Costco Shares May Still Cost Too Much

Costco (COST) shares tumbled earlier this week after the company lowered its earnings forecast for their fourth fiscal quarter of 2006, which will be coming to a close at the end of this week. The discount retailer is expecting quarterly profits of 68 to 71 cents per share with a one-time tax charge, or 71 to 74 cents without the charge. Either way, it's still short of the analyst consensus of 77 cents per share for the quarter. The adjusted forecast will also leave full-year earnings about 7 to 10 cents under initial forecasts.

The disappointing numbers certainly aren't the result of weak revenues. Same store sales are up 8% over the last 52 weeks, thanks to a big revenue improvement for overseas units. However, domestic same-store sales - the biggest piece of the revenue pie - were up by 7%. Total revenue (counting new units) was up by 11% for the last twelve month period.

The shortfall is partially blamed on higher gas prices, and a slowdown in consumer demand. Company representatives cited weaker sales of their higher-end, higher-margin items as the reason sales can be up while profits are down. Fuel costs didn't help the matter either, adding to transportation expenses for Costco, while simultaneously diverting dollars away from stores.

Shares traded on Wednesday as much as 5% under Tuesday's close, bringing even more frustration to investors who have watched the stock fall since July 3rd, from $57 to $49. Most of Wednesday's trades fell somewhere between $46 and $48.

While many consumer staple stocks like Procter & Gamble (PG) and Wal-Mart (WMT) are falling back into favor, traders recognize that Costco may be a legitimate exception to the current uptrend. Most consumer goods and service companies have made economic-based adjustments that so far have eluded Costco - a problem not seen form this major discounter. And, that fact is reflected in a falling share price.

Their full year results are typically announced sometime in November.