Costco Lowers Expectations

Richard Galanti, Costco CFO, said that the chain plans to open at least 35 units next year and possibly 40, following a fiscal 2006 of 25 new units and 16 new stores in 2005. The increase in new stores each year follows the previously announced Costco strategy of ramping up its expansion plans.

Galanti noted that since the first part of the company's fiscal year falls during the end of this calendar year, about half of the fiscal 2007 openings—our about 21 new stores—will occur during the latter part of this year. Although one reason for yesterday's conference call was to discuss lowered earning expectations, Galanti commented that Costco's expansion plans are still on track. "It's a little tough right now, but that doesn't change our outlook long-term, and it doesn't change our expansion plans," the Costco CFO said.

Galanti described a Costco fiscal year thus far in which the company, which will report quarterly and year-end earnings in October, has recorded an up-and-down performance in terms of sales, operating margins and other financial results. For the four weeks that ended Aug. 27, for example, the company's sales rose 11% to $4.55 billion. Comparable sales for the period rose 5%.

The company has reduced its forecast for earnings per share to 68 cents-71 cents for the fourth quarter and has revised them downward to $2.23-$2.26 per share for the year. Previously, Costco was expecting earnings of up to 77 cents for the quarter and $2.33 for the year.

Galanti noted that the principal factor leading to the company's revised fourth quarter earnings outlook was lower-than-planned gross margins. He also pointed out that earnings estimates include a one-time income tax charge of approximately three cents per share.

Regarding the three-cent-per-share tax charge, Galanti explained that the company has received a notice "from one of our foreign taxing authorities that we would owe up to $14.8 million for a tax structure we utilized beginning back in fiscal year 2000." The effect of the tax situation "won't be resolved by this weekend, the end of our fiscal year, but under accounting rules it's prudent to set aside reserves for it," Galanti said.