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Costco Wholesale Misses on Earnings

Costco Wholesale the giant discount warehouse reported solid sales for its first quarter for its 2016 fiscal year.

Revenue rose year over year by 1.3% to just over $26.62 billion on a decline in its comparable sales of 1%. Excluding the impacts due to the deflation in prices of gasoline and the strong U.S. dollar, comparable sales rose by 6% for the three-month period.

Last quarter, Costco posted a $480 million net income, which was down from the prior year of $496 million. Earnings per share were $1.09 in comparison to $1.12 for the first quarter of fiscal year 2015. Analysts were expecting the EPS to increase slightly to $1.17.

No in-depth explanation of earnings for the first quarter were provided, but will be discussed in an earnings call.

Membership income was up 1.9% compared to the same period one year ago, which is slightly faster than its revenue, providing a slight margin tailwind.

A strong U.S. dollar has weighed on the membership revenue at Costco just as it has cut into the overall growth of revenue.

Gross margin was up to just over 11.28% for last quarter as compared to one year ago of 11.03%. However, that gain was offset due to an increase in the selling, general and administrative costs that went from 10.25% of revenue during last year’s first quarter to 10.54% of this most recent quarter.

The increases were likely caused by the dropping gasoline prices, as it has been in recent quarters.

Costco saw a bigger impact in profit margin with a jump in its expenses for pre-opening from the first quarter of 2015 of $15 million to its first quarter of 2016 of $26 million.

Expenses for pre-opening were unusually higher during the last quarter due to Costco adding 11 new locations during that three-month period.

Interest expense increased as well by over $7 million compared to the same period last year, after Costco said it issued $1 billion of debt last February to help fund a special $2.2 billion dividend.

Finally, the effective Costco tax rate increased this past quarter to 36.1% from last year’s 35.2%.

As of Tuesday’s closing Costco had posted a return of more than 23% since the start of 2015, while the S&P 500 index has been flat.

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