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    Costco Profits Miss Street's Expectations

    A drop in nonfoods discretionary spending and foreign exchange rates eroded revenue.

    Higher gasoline margins more than made up for a hit from the strengthening dollar and a drop in nonfood sales for Costco Wholesale Corp. resulting in an increase in sales and profits for its fiscal first-quarter.

    Still, Wall Street expected 62 cents per share, and Costco delivered 60. "First quarter 2009 results benefited from very strong gasoline profitability when compared to last year," said Richard Galanti, Costco c.f.o. "Results were hurt by a slowdown in nonfood discretionary sales and related reductions in margins associated with these sales, primarily in the latter half of the quarter.

    "In addition, we incurred certain pretax charges of $34.2 million, or 5 cents per share, related to the 'mark-to-market' adjustment of the cash surrender value of certain life insurance contracts ($28.4 million charge to SG&A expense) and the impairment of corporate investments ($5.8 million charge to interest income). Finally, our first quarter earnings were negatively impacted by an estimated $22.7 million pretax, or 3 cents per share, as a result of the significant strengthening during the quarter of the U.S. dollar, as compared to the Canada, United Kingdom, Korea, and Mexico currencies."

    Net sales for the first quarter of fiscal 2009, ended November 23, 2008 increased 4 percent to $16.04 billion, up from $15.47 billion last year. Net income for the period was $262.5 million, or 60 cents per share, a slight increase from last year's $262 million, or 59 cents per share.

    Comparable store sales rose 1percent for the quarter, and were negatively impacted by foreign exchange rates overseas -- primarily in Canada, United Kingdom, and Korea, according to Galanti.

    Costco operates 550 warehouses, including 403 in the United States and Puerto Rico, 76 in Canada, 21 in the United Kingdom, six in Korea, five in Taiwan, eight in Japan, and 31 in Mexico.

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