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    Return Reserve Increase Hits Costco's Q3 Profits

    ISSAQUAH, Wash. - Membership wholesale club Costco Wholesale Corp. saw a 4.9 drop in profits due to the raise in its reserve for merchandise returns, which came as a result of the retailer's review of historical data used to determine how large it should be.

    ISSAQUAH, Wash. - Membership wholesale club Costco Wholesale Corp. saw a 4.9 drop in profits due to the raise in its reserve for merchandise returns, which came as a result of the retailer's review of historical data used to determine how large it should be.

    Costco's net sales for fiscal third quarter ended May 13, 2007, took a $228.2 million hit from the increase in the sales returns reserve balance, though it still increased 10 percent to $14.34 billion, from $13.01 billion last year. Excluding the increase to the sales returns reserve, net sales were $14.57 billion, a 12 percent increase from 2006. The company expects that its new return policy for certain electronic items, implemented in the U.S. during the quarter, will favorably impact future returns experience.

    Net income for the quarter was $224.0 million, or 49 cents per share, compared to $235.6 million, or 49 cents per share during the same time last year. Included in the results is a $48.1 million pre-tax ($30.3 million after tax) charge primarily reflecting the reduced gross margin on estimated future returns recorded in the increased sales return reserve. Excluding this adjustment net income would have been $254.3 million, or 56 cents per share, a 14 percent increase over last year.

    Net sales for the first 36 weeks of fiscal 2007 increased 9 percent to $43 billion, up from last year's $39.47 billion. Excluding the sales return reserve adjustments, net sales for this period would have been $43.45 billion, a 10 percent increase over the prior year.

    Net income for the first 36 weeks of fiscal 2007 was $710.4 million, or $1.54 per share, compared to $747.6 million, or $1.55 per share last year. Excluding the adjustments, as well as two additional non-recurring items recorded in Q2 of fiscal 2007, net income would have been $793.8 million, or $1.72 per share, an 11 percent increase over the prior year. The two adjustments included a pre-tax charge of $46.4 million associated with reducing adverse income tax consequences to employees from the review of stock options, and a $10.1 million pre-tax benefit primarily to merchandise costs for an excise tax refund on prior merchandise sales of phone cards.

    Comparable sales for Q3 increased 7 percent in the U.S. and 5 percent for international operations, and for the year to date were 5 percent in the U.S. and 8 percent for its international operations.

    Costco operates 510 warehouses, including 376 in the United States and Puerto Rico, 71 in Canada, 19 in the United Kingdom, five in Korea, four in Taiwan, five in Japan, and 30 in Mexico. It plans to open an additional seven to eight new warehouses prior to the end of its 52-week 2007 fiscal year on September 2, 2007.

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