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Deep discounting eats into Costco's holiday profit

Warehouse retailer Costco Wholesale reported a bigger-than-expected 15 percent fall in profit as unusually deep discounting in the holiday shopping season hurt margins, sending its shares down about 3 percent in premarket trading.

Bad weather and six fewer shopping days between Thanksgiving and Christmas prompted many retailers to offer deeper discounts and increase promotions to lure shoppers.

Costco Chief Financial Officer Richard Galanti said the first four weeks represented the majority of earnings underperformance in the quarter that began on Nov. 25.

Weaker gross margins, particularly during the four-week holiday selling season, and lower international profit due to a weakening of foreign exchange rates hurt results, Galanti added.

(Read more: Staples shuts 225 stores as sales fall)

Retailers have also been hurt by a $5 billion cut to the federal food stamps program in November. One in every seven Americans took a hit from the first across-the-board reduction in the history of the decades-old anti-hunger program.

Wal-Mart Stores, the world's largest retailer, blamed sharp cuts in food stamp benefits and higher payroll taxes for a disappointing full-year profit forecast last month.

Costco said sales rose 4 percent to $7.90 billion in the four weeks ended March 2. Comparable sales rose 2 percent.

A Costco store in Alhambra, Calif.
Frederic J. Brown | AFP | Getty Images
A Costco store in Alhambra, Calif.

Analysts had expected club closures prevalent across the United States, Canada and even in Japan due to frequent snow storms to pinch Costco's February sales.

The warehouse club operator, which offers discounted merchandise to members, said its profit fell to $463 million, or $1.05 per share, for quarter ended Feb. 16 from $547 million, or $1.24 per share, a year earlier.

Analysts on average had expected the company to earn $1.17 per share, according to Thomson Reuters I/B/E/S.

(Read more: Eh, don't put too much stock in retail earnings)

Sales rose 6 percent to $25.76 billion, missing the average analyst estimate of $26.65 billion.

Costco, which sells everything from carrots to coffins at its cavernous stores, said sales at stores open at least a year rose 3 percent in the quarter.

Excluding fuel and forex, same-store sales rose 5 percent for the 12 weeks.

(Read more: Wal-Mart disappoints; food-stamp cuts hurt sales)

Costco has seen steady growth in sales since 2009 due to a continuing increase in its membership base, which saw 4.3 million new members signing up in 2013, according to research firm Trefis.

The Issaquah, Wash.-based company's shares closed at $116.47 on the Nasdaq on Wednesday. (Click here for the latest quote.)

Costco's shares trade at roughly 23 times the company's expected earnings, well above the multiples for Wal-Mart Stores and Target, according to Thomson Reuters data.

By Reuters

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