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    Costco Profits Down on Charges; Sales Up

    ISSAQUAH, Wash. -- Rising sales could not stem a tide of charges that drained profits from membership wholesale club Costco Wholesale Corp., as it took hits for the second quarter and half-year due, to the impact of a new consumer electronics return policy, and tax consequences from its recent stock option review.

    ISSAQUAH, Wash. -- Rising sales could not stem a tide of charges that drained profits from membership wholesale club Costco Wholesale Corp., as it took hits for the second quarter and half-year due, to the impact of a new consumer electronics return policy, and tax consequences from its recent stock option review.

    Sales for the second quarter, ended Feb. 18, 2007, increased to $14.80 billion from $13.79 billion during the same period last year, the chain said yesterday. Comparable sales for the 12-week quarter increased 5 percent in the United States.

    During the company's analysis of its consumer electronics returns policy (which was reduced from six months in some cases to 90 days for all items), information revealed that it had a lower realization rate on returned items than were previously estimated. Because of this, as part of its quarterly analysis of estimated reserve for sales returns, Costco increased the sales reserve balance by $224.4 million and took a charge to income for the quarter of approximately $48.1 million.

    Excluding the sales reserve increase, net sales for the second quarter were $15.03 billion, a 9 percent increase over the prior year.

    Net income for the quarter was $249.5 million, or 54 cents per share, a drop from last year's $296.2 million, or 62 cents per share. Included in this year's second-quarter results are three nonrecurring items: the $48.1 million pretax charge from the sales return reserve, a pretax charge of $46.4 million associated with reducing adverse income tax consequences arising from the recent review of Costco's stock options by a special committee of the board of directors, and a $10.1 million pretax benefit primarily to merchandise costs for an excise tax refund on prior merchandise sales of phone cards. Excluding these one-time items, net income for the quarter would have been an increase over last year, to $302.9 million, or 66 cents.

    Net sales for the first half of fiscal 2007 increased 8 percent, to $28.66 billion from $26.46 billion, during last year. Excluding the sales return reserve adjustment, net sales for the first half of fiscal 2007 would have been $28.88 billion, or a 9 percent increase over the prior year.

    Net income for the first half of fiscal 2007 was $486.4 million, or $1.05 per share, down from $512.0 million, or $1.06 per share. Excluding the three nonrecurring items, net income would have increased 9 percent to $539.5 million, or $1.16 per share.

    For the half, U.S. comps rose 4 percent compared with last year, while international comps grew 8 percent.

    For the four weeks ended March 4, 2007, Costco’s net sales were $4.60 billion, an increase of 9 percent from $4.22 billion last year.

    For the six-month retail reporting period of September through February, the 27 weeks ended March 4, 2007 -- which includes the first two weeks of the company's fiscal third quarter, net sales were $32.40 billion, an increase of 9 percent from $29.65 billion during the same period last year. These sales results exclude the adjustment to the company's sales returns reserve.

    Costco operates 506 warehouses, including 373 in the United States and Puerto Rico, 70 in Canada, 19 in the United Kingdom, five in Korea, four in Taiwan, five in Japan, and 30 in Mexico. The retailer said it plans to open an additional 13 to 14 new warehouses, including the relocation of one warehouse to a larger and better-located facility, prior to the end of its 52-week 2007 fiscal year on Sept. 2, 2006.

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