Costco Shares Decline After Warehouse-Club Chain’s Profit Margin Narrows

Costco Wholesale Corp. (COST) declined after the largest U.S. warehouse-club chain said profit margin shrank in the first quarter because of rising costs.

Costco fell 2 percent to $85.76 in New York. The shares have advanced 19 percent this year.

Net income advanced to $320 million, or 73 cents a share, in the quarter ended Nov. 20, from $312 million, or 71 cents, a year earlier, the Issaquah, Washington-based company said today in a statement. Profit excluding some items was 80 cents a share, meeting the average of 19 analysts’ estimates compiled by Bloomberg.

Costco increased all membership fees by 10 percent last month, the first widespread boost since 2006, after rising costs of commodities narrowed profit margin. The chain of 596 stores has been preparing for a change in leadership as Chief Operating Officer Craig Jelinek will become chief executive officer on Jan. 1, replacing retiring co-founder Jim Sinegal.

“Not a high-quality quarter,” David Strasser, an analyst for Janney Montgomery Scott in New York, wrote today in a note to clients. The decline in gross margin is an issue, said Strasser, who recommends buying Costco shares.

The retailer’s in-store gross margin, or the percentage of sales left after subtracting the cost of goods sold, narrowed to 10.62 percent from 10.97 percent a year earlier. That marked a third-straight decline. Strasser had projected 10.69 percent.

Sales Gain 13%

Net sales gained 13 percent to $21.18 billion with membership fees advancing 7.5 percent to $447 million. Total revenue rose to $21.6 billion.

Costco said it took a $24 million charge in the quarter related to the settlement of an income-tax audit of a 50 percent-owned joint venture in Mexico. The retailer also had a $17 million charge for contributions to a successful campaign to reform alcoholic beverage laws in Washington state. The charges reduced diluted earnings per share by 7 cents.

The company said it will open two more warehouses in Japan by the end of 2011.

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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