For Costco, Gas Is a Drag

Press enter to search
Close search
Open Menu

For Costco, Gas Is a Drag

SEATTLE -- Issaquah, Wash.-based Costco reported a third-quarter profit a penny shy of Wall Street forecasts, as rising gas prices continued to pinch margins.

According to the Seattle Times, the wholesale-club retailer said its third-quarter profit was $235.6 million, or 49 cents a share, a 12.3 percent gain from a year ago. Sales rose 10.6 percent to $13.3 billion.

Analysts polled by Thomson Financial/First Call had forecast a 50-cent per-share profit on sales of $13.12 billion.

To lure customers into its warehouse clubs, Costco aims to charge the lowest price for gas within a five-mile radius of its warehouses. But the retail giant has become a victim of its own success, according to the report.

The company turns its gas supply so rapidly -- its average station uses its entire inventory in a day-and-a-half vs. seven to 10 days for a competitor -- that it's more vulnerable to a spike in prices.

When Costco buys fuel at a higher price, it still must compete with stations selling fuel purchased earlier at a lower price. Since Costco aims to charge prices lower than rivals, it eats the difference to remain competitive.

Costco chief financial officer Richard Galanti told analysts that gross margins "will continue to be a little down" due to higher gas prices, but the company believes that gas stations remain an important way to bring customers into its warehouses.

This isn't the first time Costco's profit was damped by rising gas prices, reported the Times. Costco first warned analysts in April 2005 that its financial results would fall short of Wall Street estimates due to higher gas prices.