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Costco Cautiously Optimistic Despite 'Scary' Economy

A Costco employee pulls shopping charts at a Costco Wholesale store.
Damian Dovarganes
A Costco employee pulls shopping charts at a Costco Wholesale store.

Although Costco's earnings beat Wall Street expectations, the retailer's management team is cautious about the economy and consumer spending in the months to come.

Executive VP and CFO Richard Galanti quoted the chain's CEO Jim Sinegal, saying the company is "still operating in a healthy state of paranoia because the economy is still a little scary".

Galanti noted electronics, including DVDs and CDs, and books as an area of weakness for Costco, as digital and online competition increases. However, Galanti pointed out that housewares, sporting goods and jewelry are selling well.

Costco's online sales are also trending upward, up 9 percent for the quarter and 6 percent for the fiscal year.

Consumer Nation - Holiday Central Edition - See Complete Coverage
Consumer Nation - Holiday Central Edition - See Complete Coverage

Galanti said he believes Costco's upscale membership is weathering the economic storm better than most, and Costco management believes the holidays will produce "a plus sign versus caution".

Costco shares dipped during the trading session but rebounded to close down slightly. Brian Sozzi of Wall Street Strategies brings up possible concern with the wholesaler's gross margin, but doesn't believe it's a reason for today's decline.

Over the last month, Costco shares have risen nearly 7 percent, and are up nearly 17 percent in the past 3 months. Sozzi thinks the stock is a buy based on the earnings news.

And, David Joy of Columbia Management believes the consumer is going to come back in 2011 and likes Costco, as he believes the company well-positioned to take advantage of increased retail spending.

For the quarter ending November 21, Costco reported a profit of $0.71 cents per share, beating analysts' expectations by two cents. That represents a profit increase of 18 percent over the same period last year. Costco posted an 11 percent boost in total sales versus this time last year and revenue of $19.2 billion.

Same-store sales for the 582 retail locations worldwide came in strong for the quarter as well, up five percent in the U.S., and up 14 percent internationally. Costco credits the weak dollar and increasing gasoline prices for propping up revenue. (The current average retail gas for unleaded regular gasoline is $2.97 nationwide.)

The warehouse-style retailer's profit is often buoyed by membership fees and this quarter is no exception, up ten percent to $416 million. At quarter end, 31.6 million households are Costco-card-carrying members.

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