Falling gas prices give Costco's profits a boost

ISSAQUAH, Wash. - Costco's (COST) profit jumped 17 percent during the first quarter, driven by membership fees and falling gas prices.

Shares rose in premarket trading Wednesday and appeared headed for an all-time high.

Sales at stores open at least a year rose 7 percent when the impact of lower gas prices and foreign exchange are stripped out.

Costco made $582 million from membership fees, up from $549 million a year ago during the same period.

The warehouse club operator posted net income of $496 million, or $1.12 per share. That's better than the $1.09 that analysts had projected, according to a survey by Zacks Investment Research.

Revenue was $26.87 billion in the period, just edging out Wall Street expectations.

Analysts with Janney Capital Markets said the jump in profit on a per-share basis outpaced the company's last five quarters thanks to plunging gasoline prices.

The average national price of gasoline fell to $2.66 a gallon on Tuesday according to AAA, 61 cents less than last year at this time. The national average has fallen every day since September 26.

Costco has the potential to win twice with fuel prices declining, first because it pays less to buy gasoline for its fuel pumps, and second because when those savings are passed on to customers, they may spend more freely once they get into the store.

Janney's David Strasser believes that fatter margins from that dynamic are limited for Costco.

"The issue is that we believe that much of the gross margin beat is the result of the rapid and dramatic decline in gas prices, a trend that is not sustainable," Strasser wrote Wednesday. "(Costco) most likely has one more quarter where this decline works to its benefit, but once prices stabilize at a lower level, gross margins normalize with fewer gross profit dollars."

Still, on Tuesday, the Energy Department trimmed its projections for next year's average price of gasoline across the U.S. once again, this time to $2.60 a gallon. That would be 23 percent below this year's projected average and the lowest full-year average since 2009.

Costco Wholesale Corp., based in Issaquah, Washington, runs 671 warehouses, including 474 in the U.S. and Puerto Rico, 88 in Canada, 34 in Mexico, 26 in the U.K., 20 in Japan, 11 in Korea, 10 in Taiwan, seven in Australia and one in Spain. Its stock rose slightly in Wednesday premarket trading.