Warehouse club operator Costco Wholesale Corp's profit topped analysts' estimates for the first time in five quarters, helped by strong back-to-school sales and higher membership fees.
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Costco's shares were up 1.6 percent at $127.32 in premarket trading on Wednesday.
The company's strong results are a bright spot in a retail sector that has struggled to attract customers, who have been curbing spending due to stagnant wages and higher taxes.
Costco reported a 7 percent increase in same-store sales, excluding fuel, in the quarter ending Aug. 31.
Higher discounting drove back-to-school sales in August, with the company reporting a better-than-expected 7 percent rise in same-store sales for the month.
In September, same-store sales rose 6 percent, edging past the average analyst estimate of a 5.9 percent growth.
"We believe this is just the beginning of an upturn in bottom line results," Deutsche Bank analyst Paul Trussell wrote in a note, raising his price target on the stock to $135 from $130.
The Thomson Reuters Same Store Sales Index is expected to report a 4.1 percent increase in September same-store sales, excluding the drug retailers, higher than the 1.7 percent in the year-ago period.
September sales are expected to have been boosted by promotional activities that continued into the month to attract consumers for back-to-school shopping, according to Thomson Reuters I/B/E/S analysts. Also, cooler weather arrived in late September and helped drive demand for fall merchandise.
Costco's net income rose to $697 million, or $1.58 per share, in the quarter ended Sept. 30, from $617 million, or $1.40 per share, a year earlier.
Gross margin expanded 14 basis points to 10.7 percent in the quarter, according to analysts.
Revenue for membership fees rose 7.3 percent to $768 million in the quarter.
"A combination of less intensity on promotions within food, cycling of higher meat/produce costs and a smoother run-rate of IT expenditures going forward, has us more optimistic of continued margin expansion ahead," Trussell said.
Revenue rose 9.3 percent to $35.52 billion.
Analysts on average expected a profit of $1.52 per share on revenue of $35.47 billion.
Up to Tuesday's close, the company's shares have risen 5.3 percent this year, outperforming the nearly 1 percent rise in the Dow Jones US Food Retail and Wholesale Index.