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Wednesday, August 30, 2006

Costco's Mixed Message

Stocks: (COST)(WMT)(TGT)

Costco said that is next fiscal quarterly report (Sept 3) would show that earnings would be below expectations. But, not for the usual reason. Income tax charges would be high and gross margins low.

Costco said that August sales were up 11% to $4.55 billion and that same-store sales rose 7%. Those are impressive numbers by almost any measurement.

While its may not be good for investors that tax rates went up at the huge discount retailer, the core numbers give reason for optimism.

Investors in Wal-Mart and Target should also breath a sigh of relief. The Costco numbers would indicate the fuel prices and rising interest rates are not keeping customers away from the "big box" stores.

The betting has been against the large retail firms as worries about a slower economy has moved into their stock prices. At $44.50, Wal-Mart trades near its 52-week low. At $48.72, so does Target. Costco has been somewhat more fortunate. At just under $50, it trades in the middle of its 52-week range of $57.94/$40.51.

Discount retail is alive and well, at least for the time being. Shareholders who have seen their fortunes fall with the prices of Wal-Mart and Target should take heart.

Douglas A. McIntyre can be reached at He does not own shares in companies that he writes about.

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