Leading warehouse club operator Costco
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
Grocers like Kroger
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.
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