For Costco, the formula is simple. Rising gas prices: bad. Falling gas prices: good. The wholesale-club retailer earned a third-quarter...
For Costco, the formula is simple.
Rising gas prices: bad. Falling gas prices: good.
The wholesale-club retailer earned a third-quarter profit of $209.8 million, or 43 cents a share, beating Wall Street’s revised forecasts by a penny.
Costco told analysts last month to trim their financial projections for the remainder of the year, citing pressure from high gasoline prices.
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Sales climbed 10.1 percent to $11.7 billion. Including $249.8 million in membership fees paid in the quarter ended May 8, revenue was $12.0 billion.
To lure customers into its warehouse clubs, the Issaquah-based chain aims to charge the lowest price for gas within up to a five-mile radius. But its margins took a hit during the quarter as gas prices continued to climb.
The company turns its gas supply so rapidly — its average station uses its entire inventory in a day-and-a-half versus seven to 10 days for a competitor — that it is more vulnerable to a spike in prices.
The reason: When Costco buys fuel at a higher price, it still must compete with stations selling fuel purchased earlier at a much lower price. Since Costco aims to charge prices lower than rivals, it must eat the difference to remain competitive.
Costco Chief Financial Officer Richard Galanti told analysts last month that a warehouse club’s annual sales rise 5 to 7 percent when the company adds a gas station in the parking lot.
Patty Edwards, a retail analyst with Wentworth Hauser and Violich, said the impact of high gas prices on Costco’s earnings was disappointing, but that it’s the nature of the business.
“Given what it does to drive traffic into stores, I think giving that up would be a mistake,” Edwards said.
Costco may see a little relief in the current quarter.
In Washington, the average price for a gallon of regular gas fell from a record high of $2.494 April 23 to $2.387 yesterday, according to AAA’s daily fuel-gauge report.
Even so, Galanti told analysts yesterday the company would stick with its revised outlook. Costco forecast a fourth-quarter profit of 63 to 67 cents a share.
“Hopefully, we can do a little bit better than that,” Galanti said.
The company’s comparable-store sales — a key retail gauge that measures sales at stores open at least a year — rose 7 percent for the quarter.
Costco enjoyed the strongest sales in the Southeast and Midwest, while its best categories were home furnishings, electronics and jewelry.
McAdams Wright Ragen analyst Dan Geiman said it must control overhead expenses and keep store openings on track. The company said it would open 17 stores this year, down from previous forecasts.
“If gasoline prices cooperate a little bit, I think they’ll continue to put up some pretty decent numbers,” Geiman said.
Costco’s shares closed yesterday at $45.49, up 7 cents. The stock is up 22 percent in the past 52 weeks.
Monica Soto Ouchi: 206-515-5632 or firstname.lastname@example.org