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Costco Wholesale Corp. sacrificed on profitability for the sake of popularity in its fiscal first quarter.
The wholesale club operator reported Thursday that its profit rose 2.6 percent for the period, despite significantly stronger revenue gains, as it kept prices low on gas, food and other products to gain market share at the sacrifice of its margins.
The company, based in Issaquah, Wash., has performed better than many retailers during the down economy as consumers turned to its clubs for deals on everyday necessities like food and household basics. Costco has long-recognized that it must continue to hold that low-price position to maintain its popularity even if it means pressure on its margins from time to time.
So while the cost for gas, fresh food and other items rose for the company, it focused on keeping its prices for shoppers low -- particularly as it tries to draw shoppers during the critical holiday shopping season.
"We are first and foremost a ... company to drive sales," said Costco's chief financial officer Richard Galanti. "And we think we are investing in the future."
Costco, based in Issaquah, Wash., reported net income of $320 million, or 73 cents per share, for the quarter that ended Nov. 20. That's up from $312 million, or 71 cents per share, in the same quarter last year.
After adjusting for charges related to a Mexican tax audit and a campaign in Washington state to change liquor laws, the company earned 80 cents per share meeting analyst expectations.
Revenue rose 12.5 percent to $21.18 billion on strong gasoline sales and benefits of foreign exchange. Analysts expected $21.29 billion, according to a survey by FactSet.
Shoppers went beyond the basics -- buying more books, small electronics and jewelry in addition to necessities such as food. And it paid off for the company as Costco reported that revenue at stores open at least a year rose 10 percent. Excluding gasoline prices and strengthening foreign currencies, the figure rose 7 percent. This is considered a key measurement of a retailer's performance because it excludes results from stores that opened or closed during the year.
Costco said it wanted to do something to drive sales, specifically on items it sells a lot of -- such as ground beef or laundry detergent. Lower prices on these items help secure its position in consumer's minds as a good place to shop for deals and that can prove critical in the highly competitive holiday shopping season.
Galanti said these decisions on margins, where and when a small cut is worth it in the long run, is a balancing act that the company reevaluates weekly and could not comment on how this might play out for its profit in following quarters.
Costco opened four new locations during the period and is already opening more and said it should end the week with 598 locations around the world.
Costco's shares fell $1.71, or 2 percent, to close at $85.76 Thursday.