Costco perspective: $19M well spent
Costco reports higher profit in first quarter. CFO says it spent twice what it expected to pass measure.
Seattle Times business reporter
Costco Wholesale's first quarter profit rose 2.6 percent despite the company spending $17 million during the quarter to help pass Initiative 1183, which privatizes liquor sales in Washington.
The Issaquah-based retailer spent an additional $2 million on the measure in the fourth quarter, for a total of $19 million.
That's about twice as much as it expected to spend, "but once you're into it, you do it," Chief Financial Officer Richard Galanti told analysts during an earnings conference call Thursday.
"There will be a decent return even on that larger investment, but we did it even more because of the principle," Galanti said. "We believe our members will be able to buy spirits for lower prices, and that's what we do for a living."
Spirits sales account for about 2 percent of Costco's overall sales in states where it sells liquor currently, Galanti said.
That could easily top $81 million a year in Washington, where Costco has 27 warehouses that tend to do better than the companywide average of $150 million in annual sales.
"Alcohol is typically a very high-margin product, so it's understandable that they'd spend more than they anticipated," said Jason Moser, senior analyst at The Motley Fool, an equity-research and asset-management firm in Virginia that has a conference room named after Costco CEO Jim Sinegal.
Sinegal will retire Dec. 31, to be replaced by longtime executive Craig Jelinek.
An association that represents Costco and other large grocery stores in the Northwest has said it plans to work on alcohol deregulation in Oregon and Idaho next.
Although state elections records show the warehouse chain donated $22 million to the campaign, some of the money was not spent and will be refunded.
The measure passed by a vote of 59 percent to 41 percent, and Washington is set to stop selling liquor by June, when large grocery stores will begin selling it.
Costco's stock took a beating despite its profit climbing to $320 million, or 73 cents a share, and meeting Wall Street's expectations. It fell in part because of the unexpected charges from I-1183 and settlement of a Mexican income-tax audit.
Shares fell $1.71, or almost 2 percent, to $85.76 in regular trading. They have traded between $69.28 and $88.68 over the past year.
Costco's revenue, including membership fees, grew 12 percent to $21.6 billion, in part because gasoline was up 26 percent to $3.59 a gallon on average.
The sales uptick also came from Costco lowering prices during the quarter.
"They were particularly focused on aggressive pricing with essentials, things consumers need like food and laundry detergent," Moser said.
Because their margins are so thin, he said, "they're not going to make a lot of money for every dollar, so they need to be very high volume."
Costco also might have dropped prices to ensure customers stay, Moser said, as it boosts membership fees by 10 percent in November for new members and beginning in January for renewing members.
So far, the fee hike hasn't affected new member sign-ups, Galanti said.
He attributed the aggressive pricing on economic factors, and reiterated how important it is for Costco to drive sales.
"Certainly, as Jim and now Craig has said and says constantly, we are first and foremost a top-line company that drives sales, and we think we are investing in the future," Galanti said. He declined to say how long the lower prices might last.
The company does not expect major changes with its new CEO, he said.
"If anything, I think since Craig became president [in early 2010], he's elevated his game in terms of understanding what has gotten us to where we are in terms of that discipline of value. And you can see the DNA around here is pretty intact," Galanti said.
Melissa Allison: 206-464-3312 or email@example.com. On Twitter @AllisonSeattle.
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