Gasoline Profitability Eluding Costco

Margins lower than expected

Published in CSP Daily News

ISSAQUAH, Wash.-- Costco Wholesale Corp. on Friday said earnings for the rest of its fiscal year would likely miss Wall Street forecasts because of weaker profits from gasoline sales, sending its shares down 9%.

According to a Reuters report, the largest U.S. warehouse club operator said profit margins were lower than expected, principally from gasoline sales. Costco operates gas stations at many of its 334 U.S. stores. The retailer often charges less than traditional gas stations do in hopes of bringing customers in to its stores.

But with energy prices soaring, Costco has struggled to maintain profitability on gasoline sales.

Shares of rival BJ's Wholesale Club Inc., which also has gas stations at many of its warehouse stores, fell 6% in early New York Stock Exchange (NYSE) trading.

Costco is the largest player in a warehouse club sector that also includes Wal-Mart Stores Inc.'s Sam's Club. Many Sam's Clubs also have gas stations. Costco has won customers by offering luxury items such as expensive French wines and diamond rings alongside the usual warehouse club bulk items.

But the Issaquah, Washington-based retailer has not always been a favorite on Wall Street. Analysts have long criticized the company's steep labor cost, which have hurt profits. Costco has taken steps to lower healthcare and other costs and its share price has climbed more than 30% in the last two years, but some on Wall Street remain wary.

Costco said it now expects earnings per share for its fiscal third quarter, ending May 8, to be in the range of 41 cents to 43 cents. Wall Street expected 46 cents per share profit, on average, said Reuters.

Jaison Blair, retail analyst with Rochdale Research, said the profit outlook was disappointing but added that fuel costs eventually balance out, and Costco can still reap some benefit from bargain-hunting shoppers. They offer cheap fuel, and that draws more consumers who are looking for a bargain, said Blair. While they're there, they say, Let's go in and buy some crystal or china.