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Originally published October 6, 2010 at 6:06 PM | Page modified October 6, 2010 at 7:44 PM

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Costco posts record sales, profit for quarter

Costco members stopped buying as many big-ticket items, but they continue to renew their memberships at a healthy rate and to frequent Costco for necessities like food and batteries.

Seattle Times business reporter

In the midst of a recession and at a time when it is adding new stores slowly, Costco Wholesale posted its best quarter ever.

Its international warehouses drove some of the growth, including more demand for televisions in China, but mostly Costco members in the U.S. just kept shopping for food and other basics.

"These last two years when the economy really hit the fan and people were not eating out as much ... we really didn't know, was this going to be a help or a hurt to us," Richard Galanti, Costco's chief financial officer, said in a conference call with analysts on Wednesday.

Its members stopped buying as many big-ticket items, but they continue to renew their memberships at a healthy rate and to frequent Costco for necessities like food and batteries.

Sales rose 8 percent to $24.1 billion for Costco's fiscal fourth quarter ended Aug. 29, and profit rose 16 percent to $432 million or 97 cents a share — two pennies better than analysts expected.

The holy grail of retail, same-store sales, rose 14 percent at Costco's international stores. But they represent just a quarter of its 573 warehouses.

That same measure in the U.S., which tracks stores open more than a year, rose a meager 2 percent in September and 4 percent in its fourth quarter.

Deflation continues to be a concern for Costco and other retailers.

Lower prices have cut into its gross margin, which disappointed investors so much on Wednesday that they pushed its high-flying shares down early in the day. Shares ended up 75 cents at $65.41.

Costco's gross margin grew just 0.03 percent to 10.9 percent during the quarter, lower than some analysts had expected.

Costco added just 13 net new stores during the last year.

It plans to ramp up growth this fiscal year to 29 net new locations, Galanti said.

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Costco has been careful about overseas growth but has gained confidence about expansion in some markets.

"Every new country starts with a trail of tears," he said. "It takes five-plus years to get to a bottom-line profitability in many countries. But then you go another five years out, and some of these countries are doing very well."

For example, Costco has fewer than 10 stores in South Korea and in Taiwan.

Not long ago, it thought it would have 15 in each country over the next decade; now that estimate is 25 warehouses or more.

Another area for growth is Costco Online, which saw a drop in sales to $1.6 billion in fiscal 2009 but was up to $1.7 billion in 2010.

CEO Jim Sinegal has said he thinks that eventually it could be a $5 billion business.

The plan is simple, Galanti said. "It's all about focus on merchandising. We're not going to tweet. We're not going to gift wrap."

Melissa Allison: 206-464-3312 or mallison@seattletimes.com

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