Costco Wholesale Shares Tumble After Earnings Warning
Issaquah, Washington, May 24 (Bloomberg) -- Costco Wholesale Corp. shares fell as much as 36 percent after the biggest U.S. warehouse-club retailer said earnings missed forecasts for the first time since 1995 and warned of slower growth.
The shares fell 8 11/16, or 21 percent, to 31 15/16 in late trading of 138 million, making it the most-active U.S. issue. The stock earlier dropped to 25 15/16, wiping out $7 billion in value and marking Costco's biggest one-day decline in 16 years.
Costco blamed the slowing growth on the cost of adding stores and regional offices, as well as rising wages and other expenses. The warning escalated concern that higher interest rates will curb consumer spending and hurt profits, sending down shares of other retailers.
``There's a fear that this is a big sign of a general slowdown,'' said analyst Angela Auchey of Federated Investors, which owned 130,000 Costco shares in December. ``If retailing does slow down, there will be a lot of days like this.''
Home Depot Inc. fell 3 3/4 to 46. Retail indexes accounted for four of the 10 biggest declines among Standard & Poor's industry groups.
A mishap delayed the release of Issaquah, Washington-based Costco's results to the public this morning.
Costco said it sent a copy of its earnings to about 300 people at 5 a.m. New York time, when it typically puts out its results, and had arranged for simultaneous release through Business Wire. Business Wire said internal problems may have delayed the release through its service until 9:16 a.m.
More than 5.6 million shares were traded before the statement was released to the public. During that time, Costco's shares tumbled 30 percent.
3rd-Qtr Results
Costco has 305 warehouses, which members pay a fee to join and sell goods from clothing to jewelry to electronics. It competes with BJ's Wholesale Club Inc. and Wal-Mart's Sam's Club.
Net income in the third quarter ended May 7 rose 14 percent to $120.3 million, or 26 cents a share, from $105.9 million, or 23 cents, a year ago.
Profit was a penny less than the average estimate of analysts polled by First Call/Thomson Financial. Costco last missed forecasts in the first quarter of 1995, First Call said.
Sales rose 14 percent to $6.77 billion from $5.94 billion, and revenue including membership fees rose 14 percent to $6.89 billion. Sales at stores open at least a year rose 10 percent.
``This was considered a bulletproof stock,'' said analyst Brian James at Loomis, Sayles & Co., which held 754,500 shares in March. ``They are spending heavily on accelerating new store growth and that takes up-front cost. They're also spending on their dot-com, and that loses money.''
Outlook
Earnings in the fourth quarter ending Sept. 3 will be 1 cent to 2 cents below the average estimate of 45 cents a share.
Costco said it expects earnings per share to rise 11 percent to 13 percent next year, less than the 16 percent forecast by analysts and 19 percent average of the past four years.
``The stock was primed for higher growth,'' said analyst Scott Swanson at Roger Engemann & Associates, which owns 5.1 million shares.
Costco's price-to-earnings ratio peaked last month at 47, the highest level in at least four years. The stock now trades at 24 times annual per-share earnings.
Costco plans to still try to meet its goal of 15 percent earnings growth, said Chief Financial Officer Richard Galanti.
``But given all the things we have going on, I cannot assure you we will get there,'' he said.
The Federal Reserve has raised the overnight bank-lending rate six times since June, including a half-point to 6.5 percent last week, in an effort to cool the economy and curb inflation.
Expenses and Openings
Costco's expenses have risen as it opened stores in the U.S. and overseas and invested in expanding on the Internet. The company told analysts that sales are expected to slow, making it difficult to offset cost increases. Costco's sales have risen an average 11 percent the past five years.
``As long as (same-store sales) were in double digits, this spending was covered,'' said analyst Todd Slater of Lazard Freres & Co., who downgraded the stock to ``hold'' from ``outperform.''
Costco plans to open 22 to 23 stores this year, about half of which will be in new markets. For fiscal 2001, the company plans to open 40 locations, with about 25 in new markets.
Stores in new markets typically lose money the first year, Galanti said.
Costco can delay some of next year's store openings if necessary, he added. The company already has identified two or three locations that could be delayed.
The company also said it may start buying back stock.
``The stock probably won't snap back right away,'' said Robinson-Humphrey analyst David Schick, who has an ``outperform'' rating on the shares. ``Over the long haul it's a great business, but it's got five or so quarters of expenses to cycle through.''
Costco has 231 stores in the U.S., 59 in Canada, eight in the U.K. and seven in Asia. The company also has 18 locations in Mexico with a joint venture partner.
May/24/2000 15:39 ET |
