Costco Wholesale’s third-quarter profit beat estimates but gross margins down

Costco Wholesale’s third-quarter profit beat estimates but gross margins down

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Costco Wholesale Corp (COST) recently announced its financial results for the third quarter that surpassed consensus forecast. However, the company’s gross margins were hurt due to discounts and higher freight costs.

The Issaquah, Washington-based retailer aggressively slashed prices to pull customers towards its wholesale supermarkets amid Amazon’s entry into brick-and-mortar retail with the takeover of Whole Foods Market last year that has further intensified the competition in the retail market.

The company said that its gross margins fell 46 basis points to 11.05 percent. The decline was attributed to its investment in packaging equipment and its ramped-up efforts to offer same-day and two-day delivery via Instacart, a delivery service provider.

However, a rise in membership fees earlier this year partially helped in offsetting pressure from increased freight and labor expenses.

Costco also announced that it is lifting wages of its workers in the U.S. by $1 to $14 and $14.50 per hour, effective June 11. The company is expected to take a hit of about $25 million in the fourth quarter as a result of this move.

Overall, the company reported net income of $750 million, or $1.70 a share for the three-month period ended May 13, as compared to $700 million, or $1.59 a share in the same period last year. On an adjusted basis, it earned $1.70 a share, beating consensus forecast by a penny.

Revenue for the just-ended quarter jumped 12.1 percent to $32.36 billion, and surpassed analysts’ average estimates.

Sales at established stores jumped 7 percent in the quarter. Analysts’ surveyed by Thomson Reuters were looking for a surge of 5.4 percent.

Costco shares slightly moved down on Friday despite beating analysts’ estimates for the third quarter.

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I handle much of news coverage for tech stocks, and occasionally cover companies in different sectors. In the past, I've written for other financial sites and published independent investment research, primarily on tech companies. I have a B.A. in Economics from Columbia University. I'm based out of San Diego, but grew up in Southern New Jersey. I play basketball and tennis in my spare time, am a long-time (and long-suffering) fan of Philadelphia's sports teams, and alternate daily between using an iPad Air, a Galaxy Note 3, and one or two Windows PCs.

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