Costco Same-Store Sales Rise After String of Declines -- Update

By Sarah Nassauer and Ezequiel Minaya 

Costco Wholesale Corp. said discounts and deflation erased much of the sales gains the company logged in its latest quarter, as the retail giant battles with Wal-Mart and Amazon.com for a bigger slice of consumer spending.

Costco, the second largest retailer in the U.S. by revenue, said more shoppers headed to its warehouses in the period, but lower prices on everything from food to electronics left the company with just a 1% increase in same-store sales.

For example, unit sales of TVs rose 17% in the busy November holiday shopping period, but just 2% in dollar terms, said finance chief Richard Galanti on a conference call Wednesday with investors. Meat sales rose 16% in pounds and 6% in dollars. "We're going to invest in loyalty and growth while it's raining on everybody as it relates to higher levels of deflation," he said.

Excluding the impact of the strong dollar and lower gas prices, same-store sales rose 2% in the quarter ended Nov. 20. Traffic increased 2.2%, but was "choppy," slowing the week of the presidential election, said Mr. Galanti.

The latest results come amid the relatively upbeat outlook for the holiday season among some of the biggest players in the challenged retail sector. Macy's Inc. and Kohl's Corp. have posted optimistic outlooks for the crucial holiday season, despite more long-term struggles with changing shopping habits and competition from discounters. Last month, Wal-Mart Stores Inc. also chimed in with the expectation that consumer spending would remain solid during the holidays.

Much of the sector has struggled to keep pace with Amazon.com Inc. which has e-commerce sales greater than the combined e-commerce sales of the next 20 U.S. retailers, Costco among them. At the same time, deflation is taking a bite out of many retailers' sales. Last week, Kroger Co. cut its profit guidance for the full year, saying lower prices on eggs, meat and other food are tempering sales.

Costco's online sales in the fiscal first quarter rose 8%, a slower rate than the overall e-commerce market. The Seattle-based retailer has been more blunt than competitors that it prefers shoppers to come to stores where impulse purchases are more likely. Still, it's working to be stronger online, say executives. "We think we could and should do a lot more online," said Mr. Galanti.

Asked how much of the company's sales are imported and thus potentially subject to import tariffs under a Donald Trump administration, Mr. Galanti estimated about 25% of sales come from imported goods. But it's "tenuous to come up with an exact number," he said. For example "most electronics are purchased in U.S. dollars by U.S. trading companies that are arms of the overseas manufacturer," he said.

For the quarter, Costco reported a profit of $545 million, or $1.24 a share, up from $480 million, or $1.09 a share, a year earlier. Total revenue rose 3.2% to $28.1 billion, while membership fees climbed 6.2% to $630 million.

The latest period benefited from a $51 million legal settlement that contributed 7 cents a share to earnings, the company said.

Write to Sarah Nassauer at [e-mail] and Ezequiel Minaya at [e-mail]

(END) Dow Jones Newswires

December 07, 2016 19:55 ET (00:55 GMT)

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