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Costco profit jumps despite light membership fee growth

Costco shopping carts are shown at the entrance of Costco in Mountain View, Calif., Wednesday, May 28, 2008.

Paul Sakuma/AP

Costco Wholesale Corp.'s quarterly earnings beat Wall Street estimates, but the largest U.S. warehouse club chain collected less in membership fees than some analysts anticipated.

Members pay up to $110 per year to shop at Costco's cavernous stores and website, where they can buy everything from carrots to kayaks. The fee revenue pads Costco's bottom line and allows it to offer low prices and take in thin profit margins on items it sells.

Membership fee revenue rose 14.3 per cent to $511-million in the first quarter ended on Nov. 25, Costco said. The Issaquah, Washington-based chain raised fees for most U.S. and Canadian members by 10 per cent on Nov. 1, 2011.

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The fee increase seems to have had little to no impact on renewal rates, Chief Financial Officer Richard Galanti said during a conference call.

Still, the increase in membership fee revenue was not as great as some had anticipated, and growth declined from a rise of about 18 per cent in the preceding quarter.

BMO Capital Markets analyst Karen Short said she had expected membership fee revenue of $534-million, while Sanford Bernstein analyst Colin McGranahan said the $511-million in fees was $4-million shy of his forecast.

Costco said it had earned $416-million, or 95 cents per share, in the quarter, up 30 per cent from $320-million, or 73 cents per share, a year earlier.

Analysts on average were expecting a profit of 93 cents per share, according to Thomson Reuters I/B/E/S.

"While results were solid and clean in absolute terms, we believe this was largely line with expectations and unlikely to meaningfully move the stock," said Mr. McGranahan, who rates Costco at "underperform."

Lower-than-expected interest expenses and taxes helped boost earnings per share, said Short, who has an "outperform" rating on the shares.

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Sales excluding membership fees rose 9.5 per cent to $23.2-billion, just below the figure Costco gave last month, when it said quarterly sales rose 10 per cent to $23.21-billion.

Sales at stores open at least a year rose 7 per cent, including the effects of higher fuel prices. Excluding the impact of fuel and foreign currencies, Costco recorded 6 per cent same-store sales growth.

Costco said it planned to open a new warehouse store in South Korea before the end of 2012. It operates 621 warehouses, including 448 in the United States and Puerto Rico, 85 in Canada, 32 in Mexico, and 23 in Britain. For all of fiscal 2013, it plans to open up to 30 new stores.

On Nov. 28, Costco announced a $7 special dividend, set to be paid later this month.

The special dividend amounted to roughly $3-billion, the largest payout so far from any company ahead of a likely increase in the U.S. dividend tax. The chain will use proceeds from a $3.5-billion debt offering to pay for the dividend.

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