Costco (COST): Retailing's Elite Start To Fail

There is an upper tier of retail companies both in the US and abroad. It has been assumed that these firms would not dodge a recession, but that they might keep their sales flat with last year and pick up market share from weaker competitors.

Wal-Mart (WMT) is in that special class. So is Costco (COST)

Costco has made its reputation on delivering premium items to customers at extremely low prices. It stocks it own house brand for shoppers who want to be especially frugal. Over the years, this blend of quality and cost and kept the company’s sales growing faster than almost all of its competition.

The Costco record of beating the industry appears to have come to an end. According to MarketWatch, "Costco Wholesale Corp. expects to report fiscal second-quarter earnings `substantially below’ the current First Call consensus analyst estimate of 70 cents a share, and said it won’t provide earnings estimates for the rest of the fiscal year." Same-store sales in January fell 9% overseas and were flat in the US.

While many retailers have seen same-store sales down by double digits, the Costco results in it home market are sill relatively impressive. That may be cold comfort to shareholders.

Costco’s disclosure about its fortunes over the last month confirm what many analysts have feared. Consumers will not come out of their shells even to pursue exceptional value at low prices. The next victim of the trend is likely to be Wal-Mart. At that point the last man standing will be down. The effect of the recession on the retail industry will be complete.

Douglas A. McIntyre