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Costco sags

Issaquah, WA — Costco Wholesale today reported a 5 percent drop in second quarter profits, including a $26 million pre-tax charge for rising workers' compensation claims, particularly in California.

The company reported second quarter net income of $182.1 million, $0.39 per diluted share, vs. $192.6 million, or $0.41 per diluted share a year earlier. Net sales increased 8 percent to $9.92 billion.

Sales for the first half of 2003 also increased 8 percent to $18.93 billion from $17.51 billion during the first half of 2002. First half net income rose 2 percent to $327.8 million, or $0.70 a share, against $322.2 million, or $0.68 a share last year. Comparable sales rose 4 percent in both the quarter and the half, the company reported.

New compensation laws in California are "abusive," according to Richard Galanti, cfo. About one-third of Costco's employees work in California, but they account for two-thirds of the company's total compensation expense, he noted. Companywide, worker compensation claims average $26,000, while in California they average $70,000, he said in a conference call with analysts.

Still, Costco will continue to push growth adding about 30 units a year over the next two to three years, Galanti said.

Additionally, early reports from the company's new home furnishings specialty store, Costco Home, are encouraging, he said. The unit opened last December in Kirkland, WA, as a test.

"So far, so good," Galanti said. "It is a test, and we're well above plan. But bear in mind that it's only been open for 12 and a half weeks, and my sense is that we won't make any plans beyond this first test location for at least another six months."

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