimates.

Charles Grom, a retail analyst with JPMorgan, said Costco delivered its best quarterly gross profit margin performance in five years, “driving significant, high-quality earnings-per-share outperformance.”

Its quarterly gross margins rose to 10.74% from 10.36% a year earlier, an improvement analysts attributed in part to a shift in Costco’s return policy. The retailer this year implemented a new 90-day return policy on consumer electronics to cut down on customers returning old items after purchasing newer models.

Investors are watching retail sales closely to see how consumer spending holds up as the crucial holiday selling season approaches.

Late last month, Target Corp., the No. 2 U.S. discount retail chain behind Wal-Mart Stores Inc., cut its September sales forecast. Children’s Place Retail Stores Inc. slashed its third-quarter earnings forecast Tuesday, saying price cuts hurt its margins.

Most major U.S. retail chains will report their September sales today.

Costco said same-store sales, at outlets open at least one year, climbed 5% during the fourth quarter from the year-earlier period.

For September, total sales at its clubs open at least a year rose 6%, while analysts on average were expecting a 4.7% increase, according to Reuters Estimates.

Its September international same-store sales jumped 13%, while U.S. same-store sales rose 4%.

Chief Financial Officer Richard Galanti said during a conference call that the September sales were a “nice comeback” from August, helped by improved traffic and customers spending more in Costco’s clubs during their visits.

Third-quarter net sales rose to $20.09 billion from $19.5 billion a year earlier. Including membership fees, the company’s revenue was $20.5 billion.

For Costco’s first quarter, Galanti said analysts’ consensus earnings estimate of 59 cents a share was a shade too high. His forecast is in the mid- to high-50-cent range.

Costco operates 520 warehouse club stores, including 385 in the U.S. and Puerto Rico and 71 in Canada.

Shares of Costco rose $5.82, or 9.2%, to $69.13.