Sales solid, but holidays pressured profits at Costco

In the sales versus margins battle at Costco, sales got the upper hand during the holiday season and the company’s second quarter ended Feb. 16.

Costco managed to grow sales by 5.8% to $25.76 billion and same-store sales, excluding fuel, at U.S. clubs rose a healthy 5%. However, in a shortened and intensely priced competitive holiday season impacted by severe winter weather, Costco sacrificed margin to maintain member satisfaction, which was evident in membership fee income that grew 4.2% to $550 million. The tradeoff between sales and margins was evident in the company’s bottom line as net income declined to $463 million, or $1.05 a share, compared to $547 million, or $1.24 a share, during the second quarter the prior year. Comparisons to the prior year were made more difficult because the period included a 14-cents-a-share one-time tax benefit related to a portion of a special cash dividend the company paid in Dec. 2012 to 401k plan participants.

“Even with that distinction, however, the year-over-year comparison was unfavorable,” said Costco CFO Richard Galanti. “Despite satisfactory sales results during the second fiscal quarter, several other factors led to lower earnings.”

Those 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 the fresh foods business and lower reported international profits resulting from the significant weakening of foreign exchange rates, according to Galanti.

“The first four-week period of the quarter represented the majority of earnings underperformance in the quarter," Galanti said.

Costco’s second quarter began Nov. 25, 2013 and encompassed the Thanksgiving weekend, which fell late last year and compressed the holiday season.

Total company same-store sales during the quarter, excluding fuel and the effects of foreign currency, increased 5%, and consisted of a 7% gain internationally and 5% domestic increase.

Costco ended the period with 649 stores, consisting of 462 locations in the U.S. and Puerto Rico, 87 in Canada, 33 in Mexico, 25 in the United Kingdom, 18 in Japan, 10 in Taiwan, 9 in Korea and 5 in Australia. The company plans to open as many as 14 new store before the end of its fiscal year Aug. 31, 2014.