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Originally published December 8, 2010 at 6:44 PM | Page modified December 8, 2010 at 7:31 PM

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Costco reports strong quarter; will phase out selling Apple products

Costco Warehouse says customers are coming back more often and that stores in Asia are racking up higher sales.

Seattle Times business reporter

Fighting its way back from recessionary lows, Costco Wholesale beat Wall Street's expectations with a 17 percent boost in profit to $312 million, or 71 cents a share, for the first fiscal quarter that ended Nov. 21.

Revenue grew 11 percent to $19.2 billion, and customers were visiting more frequently than ever, although not always for big-ticket items.

"We are still taking market share from traditional supermarkets and that's what drives frequency [of visits] in our business," Chief Financial Officer Richard Galanti said during a conference call with analysts.

Other Costco news Wednesday:

• International sales are growing fast — up 13 percent at stores open more than a year, compared with 7 percent for U.S. stores. Costco is ramping up new warehouse openings overseas, particularly in Asia.

• The chain is phasing out Apple products, per a mutual agreement between the companies, Galanti told The Seattle Times. Costco had sold iPods and pre-loaded iTunes cards for years, although never at huge discounts; and Apple never allowed Costco to sell its products online like other retailers, he said. "In the past couple months, we agreed to wind down."

Apple spokeswoman Amy Bessette said the company has no comment.

• Inflation sent fresh food prices up about 3 percent during the quarter. Steak, where Costco is a big player, is up 15 percent a pound from last year.

• Costco's sales in California, which were hammered during the worst of the mortgage crisis, are returning to pre-recession levels. More than a quarter of Costco's 425 U.S. warehouses are in California.

Of the 27 warehouses Costco plans during the fiscal year that started in late November, just 15 will be in the United States.

Seven are planned for Asia — three in Japan and two each in Korea and Taiwan — after years of opening two or three stores a year there.

Seven of Costco's 10 most profitable warehouses are in those three Asian countries, Galanti said, "and I wouldn't be surprised if all 10 were, if they were a little older."

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Largely, that's because sales are high in densely populated cities, including Seoul, Taipei and Tokyo.

They also "like American stuff," Galanti said. "Some of those units have twice the average number of members as our company overall."

Costco has avoided opening a store in China, which Starbucks has said could become its biggest international market.

CEO Jim Sinegal told investors at Costco's annual meeting earlier this year that it will not open there any time soon because it does not understand the demographics or business environment.

When Costco went to China to scout a possible location, he said, a factory was already on the site.

"They'll be moved," Sinegal said the Costco contingent was told. They thought, "in 10 years, that'll be us."

Costco's newest foreign market is Australia, where it debuted in Melbourne in 2009. A second warehouse is planned this spring or summer in Sydney.

The initial store has done well and given Costco a sense of what sells well in Australia, Galanti said after the conference call, but there are logistical issues.

"You can't run out of something and airfreight it," he said. "We have to build in additional time, because of the shipping routes."

Galanti told analysts Costco's holiday season is off to a good start. It begins selling Christmas items as early as September and does not rely on the day after Thanksgiving as heavily as other retailers that offer special deals that day.

"Certainly Black Friday is better for us than an average Friday, but it doesn't really portend anything in our view," he said.

Costco shares dropped 39 cents to $69.25 on Wednesday. They have traded between $53.41 and $70.06 over the past year.

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

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