Costco reported yesterday that its fourth-quarter profit rose 19. 5 percent, helped by higher sales and lower taxes. The strong results and...

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Costco reported yesterday that its fourth-quarter profit rose 19.5 percent, helped by higher sales and lower taxes.

The strong results and the Issaquah company’s announcement that it would buy back as much as $1 billion of stock pushed its shares up 4.7 percent, their biggest gain in more than 2 ½ years.

The warehouse-club retailer’s profit beat analysts’ estimates, rising to $354.7 million, or 73 cents a share, from $296.8 million, or 62 cents, a year earlier. Revenue, including sales and membership fees, rose 10.3 percent to $16.7 billion.

A tax benefit added 4 cents to Costco’s per-share earnings in the last quarter, while lower state taxes contributed 3 cents. That helped lower the company’s tax rate to 28.9 percent from 37 percent a year ago.

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Costco was expected to earn 64 cents a share in the quarter ended Aug. 28, according to analysts surveyed by Thomson Financial. The stronger-than-expected numbers pushed Costco stock up $2.01 to $44.92 yesterday.

Sales climbed as Costco used coupons to lure shoppers and emphasized upscale products such as $2,500 plasma televisions to fend off competition from Wal-Mart Stores’ Sam’s Club.

But Costco’s gross margin, or the percentage of sales left after subtracting the cost of goods sold, narrowed to 10.44 percent from 10.81 percent a year earlier after it offered discounts on gasoline as wholesale fuel costs soared.

Costco’s same-store sales growth — gains at stores open at least a year — has averaged 7 percent over the previous four quarters compared with 3.9 percent at Sam’s Club. Costco’s profit grew an average 22 percent in the prior four quarters.

Chief Financial Officer Richard Galanti said competition with Sam’s Club has intensified. “I think for the last two years, Sam’s has been more aggressive,” he said during a conference call yesterday. “They’re a tough competitor. We and they are out there fighting every day.”

Analysts said gasoline sales helped Costco draw shoppers into stores and compete with Sam’s Club.

“In this inflationary energy environment, we see Costco’s gas business as an even more important traffic driver as pressured consumers economize shopping trips and bulk up on items,” said Adrianne Shapira, an analyst at Goldman Sachs.

But Costco carries less than a day’s supply of gasoline, making it more vulnerable to wholesale price increases, Chief Executive Jim Sinegal said on a conference call in April, when the company lowered its third-quarter and full-year profit forecasts because of rising fuel prices. Costco keeps retail prices at or below those offered by local stations to bring customers to its warehouses, Sinegal said.

They get the sales gains “when gas prices go up; they don’t get the margin,” said Robert Buchanan, an analyst with A.G. Edwards & Sons in St. Louis.

For the current year, Galanti said First Call’s average estimates for profit of 44 cents for the first quarter and $2.29 for the year “are certainly doable.” That would represent the high end of the company’s guidance, he said.

Costco will open up to 30 new stores this fiscal year in cities including Atlanta and Chicago, Galanti said. Costco opened 16 stores in the fiscal year ended Aug. 28. It operates a total of 461.

Costco also said its board has authorized the repurchase of an additional $1 billion of common shares. This is on top of a previous authorization of $500 million, of which the company has spent $413 million to repurchase 9.2 million common shares at an average price of $44.87.

Information from The Associated Press was included in this report.

Costco’s

annual results

Dollar figures in thousands, except per share.
Aug. 28 Aug. 29 %
Annual 2005 2004 CHG
Profit $1,063,092 $882,393 +20.5
Per share 2.18 1.85 +17.8
Revenue 52,935,228 48,106,992 +10.0