Costco Hurt By Rising Costs; CE Biz Still Soft

By Alan Wolf -- TWICE, 7/23/2008 10:16:00 AM

Issaquah, Wash. — Rising energy and freight costs coupled with vendor price hikes in most categories except CE are impacting Costco’s bottom line, the warehouse club warned.

Chief financial officer Richard Galanti told analysts during a conference call this morning that vendors are imposing price increases of 5 percent, 10 percent and higher in virtually all product categories except apparel and consumer electronics.

The latter, he said, is still experiencing “some deflation,” but not enough to offset the price hikes in other categories. Costco had tried to hold price points to help drive sales and “maintain the confidence” of club members, but Galanti said it is now passing along the cost increases after merchandise profits came in below plan.

The conference call followed a fourth-quarter earnings alert in which Costco warned that earnings will likely fall “well below” the consensus estimate of $1.00 per share.

The company is scheduled to report results for the fourth quarter and fiscal year on October 8.

“Factors negatively affecting our fourth-quarter earnings outlook arise largely from inflation, particularly as to energy costs,” Galanti said. These include a “significantly” greater-than-anticipated LIFO (last-in, first-out) inventory charge.

Galanti acknowledged that Costco’s CE business has been weak for the past three months, particularly in flat-panel TV. He attributed the softness to aggressive moves by Wal-Mart and Target, and to TV saturation among its own customers.

“Everyone’s got three of them,” he told analysts. “It’s been so strong for so long due to the power of [Costco’s coupon mailer program]. There’s just a reduction in appetite there.”

Galanti added that Costco has enjoyed two years of double-digit increases in CE sales despite a 30 percent rate of deflation, which is “coming down a shade.”