Calif. Grocery Strikes Benefit Costco Results

Costco Wholesale Corp. (COST) posted higher quarterly profit Wednesday as Southern California shoppers flocked to its warehouses to avoid labor disputes at other grocery stores.

Costco shares slid more than 4 percent, however, as analysts worried that Costco was unable to deliver on long-awaited cost cuts even with solid sales -- a recurring problem for the Issaquah, Washington-based retailer.

Wall Street also questioned whether Costco could sustain sales strength that has been inflated by strikes and lockouts at three Southern California grocery chains, as well as steep gasoline prices (search) and a weak dollar that boosts sales abroad.

"We were surprised that the expense rate didn't show improvement in the context of an 11 percent increase in (comparable) store sales," Prudential Equity Group analyst Wayne Hood said in a research note.

Costco, which competes with Wal-Mart Stores Inc.'s (WMT) Sam's Club, has won over shoppers with a wider assortment of luxury goods such as $100 bottles of wine and $10,000 diamond rings. The upscale offerings have proved particularly popular in a rebounding U.S. economy.

The largest U.S. warehouse club operator said earnings rose to $226.8 million, or 48 cents per share, in the second quarter ended Feb. 15, from $182.1 million, or 39 cents per share, including a 3 cent after-tax charge a year ago.

Analysts, on average, expected Costco to earn 47 cents per share, according to Reuters Research.

Analysts said higher-than-expected interest income of $4.8 million was the biggest surprise in the earnings statement, and added about 1 cent per share to profit -- accounting for the better-than-expected results.

Quarterly sales jumped 14 percent to $11.33 billion in the second quarter from $9.92 billion a year ago.

February comparable store sales rose 11 percent as did second-quarter same-store sales. Total net sales were $3.49 billion in February, the company said.

The retailer has said that the recently resolved strikes and lockouts at three Southern California grocery chains helped its food sales as shoppers went to Costco to avoid crossing picket lines elsewhere.

Some analysts worry that sales will suffer now that the labor disputes have been settled, but others contend that Costco's selection of gourmet food will help it keep many of those new customers.

Martin Bukoll, retail analyst with Northern Trust, said the labor disputes added as much as 2 percentage points to Costco's sales growth since the strikes began in October.

"Undoubtedly many consumers liked the Costco experience," he said. "However, if only for convenience, many consumers will return to grocery chains for the bulk of their grocery purchases."

Costco also benefited from a weak dollar that inflated results from its 113 foreign stores. Steep gasoline prices helped too, as more people filled up at Costco's low-priced gas stations.

Despite the strong sales, some analysts have questioned Costco's ability to control costs, noting that its salaries and benefits are more generous than Wal-Mart's, and its worker's compensation costs have skyrocketed in California, where it has the largest number of stores.

Analysts said those issues will be magnified now that the strikes are settled, and the situation could get even worse if gas prices moderate and the dollar rebounds.

"When same-store sales momentum normalizes, we expect investors will again focus on the company's inability to translate sales gains to the bottom line," said J.P. Morgan retail analyst Shari Eberts, repeating her "underweight" rating on the stock.