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Costco Shares Up After Beating Expectations, Posting Profit

costcoFor the first time in five quarters, Costco  (NASDAQ: COST) profits were better than expected. Shares are trading up 2% to $127.75, and the stock is near top range for the past 52 weeks of $109.50 to $128.95. The rally was due primarily to higher membership fees and strong sales for back-to-school merchandise.

In a struggling retail sector where customers have been cutting back on spending because of stagnant wages, as well as higher tax rates, analysts are optimistic with Costco’s strong results.

Excluding fuel, Costco reported an impressive 7% increase in same-store sales for the quarter ending August 31. Discounting pushed back-to-school sales up in August and in September same-store sales experienced a 6% increase that edged past the estimated 5.9% growth.

As stated by Paul Trussell, analyst with Deutsche Bank, this is just the start of an upturn. He also raised the target price on Costco stock from $130 to $135.

A 4.1% increase is expected by the Thomason Reuters Same Store Sales Index for the current month, excluding drug retailers, which is greater than the 1.7% jump one year ago for the same period.

Promotional activities continue to attract customers for back-to-school shopping, according to top analysts, which in turn will give September sales a nice boost. In addition, cooler weather for the latter part of September had a positive impact on fall merchandise demand.

Net income for Costco rose $1.58 per share or $697 million, ending in the quarter September 30, an increase from $1.40 per share or $617 million reported earlier 2014. The gross margin also expanded 14 basis points for the quarter to 10.7% and revenue specific to membership fees saw a 7.3% increase to $768 for the same quarter.

According to Trussell, less intense promotions pertaining to food, a smoother run-rate of IT expenditures going forward, and cycling of higher costs for meat/produce, makes analysts even more optimistic for the continued margin expansion ahead.

For 2014, Costco’s shares increased 5.3% at Tuesday’s closing bell, up 1% in the Dow Jones US Food Retail and Wholesale Index.

Costco Wholesale Corporation, along with its subsidiaries, operates membership warehouses in the United States, Canada, Mexico, Puerto Rico, Japan, Australia, and the United Kingdom. The majority of merchandise comes from manufactures and routes to a cross-docking consolidation point or to warehouses directly.

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