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    Food Buoys Costco as Discretionary Spending Dips

    As the economy weakens, food is proving a key force behind sales growth at Costco, as evidenced by results in the latest quarter that the warehouse club chain discussed during a conference call yesterday.

    As the economy weakens, food is proving a key force behind sales growth at Costco, as evidenced by results in the latest quarter that the warehouse club chain discussed during a conference call yesterday.

    "When people ask us about what's going on with the customer and the weakness in the economy, where we've seen it is where you would expect to see it, relatively speaking, in areas like furniture and home furnishings and apparel--discretionary items," said Richard Galante, c.f.o. for Issaquah, Wash.-based Costco. "[But] people still have to eat, and they come in and we've got a lot of good things going on there on the food and sundries side, as well as fresh foods. Both food and sundries and fresh foods have comps greater than the company overall, with hard lines and soft lines of course being the offset of that, being below that."

    Still, fresh food did take a hit, albeit a slight one, thanks to current economic conditions. "Even within some strong categories like meat, which is about 6 percent of sales...we've seen a little bit of a mix shift over the last few months [away from higher-priced items] from beef, to things like chicken," said Galante. "All that is anecdotal but consistent, I think, with what is going on out there in the economy."

    Costco's second quarter sales increased 12 percent to $16.62 billion, from $14.80 billion last year. Sales for the first half of fiscal 2008 were $32.09 billion, up 12 percent from $28.66 billion last year, the company said.

    Profit for the retailer's fiscal second quarter was $327.9 million, or 74 cents per share, compared to $249.5 million, or 54 cents per share in 2007. Profits for the first half of fiscal 2008 were $589.8 million, or $1.33 per share, compared to $486.4 million, or $1.05 per share last year.

    Comparable sales for the second quarter and first half were 5 percent for Costco's U.S. operations, a figure that includes the effect of recent gasoline price inflation, with the average sales price per gallon of gasoline up 29 percent year-over-year for the quarter. Excluding this, U.S. comp sales for the second quarter would have been 3 percent.

    Costco operates 534 warehouses, including 391 in the United States and Puerto Rico, 75 in Canada, 19 in the United Kingdom, six in Korea, five in Taiwan, seven in Japan, and 31 in Mexico.

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