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Costco Net Income Slips In Q2

Thursday March 6th, 2014 - 2:38PM


For the second quarter ended February 16, Costco Wholesale Corp.'s net income was $463 million, or $1.05 per diluted share, versus $547 million, or $1.24 per diluted share, in the period last year. Excluding negative effects of gasoline price deflation and foreign exchange fluctuation, comparable store sales increased by 5% in the United States and 7% internationally for a company net 5%.

Net sales for the quarter increased 6% versus last year to $25.76 billion last year.

Richard Galanti, Costco’s CFO, noted in comments on the financial results, "Last year's net income was positively impacted by a $62 million—14 cent per diluted share— tax benefit in connection with the portion of the special cash dividend paid by the company in December 2012 to the company 401(k) plan participants. Even with that distinction, however, the year-over-year comparison was unfavorable. Despite satisfactory sales results during the second fiscal quarter, several other factors led to lower earnings. These factors included: weaker sales and gross margin results in certain non-foods merchandise categories, particularly during the four-week holiday selling season, weaker gross margins in our fresh foods business and lower reported international profits, resulting from the significant weakening of foreign exchange rates. The first four-week period of the quarter represented the majority of earnings underperformance in the quarter."

In a conference call, Galanti also noted that one-time items boosted SG&A, which dropped earnings by about two cents per share, and weather hurt as well as opening expenses for the Costco’s upcoming first grand opening in Spain. He added that sales trends strengthened in the last two-thirds of the quarter.

Average transaction fell by 1% as reported but increased 1% with foreign exchange rate fluctuation factored out. Average frequency gained by about 4%. The Southeast, San Diego and the Midwest were the strongest sales regions.

As for product categories, Food & Sundries comps advanced in the low single digits, Hardlines gained in the mid single digits with electronics up slightly, Softlines, including home goods, advanced in the mid single digits and Fresh Food gained in the mid to high single digits.

For the four-week reporting month of February ended March 2, Costco reported net sales of $7.9 billion, an increase of 4% from the similar four-week period last year. U.S. comparable store sales, excluding negative effects of gasoline price deflation and foreign exchange fluctuation, were up 4%, international comps were up 5% and the company total came in at 4%.

In February, the average transaction was down by 1% as reported but heavily influenced by fuel prices, which, Galanti pointed out, dropped 10% per gallon from February 2013. Average frequency increased by about 4%. As for product categories, Food & Sundries comps increased in the low single digits, Hardlines was slightly negative with electronics down in the mid single digits, Softlines was up in the mid to high single digits and Fresh Food gained in the mid single digits.

Costco operates 649 warehouse clubs, with 462 in the United States and Puerto Rico, 87 in Canada, 33 in Mexico, 25 in the United Kingdom, 18 in Japan, 10 in Taiwan, nine in Korea and five in Australia. The company said it plans to open up to an additional 14 new stores prior to the end of its fiscal year on August 31. Costco also operates E-commerce web sites in the U.S., Canada, the United Kingdom and Mexico.