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Why Costco (COST) Lost Profits Over Its Second Quarter

NEW YORK (TheStreet) -- Costco (COST) shares were trading lower premarket after the retail giant reported second-quarter profit 15% lower than a year earlier.

Before the bell, the stock had taken off 2.9% to $113.09.

In the three months to mid-February, the membership-only retailer posted net income of $463 million compared to the year-ago quarter's $547 million, even as revenue jumped 5.8% to $26.31 billion.

Earnings of $1.05 a share missed consensus by 12 cents, according to analysts surveyed by Thomson Reuters.

Though last year's profits were boosted by a $62 million tax benefit, the company said the results were not ideal.

"The year-over-year comparison was unfavorable," said chief financial officer Richard Galanti. "The first four-week period of the quarter represented the majority of earnings underperformance in the quarter."

Costco's second quarter began on Nov. 25, a period when retailers were offering steep discounts amid an aggressively promotional environment, a factor of worse-than-expected winter storms and six less shopping days between Thanksgiving and Christmas.

The Issaquah, Washington-based company said lower earnings were attributable to weaker sales and gross margins in its non-foods categories, weaker margins in its fresh food segment, and lower international profits due to unfavorable forex rates. Overall, gross margins were clipped to 11.26% from 12.48% in the year-ago quarter.

Comparable sales increased 3% over the quarter, with 4% growth in the U.S. and remained unchanged internationally.

Margin pressure is being felt across the industry. The world's largest retailer, Wal-Mart (WMT), recently reported a 21% drop in net profits over its January-ended quarter, blaming wintery weather and a reduction in the government's food-stamp program for diminished earnings.

WATCH: Hidden Camera Captures Debate Over Costco's Future

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TheStreet Ratings team rates COSTCO WHOLESALE CORP as a Buy with a ratings score of B+. The team has this to say about their recommendation:

"We rate COSTCO WHOLESALE CORP (COST) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in net income, notable return on equity, growth in earnings per share and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

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