Costco third quarter offers some surprises

ISSAQUAH, Wash. — A larger-than-expected inventory charge may have dinged Costco’s third quarter earnings per share, but strong membership upgrade numbers and a dozen fourth quarter openings bode well for the company’s future performance.

Third-quarter sales at Costco surged 16% to $20.2 billion and were aided by higher gas prices and foreign exchange benefits. Total company same-store sales increased 12%, but that number fell to 7% if gas and currency benefits were excluded. Same-store sales at the company’s U.S. operations increased 10%, or 6% excluding gas and currency benefits, while international comps were 18%, or 11% if gas and currency factors are excluded.

About 3% of the 16% total sales increase stemmed from inclusion of results from a 50% owned Mexican joint venture that were not included in the prior year reporting period.

Costco enjoyed strong growth in membership income with the addition of new members and upgrades of existing members. Total membership income increased 10.1% to $435 million as the company said it grew its $100 executive membership level to 11.3 million members with about 29,000 new sign ups weekly.

The company’s online business was a bright spot with sales up 11%, profits up 31% and site traffic up 17%, according to CFO Richard Galanti.

The sales growth translated to net income growth of 5.9% to $324 million and earnings per share that grew 7.4% to 73 cents from 68 cents. That figure fell short of analysts’ consensus estimate of 77 cents in large part because the company took a $49 million dollar inventory related charged caused by product inflation that reduced earnings per share by 7 cents.

Galanti said the company opened one new club during the third quarter in Tucson, Ariz., but note that the fourth quarter will be much busier from an expansion standpoint. A total of 12 clubs are planned for the fourth quarter which will give the company a net increase of 20 units for a year end total of 592 units.

Looking ahead to the coming fiscal year, Galanti said the company has 30 active projects underway and will probably be looking at about 25 or more new openings with about half of those openings outside of the United States.