Costco, BJ's Post Strong Profits

BOSTON — Warehouse clubs Costco and BJ's reported substantially higher profits on Wednesday, with both benefiting as cost-conscious shoppers worried about the economy shunned department stores and specialty retailers in favor of lower-priced alternatives.

BJ's even said it welcomes continuing modest inflation, hoping more shoppers will view warehouse clubs as safe havens from higher food and gas prices.

"We're embracing inflation in this particular organization," BJ's Chairman and Chief Executive Zarkin told analysts in a conference call.

Costco Wholesale Corp., the nation's largest warehouse club, said its quarterly profit rose 31 percent to continue a recent run of solid results driven by strong sales and cost-cutting.

Its smaller rival, BJ's Wholesale Club Inc., saw its first-quarter profit more than quadruple. The Natick, Mass.-based chain beat Wall Street expectations and raised its 2008 earnings forecast, continuing a turnaround since disappointing 2006 results led Zarkin's predecessor to step down.

The quarterly numbers appear to bolster the warehouse clubs' reputations as strong performers during economic downturns, said UBS analyst Neil Currie.

"There is no such thing as a recession-proof retailer," Currie said. "But there are some formats that are more resilient. Drug stores are the most resilient, but warehouse clubs aren't far behind."

Both companies' results also were boosted by increased gasoline sales, although gas profit margins were low. Warehouse clubs' low gas prices entice many customers to also shop for merchandise during the same trip.

Issaquah, Wash.-based Costco — whose chief rival is Wal-Mart Stores Inc.'s Sam's Club — said second-quarter net income rose to $327.9 million, or 74 cents per share, matching expectations of analysts surveyed by Thomson Financial. In the same quarter a year earlier, Costco earned $249.5 million, or 54 cents per share, when it took $53.4 million in charges.

Sales increased 12 percent to $16.62 billion, just shy of the analysts' consensus estimate of $16.85 billion.

Costco's shares fell $1.56, or 2.5 percent, to $60.83.

Shares of BJ's rose $2.28, or 6.85 percent, to $35.56 after the company posted fourth-quarter net income of $50.2 million, or 80 cents per share, which easily beat analysts' forecast for a profit 74 cents per share. It was up from net income of $11.9 million, or 18 cents per share, in the year-ago period.

BJ's attributed the higher profit to strong January sales, rising profit margins and lower-than-expected expenses.

Revenue rose 2 percent to $2.48 billion — just above analysts' forecast of $2.46 billion. Sales at stores open at least a year rose 5 percent at BJ's, whose 177 clubs are all in the U.S., spread across 16 Eastern states.

The same-store sales gain was a heftier 7 percent at Costco, which benefited from having stores overseas, where sales jumped 17 percent.

BJ's raised its 2008 earnings outlook, with expectations for net income of $1.98 to $2.08 per share, up from its earlier guidance of about $1.90 per share.

Costco Chief Financial Officer Richard Galanti said his company expects it can meet Wall Street's third-quarter earnings estimate of 65 cents per share and $2.99 for the full year.

Whatever happens to retailers as the economic downturn lingers, Galanti said he hopes his company "will tend to do a little better than that."

While some specialty retailers are closing stores, Costco and BJ's both outlined growth plans on Wednesday. Costco, which operates 534 warehouses, plans to open 16 to 18 new locations by the end of the current fiscal year ending Aug. 31. BJ's plans four new stores in existing markets this year, with seven to nine locations to be added each in 2009 and 2010.

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AP Business Writers Elizabeth M. Gillespie in Seattle and Jennifer Malloy in New York contributed to this report.

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