Even with more shoppers, falling prices keep Costco's earnings flat

More shoppers are strolling at the aisles at Costco Wholesale Corp. (COST) stores, but they're still spending less on average. And that left the warehouse club chain with flat results during its most recent quarter.

Costco reported that net income for the quarter ended Nov. 22 was $266 million, or 60 cents per share, which met Wall Street's expectations to the penny. That was barely higher than the $263 million it posted during the same period last year.

Sales were up slightly, helped by rising gasoline prices, but they were also held down by falling prices in food and electronics. Costco's sales rose 6% to $16.9 billion, or 3% on a comparable-store basis (stores open for more than one year). In the U.S., comparable sales rose 1%, or 2% if gasoline is factored out, while comparable international sales rose 13%, or 8% after factoring out the dollar's drop against foreign currencies.

"Fairly Hefty Price Deflation"

Store traffic increased in the neighborhood of 6% during the quarter, but average transaction size dropped 1.5%. Lower prices continue to take a toll, especially in the food aisles and in some electronic categories.

Costco is "experiencing fairly hefty price deflation," said Chief Financial Officer Richard Galanti during a conference call with analysts. He noted unit sales of digital cameras and laptops have both been strong recently, but price deflation has offset those sales gains. For example, top-brand laptops, which are popular items at Costco, are now selling for $600 to $800, he said.

The price drops seem to be slowing down recently, said Galanti, who added that he's expecting food prices to turn around in January or February. "A little inflation would be nice from a bottom-line point here."

The Coke Is Back

Costco made some other news: Customers can now shop with food stamps at all Costco stores, and Coke is returning to the shelves. Costco had taken Coke products off its shelves in November when negotiations broke down with Coca-Cola (KO) over new wholesale prices.

Galanti said food-stamp shopping, which initially had been offered only in New York stores, was rolled out across the country over the last two months. Galanti confirmed that Coke products will be back on shelves as soon as Monday. But when asked if there was an agreement on prices, he would only quote the sign placed on the barren soda shelves saying Costco wouldn't sell Coke until it could do so at competitive prices.

"We have a long-time relationship with Coke Co., and we're happy to have them on our shelves," he said, then moved on to the next question.

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