Costco, BJ's profits jump; Big Lots raises guidance

NEW YORK (MarketWatch) -- Thanks to value-seeking shoppers, Costco Wholesale Corp., the largest U.S. wholesale club, said Wednesday that quarterly profit jumped 31%, boosted by international demand and U.S. sales of gasoline. Smaller rival BJ's Wholesale Club Inc. said that profit exceeded its previous projection.

Costco's net income in the fiscal second quarter climbed to $327.9 million, or 74 cents a share, from $249.5 million or 54 cents a share a year earlier, when it had $53.4 million in nonrecurring charges, the Issaquah, Wash.-based retailer said. Sales in the quarter ended Feb. 17 rose 12% to $17 billion. Profit for Costco matched the average estimate of analysts surveyed by Thomson Financial. Sales exceeded the $16.9 billion in average analysts' estimate, according to Thomson Financial.

Wholesale clubs Costco and BJ's, along with discounters and off-price retailers, have benefited from budget-conscious shoppers buying items in bulk or seeking name-brand items at a discount, posting February sales gains that exceeded Wall Street estimates. They are among the few bright spots in the retail sector as economic worries and lack of must-have fashions have hurt department stores and specialty retailers. See full story.

Shares of BJ's (BJ) and close-out retailer Big Lots (BIG) both jumped while Costco's (COST) dropped slightly after its margin missed the forecast.

"Consumers are looking for opportunities to save money in a challenging macroeconomic environment," said Tom Forte of Telsey Advisory Group. "You are seeing that in Costco, BJ and Big Lots."

Costco

Shares of Costco fell 1% after its margin missed some analysts' estimates. The company said margins benefited from higher food sales and a change in its electronics-returns policy, but came under pressure in the pharmacy department and at its food court, with no changes there to counter rising cheese prices. Gross margin widened by 0.24 percentage points, Chief Financial Officer Richard Galanti said on a conference call. Galanti added that Costco is comfortable with analysts' average estimate of 65 cents for the third quarter, though he said that's at "the high end of a small range." Costco's second-quarter U.S. same-store sales rose 7%, including a 5% increase in the U.S. and a 17% jump internationally. Higher sales of gasoline have been a boon to the retailer, with the average price per gallon surging 29% during the quarter. A lower U.S. dollar against the Canadian currency also helped sales. Consumers can buy gasoline as much as 10 cents a gallon cheaper at Costco compared with others in the local market, according to Forte.

"Eventually if it's only gasoline price and foreign currency benefiting results, we could see a decrease," analyst Jharonne Martis of Thomson Financial said.

California, while hurt by declining housing market, also posted positive same-store sales. Deli, produce and fresh-food sales increased, while discretionary items such as home furnishings and jewelry posted a same-store sales drop, Galanti said. Some analysts also noted that the company has benefited from better availability of brands such as Crocs footwear.

"We in fact are seeing quite a bit more activity from some of the variety of nonfood manufacturers that historically would not sell us directly," Galanti commented on the call.

Costco also said Wednesday that February same-store sales rose 7%, including a 5% increase in the United States. Overseas sales climbed 18%. The company has seen a pickup in sales in the last two weeks of the month. Analysts surveyed by Thomson were expecting sales gain of 6%. Results also outpaced the 0.5% to 1% average gain projected for U.S. retailers, according to the International Council of Shopping Centers.

Excluding the benefit of gas inflation, U.S. sales in February rose 3%.

Same-store sales are a key retail performance metric that excludes sales from newly opened or closed locations. Costco has 534 warehouses, including 391 in the United States and Puerto Rico.

BJ's, Big Lots

Also juiced by higher gasoline sales, BJ's net income soared to $50.2 million, or 80 cents a share, from $11.9 million or 18 cents a share a year earlier, when it had a 40-cent net expense. Results exceeded the company's previous guidance of 70 cents to 74 cents a share.

February same-store sales rose 5.9%, exceeding forecast of a 3.8% gain.

BJ's has brought back its former senior management, closed pharmacy departments, shortened store hours and slowed new-unit growth to bolster results, analysts said.

"They are doing a good job of turning around the business," Forte pointed out. "They really did a good job."

Bit Lots shares surged 21% after the close-out retailer projects 2008 profit of $1.70 to $1.80 a share with comparable store sales expected to increase 1% to 2%. The profit forecast exceeded average analysts' estimate of $1.53 a share, according to Thomson Financial. Big Lots, which has 1,353 Big Lots stores in 47 states, sells name-brand furniture, lawn and garden and home-furnishing products at discount prices.

Fourth-quarter profit fell to $92 million from $104.3 million a year earlier. Big Lots said that it expanded operating profit and turned inventory faster as it lowered expanses and installed new register software in 700 stores.

Source: MarketWatch