May 27, 2010 / 3:30 PM / in 7 years

WRAPUP 2-Costco, Big Lots profits up; shoppers move past basics

* Costco EPS $0.68 vs Wall St $0.66 view

* Big Lots EPS $0.68 vs Wall St $0.67 view

* Big Lots raises full-year sales, profit view

* Costco shares up 4.4 pct, Big Lots up 0.5 percent (Rewrites, adds details, executive, annalyst comments, updates shares)

By Brad Dorfman

CHICAGO, May 27 (Reuters) - Warehouse club operator Costco Wholesale Corp (COST.O) and close-out retailer Big Lots Inc (BIG.N) both posted higher-than-expected quarterly profits as consumers were willing to spend on more than just essentials.

U.S. consumers remain on tight budgets, but greater confidence in an economic recovery has let them shop beyond basic necessities like food, as shown by sales and earnings at retailers ranging from discounter Target Corp (TGT.N) to upscale department store chain Nordstrom Inc (JWN.N). Tiffany (TIF.N) and Signet (SIG.N) said on Thursday their results were boosted by revived sales of pricier jewelry.[ID:nN27257094]

Costco shares rose 4.4 percent, while Big Lots was up 0.5 percent.

“We were very encouraged by the customers’ continued focus on a discretionary purchase, whether it was furniture, home, or seasonal type merchandise,” Big Lots chairman and CEO Steven Fishman said during a conference call with investors.

But many industry executives have also tempered expectations for consumer spending for the remainder of the year, citing high unemployment and a European debt crisis that has hit U.S. markets as well.

Big Lots also said that sales slowed at the end of the quarter and its margins did not improve as much as some analysts expected.

“There’s starting to be a little bit more of the wallet opening up to discretionary things, but it’s selective,” said Edward Jones analyst Matt Arnold.

The lingering caution was evident in a U.S. Commerce Department report on Thursday, showing that first-quarter economic growth was less than previously estimated. At the same time, the Labor Department said new applications for state jobless benefits fell last week. [ID:nN27259780]

COSTCO SALES UP

Costco charges members an annual fee to trawl its aisles for toilet paper and food, packaged in bulk, and bigger ticket items like HD televisions.

The company said its net income was 68 cents a share, in its fiscal third quarter ended May 2, ahead of the average analyst estimate of 66 cents a share, according to Thomson Reuters I/B/E/S.[ID:nSGE64Q071]

Costco said this month that clothing, garden and patio products and candy were among the better sellers in April.

A lower-than-expected tax rate also boosted earnings by about 2 cents a share, analysts said.

Costco’s expenses as a percentage of sales improved, which bodes well for earnings if consumer spending improves even more and lifts same-store sales, Bernstein analyst Colin McGranahan said in a research note.

Big Lots, which specializes in sales of excess inventory, posted a profit of 68 cents a share, slightly better than the 67 cents per share predicted by analysts. [ID:nSGE64Q0AX]

Sales rose 8.2 percent to $1.24 billion and sales at stores open at least two years rose 6 percent.

J.P. Morgan analyst Charles Grom said the company’s margin in the quarter rose to 40.6 percent, but was lower than his forecast of 41.2 percent, pressured by higher freight costs.

U.S. freight costs were up due to higher fuel prices, the company said. Big Lots also said its forecast for second-quarter freight costs in both the United States and on imports, was up.

It forecast a 4 percent to 5 percent same-stores sales increase and earnings from continuing operations of 44 cents to 49 cents a share in the second quarter. Analysts on average forecast 44 cents.

For the year, the company now sees earnings of $2.75 to $2.85 per share from continuing operations, up from its previous view of $2.65 to $2.75. It raised its same-store sales view to an increase of 3.5 percent to 4.5 percent from a prior forecast of 3 percent to 4 percent.

Analysts on average forecast full-year EPS of $2.80. (Reporting by Bradley Dorfman, editing by Michele Gershberg and Dave Zimmerman) (bradley.dorfman@thomsonreuters.com; +1-312-408-8133))

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