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Thursday, March 5, 2009

Costco Leads Expected String Of Retail Warnings
As Originally Posted in The Wall Street Journal

Costco Wholesale Corp. warned that its fiscal second-quarter profit will fall "substantially below" Wall Street estimates -- foreshadowing what's expected to be a glum parade of downbeat news in the January retail-sales reports that come out Thursday.

Costco, the nation's largest warehouse club chain by sales, had outperformed the retail pack for much of 2008. But Wednesday it said U.S. same-store sales in January were flat compared with a year earlier, while sales at its foreign stores, including markets such as the U.K. and Japan, fell 9%, partly because of unfavorable currency exchange rates.

Citing the "uncertainties surrounding the economy," Costco Chief Financial Officer Richard Galanti declared that the company will no longer publicly forecast financial performance for the remainder of its current fiscal year ending Aug. 30.

Most big retailers report January sales Thursday, and many analysts and consultants are predicting more companies will yank earnings forecasts altogether, as growing unemployment depresses consumer spending and clouds timetables for recovery from the recession.

At Costco, the recession cut into its sales of nonfood items and crimped profit margins in recent weeks as the company lowered prices to spur sales and boost market share, said Mr. Galanti.

Still, he struck an optimistic tone, saying that he believed the pressure on Costco's margins would soften in coming weeks as manufacturers lowered prices for retailers in response to falling commodity costs.

"Who knows where bottom is and how long it will last," Mr. Galanti said in an interview. "But relative to other retailers, we believe we are winning market share, not losing it."

In general, warehouse and discount retailers such as Costco and Wal-Mart Stores Inc. have held up better in the weak economy as consumers seek out lower prices, while luxury retailers have been among the worst hurt. Tuesday, Neiman Marcus Group Inc. reported a 24% decline in same-store sales and warned that it would post a quarterly loss.

Industry experts believe more retailers will announce job cuts and other belt-tightening moves as they brace for a brutal business climate in the first half of 2009, and possibly longer. Macy's Inc. Monday announced 7,000 layoffs as part of a broader corporate reorganization. Numerous retailers including Target Corp., Best Buy Co. and Sears Holdings Corp. have recently announced corporate staff cuts.

Thomson Reuters, which maintains an index tracking 35 top retailers, predicts January same-store sales will fall 2.3% compared a with a year earlier. Remove Wal-Mart from the equation, and the weighted-average decline grows to 5.7%.

In particular, it expects double-digit sales declines from department-store and apparel chains, which have been hit particularly hard by discretionary spending declines.

January is traditionally a slow time for retail sales, making up a small fraction of annual totals, but analysts are closely watching this month's figures for signs of which major retailers continue to struggle with bloated inventory levels well after the holidays -- and which may be failing.

The reduced demand is leading retailers to step up efforts to carry fewer, better-selling brands, or to pare back stocked inventory, requiring suppliers to replenish shipments more frequently.

That was already a retail trend but is being accelerated by the recession, said Lorcan Sheehan of ModusLink Global Solutions Inc., which helps companies manage supply chains.

"It is a difficult time for the number-two, three and four brands," Mr. Sheehan said.

While Costco posted net sales of $5.10 billion for January, flat with $5.11 billion a year earlier, Costco's Mr. Galanti saw some hopeful signs. Television sales were up after sharply discounted promotions that included bundling pairs of high-definition sets, and membership renewal rates were at record levels.

Still, the warning that the company would miss analysts' earnings estimates for the second quarter ending Feb. 15 -- and lack of guidance about what the future would hold -- clearly disappointed investors.

In 4 p.m. composite trading Wednesday, Costco shares were down on the Nasdaq. But shares were up slightly in after-hours trading.