Costco Surrenders Profits To Make a Point

(MoneyWatch)  Although its earnings guidance may alarm Wall Street, Costco's aggressive pricing in the latest quarter may put it in a better position to withstand the recession.

Costco's first quarter opened just as November ended, and aggressive pricing the company instituted then and through December made sense for a couple of reasons. Driving holiday sales is one, but a big question warehouse clubs face in the current economy is whether consumers worried about their finances will pony up the required fee when it comes time to renew their memberships. Aggressive pricing in the holiday was a way for Costco to suggest that the values it offers outweigh the $50 fee.

Costco's non-food sales have been hit by the recession while currency exchange rates and gas prices took their own toll, as well. Yet, in a conference call today, Richard Galanti, the company's CFO, made the point that much of the pressure on margins ?€" and the corresponding depression in earnings -- was self-inflicted. Costco aggressively cut prices on popular merchandise in December to, among other reasons, drive sales and increase market share.

Galanti said the strategy was one of anticipation. Costco was aware that manufacturers would be reducing costs on a range of products and decided to cut its own prices a week or two before the reductions came through. By doing so, the company got ahead of its competition and took advantage of an opportunity to "wow" its shoppers. As the supplier cost cutting leveled and the holidays closed, Costco pulled back to more traditional margins, Galanti said. Rivals, ranging from other warehouse clubs to department stores to Wal-Mart, all were curtailing their hyper competitive holiday promotions at December's end, and Costco had gotten its point across with consumers.

"Incrementally, we've gotten a few new customers," Galanti said in the conference call, adding that the additions would translate into more store visits throughout the year. Costco also could count on the December shoppers enticed into its clubs to impulsively purchasing time-sensitive holiday items such as gift baskets that otherwise would have been unloaded at clearance prices.