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Sales up, profits down for Costco

Hit by a $26 million pre-tax charge to cover rising workers' compensation costs, most notably in California, second-quarter profits at Costco Wholesale Corp. slipped by 5.4 percent, to $182.1 million from $192.6 million last year, even as sales increased by more than 7 percent.

Taking the bite out of the bottom line, Costco said reserves for rising unemployment costs totaled $26 million on a pre-tax basis during the second fiscal quarter ended Feb. 16, or $16 million after taxes. More than a third of its U.S. workforce is in California, and claims there accounted for about two-thirds of Costco's workers' compensation.

Sales at the warehouse giant rose by 7.7 percent, to $9.9 billion from $9.2 billion last year. Same-store sales rose by 4.0 percent, with sales in U.S. stores up 3.0 percent and international sales rising by 5.0 percent.

Average gross margin held relatively steady during the second quarter, inching ahead by 10 basis points, to 10.9 percent from 10.8 percent a year ago. But offsetting modestly stronger margins, costs climbed higher by 60 basis points, rising to 9.7 percent of sales from 9.1 percent the preceding year.

Acting as a drag on the bottom line, interest expense jumped up by 29.1 percent, to $8.0 million from $6.2 million last year. But acting as an offset, interest income increased by 13.3 percent, to $9.0 million from $7.9 million.

Costco Wholesale Corp.

Qtr. 2/16 (x000) 2002 2001 % change
Average gross margin and SG&A expenses are calculated as a percentage of net sales, excluding membership and other fees.
a-Net sales, excluding membership and other fees. During the fourth quarter, membership fees totaled $193.8 million, up 11.1 percent from $174.4 million last year. For the 12 months, membership fees were $381.9 million, up 11.0 percent from $343.9 million.
b-Fourth-quarter operating profits and net income were reduced by a pre-tax asset impairment and store closing costs of $4.5 million vs. $3.0 million last year. 12-month results include $9.5 million in asset impairment and store closing costs, compared with $11.6 million the prior year.
Sales $9,920,324a $9,208,413a 7.7
Oper. income (EBIT) 295,060b 319,201b -7.6
Net income 182,065b 192,556 -5.4
Per share (diluted) 0.39 0.41 -4.9
Average gross margin 10.9% 10.8%
SG&A expenses 9.7% 9.1%
12 months
Sales 18,930,895a 17,505,489a 8.1
Oper. income (EBIT) 532,852b 534,555b -0.3
Net income 327,794b 322,212b 1.7
Per share (diluted) 0.72 0.71 2.9
Average gross margin 10.8% 10.6%
SG&A expenses 9.8% 9.3%

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