Costco alert points to lower US spending

Costco alert points to lower US spending
By Jonathan Birchall in New York
Copyright The Financial Times Limited 2006
Published: August 30 2006 17:34 | Last updated: August 30 2006 18:45


Costco, the US retailer, on Wednesday provided further evidence of weakening US consumer spending as it warned that quarterly profits would be hit by poor sales of furniture, electronics and jewellery.

The warning followed Tuesday’s report from the Conference Board, which showed consumer confidence in August at its lowest level for nine months.

Yields on the 10-year US Treasury bond also slipped on Wednesday to their lowest levels since March – reflecting expectations of a slowdown.

Costco – whose warehouse clubs have 47m members, mostly on higher income – said it had been forced to cut prices on furniture items selling for more than $1,000 during the quarter, in response to slower sales.

Jim Sinegal, chief executive, said higher petrol prices were to blame. “Obviously it has to be a factor. We have customers at the higher end of the demographic scale and so we feel that our customers are generally influenced later than other consumers across the country. But they have to be mindful of it.

“Furniture seems to be a discretionary purchase and we saw that fall off a little bit. The jewellery seems to be discretionary: we saw that fall off. But toys and electronics seem to be doing well, so it is a mixed bag.”

Jim Galanti, chief financial officer, said he was optimistic that petrol prices would move downwards, given the end of peak summer demand in the US and the easing of tensions in the Middle East.

Costco’s overall store sales grew by 7 per cent during August – more than analysts had expected. But the retailer said its profit margins had been hit by price markdowns and that it was now expecting earnings of 68-71 cents a share, against the 77 cents expected by Wall Street.

Separately, a survey published on Wednesday by Boston Consulting Group highlighted the far greater impact of higher fuel prices on middle- and lower-income consumers, with substantial reductions in eating out, holidays and spending on entertainment and impulse purchases.

Michael Silverstein, an economist at BCG, said the results highlighted, in particular, the impact on the lowest-income group of families earning less than $35,000 a year.

But he noted that the core of families earning $50,000-$150,000 annually, who account for 66-67 per cent of consumer spending, was adjusting purchasing habits to maintain lifestyles, while worrying about the future of energy prices in particular.