By Karen Talley
Costco Wholesale Corp. is still seeing strong demand for its merchandise, but is dealing with broad inflation for products ranging from dog food to plastic cups.
The impacts showed up in the wholesale club's fiscal third-quarter earnings and may be a precursor to what other retailers, such as mass merchants and supermarkets, will face because they may not have placed significant orders yet at the newly elevated prices. Costco sells its inventory very quickly and, as a result, is already restocking merchandise at the higher prices.
"We saw quite a bit of inflationary pricing," during the third quarter, and the pressure is expected to continue in the current period, Chief Financial Officer Richard Galanti said during a conference call with analysts.
"Everything from dry dog food up 3.5%, to all your detergents of 10% plus, to various waters 10% or so, to all your plastic, your plates and your plastic cups and everything, 8% to 9%," Mr. Galanti said. "We're fighting to keep them lower, keep them delayed."
Costco has to walk a fine line between absorbing the costs and passing them to customers because of its positioning as a warehouse club that, while catering to generally higher-end consumers, does have a reputation for offering decent prices. The company's strategy is to "hold prices as long as we can" at levels customers are used to, but at least some increases will likely be passed along, Mr. Galanti said.
The company won't, however, begin offering cheaper merchandise because of how customers can react, Mr. Galanti said. "When you trade yourself down, it's darn tough to get them back."
Still, Costco's fundamental business continues doing well, with all categories except electronics showing growth during the quarter. Customers remain focused on food, sundries and gasoline, similar to what other mass merchants pointed to during their own quarterly reports.
Costco's third-quarter earnings rose 6% as strong same-store sales growth and expense controls more than offset a slight decline in margins.
The largest U.S. warehouse-style retailer by revenue also benefited from stronger foreign currencies in addition to a bulk selling approach that appeals to cost-conscious consumers.
For the quarter ended May 8, Costco reported a profit of $324 million, or 73 cents a share, up from $306 million, or 68 cents a share, a year earlier. The most-recent quarter included a pretax $49 million, or seven-cent-a-share, last-in-first-out charge. Last-in-first-out, or LIFO, is an accounting approach that requires revaluing inventory if prices are rising or falling. Since prices are rising, Costco had to value the inventory higher, which resulted in the a LIFO charge.
Revenue jumped 16% to $20.62 billion.
Analysts polled by Thomson Reuters had forecast earnings of 77 cents on revenue of $20.14 billion.
Same-store sales, excluding currency changes and gasoline, were up 7%. The sales increased 6% in the U.S. and 11% internationally. Total same-store sales, including Mexico stores, rose 12%.
Operating margin slipped to 2.7% from 2.8%. Membership fees, which typically make up the majority of the company's operating profit, rose a strong 10% to $435 million from $395 million a year ago.
Costco's inventory at the end of the quarter was up 15.3% compared with a net sales increase of 16.1%. Retailers have been trying to keep inventory in line with sales as a way of matching supply with demand.
Costco operates 581 warehouses, 425 of which are in the U.S.
