Costco Profit Tops Views for First Time in Five Quarters

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.

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.