Conservative Costco Adjusts to Reality

A warranty and technical help complement its new, more reasonable return policy.

Anders Bylund
Anders Bylund
Mar 9, 2007 at 12:00AM
Other

Sometimes, you can be too customer-conscious.

That's what Costco Wholesale (NASDAQ:COST) realized last month, when the warehouse chain changed its consumer electronics return policy.

Used to be that you could buy a plasma TV, or an iPod, or an Xbox 360, use or abuse it to your heart's content, and then return it many months later -- or even years -- for a full refund, no questions asked. There's a certain segment of the population that will abuse such a generous protocol, even at relatively high-end stores like Costco, so after a lengthy analysis of return patterns, management decided to cut the return period to 90 days and increase its sales reserve balance by $224 million.

That adjustment was one of the biggest one-time charges in the just-released earnings report. Excluding the nonrecurring items, earnings per share came in at $0.66, meeting the very top end of official guidance.

Costco customers still have it good, though. Ninety days is still pretty generous. Stores like Circuit City (NYSE:CC), Best Buy (NYSE:BBY), BJ's Wholesale (NYSE:BJ), and Wal-Mart (NYSE:WMT) generally give you only 30 days to bring your items back for a refund, and 14 days for most electronics. Wal-Mart's Sam's Club warehouses still have an essentially infinite return period, except on personal computers, and Target (NYSE:TGT) matches Costco's 90-day policy.

Even at that, Costco stands out from the pack. The company has negotiated the rights to offer free two-year manufacturer's warranties on most of the really expensive stuff like flat-screen TVs and computers. And to reduce returns from customers who can't figure out what buttons to push, there's a "concierge service" hotline now, where you can call to get faster and higher-level support than you're used to from customer service reps.

Assuming that these changes reduce the return percentages, these things should kick in a small but appreciable boost to net revenues, as that's where return items get deducted from. It's probably worth losing the vocal minority that complains about the new restrictions, as Chief Financial Officer Richard Gantali noted that many of the complaints have come from "people that have been fairly aggressive in their returns personally," which probably means policy abusers who actually cost the company money. Good riddance, I say.

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Fool contributor Anders Bylund holds no position in any of the companies discussed here, but he is a frequent Target shopper. You can check out Anders' holdings if you like, and Foolish disclosure will handle your returns anytime you like.