Costco Wholesale Corp. (NASDAQ: COST) is taking a drumming this morning after it earnings warning.  What is interesting is that if you overlay the customers of American Express, you essentially get a view of Costco customers.  In short, the American Express dismal report and outlook for its customer base should have been a classic "tell" here.  The overall fix is here is one that Joe Public isn’t going to like, but public companies cannot afford to sit around and just hope that prices come back down for materials and raw goods.

The company said that its earnings would be well below the currentFirst Call consensus estimate of $1.00 for its EPS.  The company blamedinflation, particularly energy costs, and noted that earnings wouldtake a higher LIFO accounting charge, a negative swing in gas salesprofits, and slightly under-plan merchandise profits.  The companynoted that it held selling price points to "help drive sales andmaintain the confidence" of members.  Costco can’t afford to drive customers away but it also has a higher quality product than most box retailers and is going to have get those price tag sticker machine labels back out.

It declared a normal common stock dividend of $0.16 per share, or $0.64annualized (1% yield now) and it authorized an additional $1 Billionfor share buybacks in addition to the aggregate $5.8 billion amountpreviously authorized (of which $4.6 Billion has been used since June2005).  It also still plans on opening 20 to 25 stores in fiscal 2009.

There is a pretty evident trend here, and one that Joe Public isn’tgoing to like.  Oil prices have fallen sharply from earlier in July,but retailers and economics are still pricing things like oil is at$100.00 per barrel in many cases.  The second wave of price hikeshasn’t come and if you shop at Costco you might notice that priceshaven’t gone up as much as they have at some grocers and otherspecialty retail merchandisers.  As far as oil is concerned, well thecompany is quite simply going to have to learn how to better hedge itsoperations there with collars or they are just going to have to raiseprices.

Costco shares are down $8.00 at $64.00 today on more than double theaverage volume.  Its 52-week trading range is $56.09 to $75.23.  Thatlast move up from $70.00 to $75.00 seemed a bit excessive, but eitherway you just do not get too many opportunities in Costco stock to get a15% pullback.  Generally these gap-down of this size are followed byminimal buying on the dip and then more selling to lower levels beforea base is found.  If the sales trends continue to weaken and pricesremain too high then you might expect yet another ball to drop andanother leg down. 

But today the biggest discounted item in all Costco stores is its stock.

Jon C. Ogg
July 23, 2008

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