Costco Wholesale Corp. reported a 46 percent jump in quarterly profit as the club store operator benefited from an improving economy and rising sales of fresh meat, produce and other foods.
Consumers appear to be having “frugality fatigue” and are now spending more on non-discretionary items after the recession prompted belt-tightening last year, Costco executives said today during a conference call with analysts.
“There’s at least not as much concern that the sky is falling,” Costco’s chief financial officer Richard Galanti said during the call, which followed the release of the Issaquah, Wash.-based company’s fiscal 2010 third-quarter results.
Costco’s net sales increased an average of 10 percent over the past three quarters, reflecting both stepped-up consumer spending and club stores’ growing share of the retail food market. By the end of August, Costco expects to open five new stores, along with the 524 it already operates in the U.S., Canada, Mexico and Puerto Rico.
Sales at U.S. stores open at least a year rose 3 percent, excluding gasoline, during the quarter, compared with a year earlier, Costco said.
In meat, produce and other fresh foods, Costco’s sales rose by “mid- to high single-digits” on average, in percentage terms, compared with the same period a year earlier, Galanti said.
While there was slight inflation in meat prices during the quarter, Galanti indicated that the combination of food retailer competition and cheaper private label products may keep food costs in check in coming months.
“There’s still very competitive pricing out there,” Galanti said.
Costco expects “very modest” food price inflation, at no higher than 1 percent to 2 percent, over the next six months, Galanti said, citing discussions with store operators.
During April, prices for food consumed at home were little-changed compared with the same month in 2009, according to government data.
Club stores, which charge membership fees for access to discounted goods in bulk, have gained ground in food retailing at the expense of traditional supermarkets. That reflects consumers seeking lower prices as well as access to nonfood items, such as fuel and apparel, at the same location they bought groceries, analysts say.
During the third quarter, Costco’s net income rose to $306 million, or 68 cents a share, from $210 million, or 48 cents, a year earlier. Sales rose 12 percent to $17.4 billion.
Per-share profit beat analysts’ expectation by about two cents, according to Thomson Reuters I/B/E/S. Costco shares rose $2.44, or 4.4%, to $58.42 in early afternoon trading today.
The stock may climb further amid an outlook for even stronger profit in 2011, analysts said. Costco shares are still down about 1.2 percent this year.
Deflation has waned, consumer discretionary spending is re-emerging and store traffic is “nicely positive,” Peter Benedict, an analyst with Robert W. Baird, said in a report on Costco today. “Fundamentals should continue to improve over the balance of the year.”
Benedict has an “outperform” rating on Costco shares and estimated the stock may reach $70 over the next 12 months.
Wal-Mart Stores, Inc.’s recent discounting campaign to boost store traffic has affected traditional supermarkets more than Costco, Galanti said. Still, Sam’s Club’s, Wal-Mart’s club store unit, remains a top rival.
“We and Sam’s Club are fierce competitors” under pressure to make money, Galanti said. “We’ll hold our own.”
Wal-Mart is the top U.S. club store operator, with 596 Sam’s Club stores at the end of 2009.