Declining Costco earnings better than expected

Issaquah's largest employer

Issaquah's largest employer

An audience spanning from worldwide investors to Mayor Ava Frisinger are keeping a close eye on Issaquah-based Costco Wholesale Corp., after posting fourth-quarter earnings Oct. 7.

The warehouse club retailer posted better-than-expected numbers but earnings are still in decline. A moderate 6 percent decline to $374 million compared to the year prior assuaged Wall Street investors nervously predicting a steeper decline due to the recession and rising unemployment.

“(We) were negatively impacted by these previously reported factors: on-going softness in U.S. sales, primarily the result of a weak economic environment; higher employee benefit costs, mainly consisting of higher health care eligibility and usage; and lower U.S. dollar amounts of international profits as a result of weaker foreign currencies,” said Costco CFO Richard Galanti.

Costco executives are hoping for improvement in the fall, citing last month’s net sales of $6.85 billion in the same news release — an increase of 3 percent from the prior year.

With over 3,300 employees working at the company’s headquarters on 999 Lake Drive, the City of Issaquah is also paying close attention to a company that comprises a healthy chunk of the city’s tax base. Preparing to address Issaquah City Council Monday, Mayor Frisinger said recent changes to state law streamlining tax collection caused a significant drop in city coffers. She attributed an estimated $800,000 drop in city revenues specifically to taxes previously collected from purchases made from Costco’s online business — now disallowed by the new rules.

“The portion of our revenues attributed to sales tax has gone up steadily over the past few years,” Frisinger said.

The warehouse retailer has seen strong sales of food and everyday items at its wholesale clubs during the economic downturn. But their profitability has suffered as consumers closely watch their spending in a down economy — especially on the company’s big ticket items like jewelry and furniture.

Costco representatives said that its focus remains on providing low-priced offerings of all types to customers, a move they believe will pay off as the economy recovers.

While Costco has opened fewer stores during the quarter than anticipated, that could be partially offset by strong membership renewal rates in its existing stores.

Plans for a new store in Bellevue were shelved earlier this year and the company wound-down its home furnishings store concept when it closed Costco Home stores in Kirkland and Phoenix in July.

Costco shares have fallen nearly 10 percent over the past year.

Costco’s next sharholder meeting is scheduled for Jan. 28, 2010 at the Meydenbauer Center in Bellevue.

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Robert Toomey, CFA/CFP, is Vice President of Research for S. R. Schill & Associates on Mercer Island.
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