Costco Shares Fall as Accelerating Sales Fail to Boost Margin

(Bloomberg) -- While sales at Costco Wholesale Corp. remain strong, investors may be concerned that profitability is taking a hit.

The shares fell as much as 3.5 percent in late trading Thursday after a quarterly report showed gross margin shrinking from a year earlier -- a sign that higher sales aren’t translating into more cash for shareholders. Shares later pared some of the decline.

Costco has largely been immune to the forces buffeting other U.S. retailers, including the encroachment by Amazon.com Inc., a tighter labor market and a desire on the part of consumers for experiences that transcend humdrum big-box shopping. Still, the warehouse-club retailer has been slow to embrace online sales, and upstarts like Boxed offer the same bulk-sized goods with the promise of home delivery.

Investments to boost online sales through services like same-day delivery and automated fulfillment centers have cut into the profitability of retail chains in recent months. Walmart Inc., Target Corp. and Best Buy Co. all suffered share declines after reporting results for the first quarter, despite strong sales.

Costco shares dropped as low as $191.30 in after-hours trading. They had gained 6.5 percent this year through Thursday’s close.

Gross margin was 11.05 percent, down from 11.50 percent a year earlier. Revenue of $32.4 billion surpassed analysts’ estimate of $31.9 billion.

To contact the reporter on this story: Matthew Boyle in New York at mboyle20@bloomberg.net

To contact the editors responsible for this story: Anne Riley Moffat at ariley17@bloomberg.net, Jonathan Roeder, Mark Schoifet

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