Most stories about warehouse club leader Costco's
Costco, which has taken a stand on the cost of the California worker's compensation system, added $43 million to reserves last year ($0.06 a share) to cover these expenses. This latest report was tailor-made for Costco to signal either its satisfaction with the new law California's legislature approved or its hopes that the new governor will do more after the law takes effect in January. But all the company said was, "We don't know the impact."
Management did leave the impression that, because of conservative reserving, we might see a positive impact when actual costs are finally known. The California Insurance Commissioner forecast a 20% to 30% decrease in the cost of worker's compensation claims. A 12% rate increase scheduled for January should be eliminated, and there is talk of a 7% rollback in rates already in effect. The combination should be positive for Costco's margins.
Where else are margin improvements likely to come from? Health-care costs have been increasing at twice the rate of sales. Although Costco has not raised employee health-care contribution rates for eight years, it will raise them gradually for full-time employees from 4.5% to 8% of total cost by 2007. Even at that rate, Costco will still provide benefits at better than the industry's 20% to 30% rate.
The latest earnings webcast is revealing. Costco is clearly proud to be paying the industry's highest hourly starting wage of $10 to attract the best people. They are focused on quality and profitability -- and on Wal-Mart's
The earning forecast for 2004 is $1.67. If margins are going to be affected by worker's compensation, the first signs of improvement will not show before the second quarter, when actuaries can measure any effect. Nevertheless, the conference call makes it clear that Costco is focused on improving margins. Based on the changes being made, the earnings estimate for 2004 looks very light.
Costco was Tom Gardner's pick for Motley Fool Stock Advisor in May 2002.
W.D. Crotty can be reached at HawaiiFool@hawaii.com .