After recent success, Costco starts feeling pinch

ISSAQUAH, WASH. —Just how bad is the economy? Bad enough for Costco to lower its earnings outlook for the fourth quarter, citing price hikes that have analysts once again questioning its dogged reluctance to raise margins.

Costco, which has been reporting strong comps all year, including a 9% increase in same-store sales in June, said high gas prices and increased product costs are taking a toll and will impact earnings, which are expected to be well below earlier estimates of $1 per share.

“We’re seeing our prices increase 5% to 10%, and even more than 10% in some cases,” said Costco evp and cfo Richard Galanti during a July 23 conference call. “But in every case, we’re trying to hold the line as long as we can and be the last one to pass them [price hikes] on.”

Galanti cited the price of Costco’s rotisserie chickens, one of its signature products, which jumped 20% in recent months after being at $4.99 for years. “We raised the price to $5.49 earlier this year and then raised the price to $5.99 this past Monday [July 21],” said Galanti. “In both cases, we held off for weeks before we passed on those increases to our customers. We hate to raise our prices, but ultimately you have to pass it on.”

The increases extend beyondfood. Galanti said the company is expecting to pay 10% to 12% more for some Christmas decorations and up to 15% more for patio furniture. “About the only place we’re not seeing prices increase is in apparel,” he said.

When asked about the possibility of bumping its margins to recoup some of its losses, Galanti said recent events aren’t to going to change the way it does business. “As Jim [ceo Jim Sinegal] has reminded us time and time again, we’re going to be competitive out there and drive sales.”

For years, Sinegal has resisted calls from investors to raise Costco’s margins—estimated to be about 13% on average—to boost profits. And even in one of the most challenging retail environments since the early 1990s, that stance probably won’t change. “It’s not going to happen,” said George Whalin of Retail Management Consultants. “Low margins are the core principal of their business and he [Sinegal] is one of those guys who isn’t going to mess with that.”