Returns Hit Costco Profit

Updated from 7:09 a.m. EDT

Costco's(COST - Cramer's Take - Stockpickr) fiscal third-quarter earnings fell 5% from year-ago levels as the warehouse retailer was forced to add to its sales-return reserves.

For the quarter ended May 31, the Issaquah, Wash.-based wholesaler earned $224 million, or 49 cents a share, down from $236 million, or 49 cents a share, a year earlier. Sales rose 10% from a year earlier to $14.34 billion.

Costco said revenue was reduced by $228 million as a result of an increase in its sales returns reserve balance. Profit was hit to the tune of $30 million.

The company changed its return policy after conducting a review of historical trends of sales returns and finding that long delays in returns were costing it money. Earlier in the year, Costco put a 90-day limit on returns for electronics such as televisions, computers, camcorders and iPods.

During a conference call with analysts, Chief Financial Officer Richard Galanti pointed out a situation last year where Costco sold thousands of iPods with movie screens during the first week the products hit the market.

"That same week, we had returned about half as many of those thousands of units," he said. "Maybe 100 of them were broken and the rest of them were just upgrading the one that you bought a year ago that was $10 more and didn't have a movie screen. That is almost entirely eliminated because anything bought more than 90 days ago can't be returned."