Costco's Earnings Jump

In addition to reporting earnings, CFO Richard Galanti, in a question and answer session during Wednesday's conference call, elaborated on the company's expansion plans for the rest of this year and into 2006. The Costco CFO said that the company has opened eight new stores and relocated three others during the first two quarters of this year, with plans to open 14 to 16 new locations during the rest of the year, among them two or three relocations. On the basis of the 417 units Costco began the year with, that would be a 5% increase in units and 6% in square footage.

Although Costco's pace of expansion has slowed from that of past years, Galanti indicated, the company remains committed to expanding and hopes to boost the number of new stores to about 30 in 2005 and 35 in 2006 after finishing 2005 with about 21 new locations. Nonetheless, those numbers are always subject to change, the Costco CFO pointed out, saying, "We always find ourselves pushing to get as many stores open as we can in the year, and inevitably a few drop out and get delayed until the first quarter of the next year."

One reason that Costco's rate of expansion has slowed, according to Galanti, is that, in order to ensure that new stores perform up to the company's standards, "We've gotten a little tougher on ourselves" in choosing locations. Nonetheless, he says, the company is pushing to find suitable new locations. In addition, the company is operating in "a more difficult environment" today, he said.

Costco's financial results for the second quarter reflected a one-time income tax benefit of $52.1 million, covering the years 1996 to 2003, resulting primarily from the settlement of a transfer pricing dispute between the United States and Canada. Without the impact of the $52.1 million income tax benefit and other one-time items, net income for the second quarter of fiscal 2005 would have been $263.3 million, or 54 cents per share. The quarterly results showed that comparable store sales rose 6% in the United States and 12% internationally for the quarter. Costco ended the quarter operating 451 warehouses, including 333 in the United States, 64 in Canada, 15 in the United Kingdom, five in Korea, four in Taiwan, five in Japan and 25 in Mexico.

Galanti's review of the quarter's results included mention of some unusual publicity the chain has garnered in recent weeks, including press reports about its sale of a $40,000 Picasso art work and, more recently, the sale of a diamond ring for $190,000. "We are finding that our members are willing to spend money on all kinds of things, as long as the value and quality are there," Galanti said.