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Higher operating expenses pinch Costco profit

Shoppers push a trolley outside a Costco Wholesale store in Los Angeles, California March 6, 2013. REUTERS/Mario Anzuoni
Shoppers push a trolley outside a Costco Wholesale store in Los Angeles, California March 6, 2013. REUTERS/Mario Anzuoni

By Siddharth Cavale

(Reuters) - Costco Wholesale Corp reported a first-quarter profit that fell short of analysts' estimates, hurt by higher stock-based compensation expenses and spending on technology.

Shares of the warehouse club operator, which sells everything from carrots to coffins at its cavernous stores, fell as much as 3 percent in morning trading on Wednesday.

"While Costco has generally been prudent in controlling costs, Q1 selling, general and administrative (expense) was higher than we expected," Cowen and Co analyst Faye Landes wrote in a note.

Operating expenses rose 5.5 percent, while selling, general and administrative (SG&A) expenses rose 7.2 percent in the quarter.

Chief Financial Officer Richard Galanti said employee stock option expenses rose due to a 24 percent year-over-year increase in the company's stock price, which spurred vesting by long-term and senior employees.

Stock option expenses reduced earnings by 2 cents per share in the quarter, while IT investments increased SG&A expenses by $12 million, Galanti said on a conference call.

Technology spending will remain high through fiscal 2014 ending October and perhaps beyond that, Galanti said.

S&P Capital IQ analyst Ian Gordon said that while operating expenses were higher than he expected, gross margins were strong despite widespread discounting.

Janney Montgomery Scott analyst David Strasser said the company's gross margin of 10.8 percent was better than his estimate of 10.7 percent.

The company's profit rose to $425 million, or 96 cents per share, in the first quarter ended November 24 from $416 million, or 95 cents per share, a year earlier.

Analysts on average had expected the company to earn $1.02 per share, according to Thomson Reuters I/B/E/S.

Sales rose 5 percent to $24.47 billion, but missed the average analyst estimate of $25.35 billion. The company announced quarterly sales last week.

Sales at stores open at least a year rose 3 percent, including the impact of lower gasoline prices and a stronger dollar. Analysts on average were expecting same-store sales to rise 3.54 percent.

Excluding fuel and forex, same-store sales rose 5 percent.

Rival Wal-Mart Stores Inc reported a third-straight quarterly decline in U.S. same-store sales last month and forecast a lower-than-expected profit for the holiday quarter.

Costco, whose members pay up to $110 per year to shop at its big stores and website, operates 648 warehouses, including 461 in the United States and Puerto Rico.

It also has stores in Canada, Mexico, the United Kingdom, Australia, Japan and other Asian countries.

Shares of the Issaquah, Washington-based company were down 0.4 percent at $119.49 in afternoon trading on the Nasdaq.

(Reporting by Siddharth Cavale in Bangalore)

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