Costco reduces earnings outlook

From the Associated Press

Costco Wholesale Corp. said Wednesday that its earnings for the current quarter would be lower than expected as it delayed raising prices on items such as food and patio sets amid soaring energy costs.

Shares in the nation’s No. 1 warehouse club operator -- which had been one of the few bright spots in retailing -- plummeted almost 12% on Wednesday. Rival BJ’s Wholesale Club Inc. fell more than 9% as investors saw Costco’s willingness to hold prices on some products steady as a sign BJ’s might have to do the same.

The reduced profit outlook from Costco reflects a dilemma that retailers, particularly low-price operators, face as the economy struggles: whether to raise prices on products -- which could cost them customers -- or resist price hikes from suppliers as long as possible, a move that depresses profit as they absorb higher costs.

Issaquah, Wash.-based Costco, which sells items in bulk and features gas stations at most locations, has attracted crowds of shoppers seeking cheaper options. But it can resist raising prices for only so long. Most retailers ultimately are passing along the higher costs, which Costco officials said were being pushed by suppliers at a faster and higher rate in recent weeks than before. That means more financial pain for shoppers.


“I think the consumer is just starting to see, not only with us, rising commodity costs and rising general merchandise costs in a much bigger way then they’ve seen other than with gasoline itself,” said Richard Galanti, Costco’s chief financial officer, during a conference call Wednesday.

At Costco, customers have seen the price for rotisserie chicken rise 20% in a matter of months and they will face a 10% to 15% price hike on holiday decorations.

Higher energy costs are also affecting the freight costs of distributing merchandise, Galanti said. As a result, Costco now expects profit for the fiscal fourth quarter ending Aug. 31 to be “well below” Wall Street estimates. Analysts polled by Thomson Financial expected Costco to earn $1 a share for the fourth quarter.

Costco’s shares fell 11.9%, or $8.57, to $63.43.