Earnings: Costco |

Costco Sees Profit Jump, But Misses Estimates

Costco Wholesale Corp. (COST), the largest U.S. warehouse club operator, Wednesday posted lower-than-expected quarterly profit, hurt by higher taxes and soaring oil prices that pressured margins at its gas stations.

Sales rose 11 percent, easily outpacing rival Sam's Club, owned by Wal-Mart Stores Inc. (WMT), as customers bought fresh food, Easter candy and other seasonal merchandise, but profit growth of 12 percent disappointed many investors, and the stock fell more than 1 percent in premarket trading.

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The earnings miss broke a streak of four consecutive quarters of better-than-expected results.

"While higher income taxes appear to be the culprit, we're not sure how forgiving the market will be today — particularly given the stock's 'priced-to-perfection' multiple," J.P. Morgan analyst Charles Grom wrote in a note to clients.

Costco's shares trade at 20 times analysts' profit estimates for next year, compared with 14.6 times for Wal-Mart, according to Reuters Estimates.

Earnings increased to $235.6 million, or 49 cents per share, in the fiscal third quarter that ended May 7, from $209.8 million, or 43 cents per share, a year earlier.

Analysts, on average, looked for earnings of 50 cents per share, according to Reuters Estimates.

Grom said that while gas prices were probably "more of a headwind than even Costco anticipated" in the latest quarter, he had still expected the company to beat earnings estimates. Gross margin was modestly weaker than he had anticipated.

Quarterly sales rose 11 percent to $13 billion, excluding membership fees, well ahead of the 6.8 percent increase that Sam's Club posted for its fiscal first quarter that ended April 30.

WORRIES OVER MARGINS

Despite the strong sales growth, several analysts had cut their quarterly profit estimates in recent weeks because of rising gas prices.

Costco has gas stations at many of its 350 U.S. stores, and typically replenishes supplies daily, which makes it particularly sensitive to rapid price swings. Most gas stations replenish supplies weekly.

The most recent data from the federal Energy Information Administration showed the national average price per gallon of gasoline was $2.88, up 76 cents from a year earlier.

Third-quarter sales at stores open at least a year — a key retail measure known as same-store sales rose 7 percent. For May, they were up 10 percent, better than analysts had expected.

Attention now shifts to a mid-morning conference call with analysts, where Costco is expected to provide a fourth-quarter profit forecast.

"The direction and tone of the company's fourth-quarter guidance and updated store plans will be watched closely, and Costco's May (same-store sales) of 10 percent will add support," J.P. Morgan's Grom said.

With gas prices rising and analysts raising concerns about profit margins, Costco's shares have been under pressure in recent weeks, falling about 7 percent from an April 7 peak to close at $53.56 on Nasdaq on Tuesday.

The shares fell to $53.10 in premarket trading on the Inet electronic brokerage Wednesday.

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