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Costco Rings Up Big Gains

Shares jump after the retailer tops profit estimates.

Updated from 9:44 a.m. EDT



(COST) - Get Costco Wholesale Corporation Report

has rewarded the faithful.

Shares of the warehouse-club chain hit a record high Wednesday after the company topped fourth-quarter earnings expectations and posted better-than-anticipated sales for September. That soothed fears raised by the retailer's

weaker-than-expected August sales report, which stirred concern among analysts and spurred a stock selloff last month.

For the quarter ended Sept. 2, Costco earned $372.4 million, or 83 cents a share, up 4.7% from earnings of $355.6 million, or 75 cents a share, a year earlier.

The results were hit by a charge of $56.2 million, or 8 cents a share, tied to the way the company recognizes revenue from membership fees. Excluding the charge, earnings jumped 21% to $408.2 million, or 91 cents a share.

Analysts polled by Thomson Financial projected earnings of 83 cents a share, before the charge.

Revenue climbed to $20.48 billion from $19.88 billion a year earlier, slightly shy of Wall Street's $20.73 billion target. Same-store sales, or sales at stores open at least a year, increased 5%.

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Banc of America Securities analyst David Strasser said he was impressed by Costco's gross margins, which climbed 38 basis points in the fourth quarter, beating his estimate by four basis points.

"We believe the company is beginning to realize the benefits from efforts to drive gross margin through pricing as well as changes to their returns policy," Strasser wrote in a research report. "That said, we were surprised at the magnitude of the margin expansion."

For the September selling period, Costco reported a 6% climb in same-store sales, topping Wall Street's target for a 4.9% gain. September's U.S. same-store sales rose 4%, while international same-store sales soared 13%.

On a conference call with analysts, Costco Chief Financial Officer Richard Galanti cautioned that the strong fourth quarter should not be used as a template for next year. He said analysts' average estimate for a first-quarter profit of 59 cents a share was a bit too high, and instead guided to earnings per share in the mid to high 50s.

Despite nervousness in the retail industry of a promotional holiday season this year -- discount giant


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has already begun holiday-related price cuts -- Galanti said he does not expect any big strategy changes for Costco.

"In terms of competitive pricing, I haven't seen any need to do anything crazy there," he said.

For the current fiscal year, the company expects earnings to range in the high $2.80s to $3. Analysts, on average, predict earnings of $2.91.

Shares of Costco recently were up $5.68, or 9%, to $68.99. The stock easily surpassed its previous high of $65.57, set Aug. 9.