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Costco Q1 profits inch up on 8.1% sales gain

Company misses revenue projections for first time in three years: report

Costco Wholesale Corp. on Thursday said its profits for the fiscal first quarter edged up slightly, to nearly $1.4 billion, on sales gains of 8.1%, to $53. 4 billion, compared with the first quarter of a year ago.

Companywide comparable-store sales were up 7.1% in the 12-week period, which ended Nov. 20, after adjusting for changes in gas prices and foreign exchange. Comps in the U.S. rose 6.5% after the adjustments. Adjusted e-commerce sales were down 2% for the quarter.

Total revenues for the quarter were $54.4 billion, which included $1 billion in membership fees.

Both the recent quarter and the year-ago period net income figures included several adjustments. This year’s results included a pre-tax charge of $93 million, primarily related to downsizing the company’s charter shipping activities, and a tax benefit of $53 million related to stock-based compensation.

The year-ago results included a pre-tax write-off of certain information technology assets, and a tax benefit of $91 million related to stock-based compensation.

The results came in below analysts’ estimates, according to a report on Seeking Alpha, marking the first time in three years the company failed to meet revenue projections.

Costco had previously disclosed the sales total for the third quarter when it reported November sales.

In a conference call with analysts, Richard Galanti, chief financial officer, attributed much of the company’s slowdown to sluggish sales of big-ticket discretionary items, as well as difficult sales comparisons against exceptionally strong sales in the last two years.

He said the company’s core gross margin was down 31 basis points in the quarter, with food and sundries up slightly, offset by declines in nonfoods and fresh foods.

“In addition, we are looking to hold prices on some of those price points despite inflated costs in some of the fresh food categories,” he said.

That strategy has mostly unfolded in proteins, and to a lesser degree in the bakery area, he said.

Costco is deliberately focusing on remaining price-competitive in fresh foods, Galanti said, because of its potential to drive sales and traffic.

“We want to be the most competitive, and we can drive a lot of volume,” he said. “In our view, people notice those prices differences.”

Galanti also noted that e-commerce sales would have been “positive in the low single digits” if third-party delivery services such as Instacart had been included.

Year-over-year price inflation was up about 6% to 7%, down slightly from 8% in the fourth quarter, he said, with food and sundries slightly higher than nonfoods. Inflation on commodities such as corn flour, sugar and butter has been declining, however, he said.

The company plans to open 24 new units this fiscal year, including 15 in the U.S. and nine overseas.

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