Leading warehouse club operator Costco (NASDAQ:COST) today issued a press release clarifying its earnings outlook for the third quarter and its full fiscal year ending in May. The gist of the missive was that current analysts' expectations are too high. This follows a portent during the second-quarter earnings conference call that consensus analyst expectations were at the high end of the company's expectations.

New expectations announced today are $0.41 to $0.43 for the third quarter versus the analyst peg of $0.47, and $1.98 to $2.04 for the full year, down from analyst expectations of $2.11. Fiscal year guidance excludes an $0.08 one-time gain the company enjoyed in the second quarter. Costco also announced a 15% increase in its dividend to $0.46 per share annually from $0.40.

The problem, according to Chief Financial Officer Richard Galanti, is lower margins from gas sales. Fuel has become big business for warehouse club operators like Costco, BJ's (NYSE:BJ), and Wal-Mart's (NYSE:WMT) Sam's Club. They began to capture a huge share of this commodity in the 1990s with a simple formula. The club business prices all merchandise close to operating costs, with the majority of profits coming from the sale of memberships. This allows them to sport unusually low margins on fuel because the primary reason they sell fuel is to drive traffic into the warehouse and lock in memberships. It seems that people can be a bit irrational about gas prices and get into the habit of going where the prices are lowest, even if they burn up more gas on the trip than they save by filling up for a few cents per gallon less.

Grocers like Kroger (NYSE:KR) and Albertson's (NYSE:ABS) have tried to crash the party with moderate success by opening their own fuel stations, but they don't have the competitive edge of membership income to allow them to fully compete on price with the warehouse clubs. It's easy to track this by looking at the number of pumps at a station. Grocers typically install four to eight pumps; Costco and Sam's Club go for the gusto with 12 to 16 pumps per station because their high volume demands it.

But massive fuel volumes can be a double-edged sword. They also mean warehouse clubs go through their fuel inventory in the ground more rapidly. It becomes a "feast or famine" on fuel margins. When fuel costs go up rapidly, margins go into the red for club operators because pump prices don't move up as quickly when competitors have a lower-cost product in the ground to sell. It moves the other way when fuel costs go down: The clubs can start selling the lower-cost product sooner and enjoy good margins as competitors keep prices up until they move through their higher-cost inventory.

What does all this mean for Costco? Readers and investors should not get too gassed up about the earnings warning. Fuel prices are volatile, and the company will likely make back most or all of the $0.13 shortfall later in 2005 if fuel prices ease a bit. Even if prices stay high, this is a blip on the radar, not a signal of a fundamental problem with Costco's underlying business. In the meantime, watch how the rest of the market reacts to the news. A sharp sell-off in Costco shares could create an opportunity to buy in.

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Fool contributor Timothy M. Otte has been known to step on the gas when he sees value. He owns shares of Wal-Mart.