Adds detail on potential supply chain changes
Costco says it could mix up supply chain if tariffs prove painful
Company misses Wall Street expectations for second-quarter earnings
Retailers throughout US bracing for potential trade wars as tariffs ramp up
By Neil J Kanatt, Nicholas P. Brown
March 6 (Reuters) - Costco Wholesale COST.O would consider making changes to its international supply chain if tariffs from U.S. President Donald Trump lead to big price hikes, Chief Executive Officer Ron Vachris said on a conference call on Thursday.
The membership-only retailer, which on Thursday missed Wall Street expectations for second-quarter profit, organizes its stores in a so-called treasure hunt structure that allows it to adjust its merchandise mix more easily than other retailers — and possibly source products from countries that are not subject to tariffs, Vachris said.
"With our flexibility, there are not many items we can't find something else to replace, or something else to bring in," Vachris said on Costco's second-quarter earnings call.
Vachris added, though, that Costco would work with existing suppliers to keep prices low, and aim to avoid charging consumers more at a time when they are getting choosier about how to spend their money.
Costco earned $4.02 per diluted share, missing analysts' estimate of $4.11 per share, according to data compiled by LSEG. The company's quarterly revenue rose 9% to $63.72 billion, compared with analysts' average expectation of $63.13 billion. Costco's shares fell nearly 1% in extended trading.
Retailers are struggling to navigate an uncertain environment amid fears of trade wars. Target TGT.N and Walmart WMT.N both recently issued cautious forecasts, bracing for tariff-driven price hikes and retaliatory measures by affected countries.
Vachris said that about one-third of Costco's U.S. sales are products imported from other countries, less than half of which are from China, Mexico and Canada.
Soaring egg prices, a result of rising bird flu cases in the U.S., also hit Costco's margins, alongside coffee and cocoa price inflation.
Higher costs of eggs are boosting prices in Costco's bakery section, where eggs are a key ingredient in cakes and breads, overshadowing its lower costs for sugar, butter and flour, Chief Financial Officer Gary Millerchip said on the call.
Merchandise costs for the quarter ended February 16 rose 9%, compared with a 5% rise a year earlier.
Costco is also facing political headwinds over a decision to keep its diversity, equity and inclusion programs, which some big consumer brands and retailers have dropped since the Trump administration threatened to investigate companies that maintain them.
In January, 19 Republican U.S. state attorneys general demanded that Costco repeal the DEI programs within 30 days or else explain why it hadn't. It was unclear on Thursday whether Costco responded to the demand.
(Reporting by Neil J Kanatt in Bengaluru; Editing by Krishna Chandra Eluri and Alan Barona)
((Neil.JKanatt@thomsonreuters.com))
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